Good news gets ignored

It's apparently not fashionable to talk about the good economic news, but the dollar is up over 20% from its recent all-time low last July. And that's not all: with a stronger dollar have come weaker commodity prices, and that is very good news indeed. Since last July, oil is down 65%; copperis down 58%; non-energy spot commodity prices are down 30%; lumber prices are down 28%; natural gas is down 52%; shipping rates are down 91%; and gasoline prices are down 46%.

What this means is that consumers' purchasing power has received a tremendous boost in the past four months. (A pessimist would say that four months ago consumers' purchasing power was seriously eroded, but it has made a strong comeback since.) The dollar not only buys 20% more of everything overseas, but it now buys almost twice as much of the raw materials necessary to make our economy run. This reflects a major and fundamental shift in the underlying dynamics of the global economy.

Some worry that we are about to enter into a paralyzing period of deflation, but that's not the message I get from sensitive prices. Take gold, for example. It is down 25% from its July highs, but it is still up 180% from its 2001 lows; at $732 it is still saying that inflation is more likely than deflation. Rather than tipping into a deflation, I think prices are telling us that we have pulled back from a debilitating inflation and now face merely a continuation of mild, but above-target inflation. Things could be a lot worse, that's for sure.

Yet the market continues to behave as if all is lost. The pessimism is so thick you can see it.