Thursday, April 28, 2011

Deflation is dead

With today's release of first-quarter GDP, we see that the GDP deflator, the broadest measure of inflation available, has clearly turned up. Deflation risk was palpable in 2009, as the deflator neared zero, but it's now history. Deflation is dead, and the only uncertainty about the outlook for inflation is how high it will be in coming years.

With the death of deflation risk, the outlook for equities and corporate bonds has brightened. Deflation means shrinking cash flows and shortages of money, and both of those are bad for equity and corporate bond holders. Eliminating that risk increases the expected returns from future cash flows, even if the growth of those future cash flows might seem otherwise unimpressive.

1 comment:

TradingStrategyLetter - Weekly Summary said...

I sure do dig your analysis. No fooling around or double speak. Nice change of gears. Luv your style! Best stuff I read!