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OPINION

Not Bowed

The opinions expressed by columnists are their own and do not necessarily represent the views of Townhall.com.
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He has no hope who never had a fear.
-William Cowper

Our thoughts and prayers go out to the victims of the Boston attacks. It's a reminder hatred never sleeps and never stops scheming. But, we know we must live as free as possible and never succumb to fear as that is the true aim of any terrorist attack. It's not the injured and dead at the scene of the crime but the lingering fear that cripples the masses. Americans have hope because we've endured fear but, it's never beaten us ... and never will!

Now it's Deflation?

It was already shaping up to be the worst session of the year, but there was one element missing from the trading session: fear. Gold crashing was confusing for a number of reasons, including how easy the argument for it going higher has been-that is, the mindless global money printing. The commonsense and elementary notion gold should be much higher and stocks much lower had confounded investors all year long, but the narrative has changed altogether in the last few sessions. Gold had already entered a bear market by the close on Friday, but yesterday's freefall pointed to a worry not articulated by anyone in 2013.

Have we entered into some sort of deflationary spiral?

I watch earnings presentations very closely, looking for a laundry list of tidbits and guidance that gives insight, but nothing is more important than management stating clearly they have pricing power. The ability to raise prices is the start of larger margins and stronger bottom lines. It's been somewhat elusive for many companies and even industries to enjoy widespread pricing power but most seem to have arrested prices from freefalling. Of course prices can climb from temporary supply constraints, making margin and earnings improvement temporary.

I haven't seen anything thus far in the current earnings period to indicate deflationary pressure even if there is still C-suite caution with respect to hiking prices. I've actually seen key industries where it seems like deflationary death spirals have reached inflection points, including coal price guidance from Walter (WLT) last Friday.

A couple of weeks ago on Varney & Co on the Fox Business Network I remarked there wasn't a feeling of classic inflation: too many dollars chasing too few goods. Despite all that money printing, it seems to be sucked up mostly by the Federal government's voracious need for every nickel, with some trickling into housing and home loans, but again with the financial blessing and cash coming from the Federal government. Yet there is a big leap from an environment not being classically inflationary to being classically deflationary.
Of course, classic deflation is a problem more detrimental than inflation. The Great Depression was the result of a deflationary death spiral and Japan has endured two decades of lost growth as it battles deflation. I think we were in a deflationary death spiral in housing but that's reversed due mostly to investors picking a bottom and general money-printing. Here is how it works:

Lower Demand=
Lower Production=
Lower Jobs/Wages=
Lower Demand=
Lower Production=

I don't buy we are at this point in the US economy, but I've said all along the greatest threat to the stock market rally is a sluggish domestic GDP that dips even lower. We really must find a way to kick-start the economy. I'm not talking about redistribution gimmicks by the administration but opening the floodgates of opportunity. I realize that's a long shot when the Secretary of State is going around the world saying people are afraid to visit the United States because of our gun policies. The administration is on a different page - and economics continue to be ignored.

This has put the economic ball squarely in the Fed's corner. The Fed has done what central banks do and focus on tomorrow rather than next week or next year. Yet consider the Fed has done everything possible to generate inflation and while one could argue it has worked with housing, the stock market and Main Street aren't taking the bait. If after all their efforts and dangerous traps, deflation reared its ugly head then it would be problematic. I don't think we're there.

But there are questions about why gold is freefalling in the midst of what many thought was the best-case scenario for precious metals - global money printing and massive uncertainty.

I think the market was due for a pullback and I think we'll continue to rebound, even as terror joins what was already an anxious market.

Ye fearful saints fresh courage take
The clouds ye so much dread
Are big with mercy, and shall break
In blessings on your head

William Cowper

The Market

Stocks will rebound today with major indices probably beginning the session at the same levels they were at when the bottom fell out from news out of Boston. The good news is stocks are higher mostly on earnings news from key blue chip names.

Coca Cola (KO) beat by $0.01
Johnson & Johnson (JNJ) beat by $0.04
Goldman Sachs (GS) beat by $0.45

Housing starts cracked one million for the first time since June 2008 that's added a little more lift to equities pre-open. Up 7.0%, housing starts came in at 1.036 million although permits came in below consensus. There are still serious jitters about the domestic economy and whether all the money printing will ever work. Without pro-growth fiscal policies there's a chance the economy could go from sluggish to something more worrisome.

I believe in the engine of America but still think we aren't even at 20% of what we are capable of being and at some point it becomes detrimental. Ironically, it wasn't long after the horrific attacks on 9-11 that the stock market reversed into a new bull market powered by resilience on Main Street, very low unemployment and that booming housing market. Maybe the silver lining from the Boston attack is a gelling of America.

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