Why does an accident on any well-travelled highway always cause a traffic tie-up on both sides of the road?

We just can’t help but stop and stare.

And only once the mayhem caused by onlookers clears does the traffic return to its earlier pace.

In this case, the accident is the US Federal Reserve thinking we’re still in an old-world economy; where growth, high job counts and increasing earnings and revenues means something bad is about to happen. 

If that logic causes your brain to tilt just bear with me because it’s gonna get more congested before this road clears.

In the ‘old world’ where inflation was the dreadful and logical outcome of any growth curve we would quell that risk by the Fed raising rates, burning down the city and snuffing out the growth so that ‘the bad things won't happen.’

But we left that world in the early 1980s when the CPI hit just north of 15% (in my early years).

Just as $148 crude oil back in the summer of 2008 made it a near certainty we would never run out of crude oil, the early 1980s was the guillotine falling on the fear of inflationary peaks for the decades ahead. 

In a long-term sense, once a lesson has been learned to the point where it is a constant internal fear the new lesson won’t be far behind.

This time the learning is about how we live with deflation.

The Head Fake?

The Fed has been responding to the economy as though we have inflationary pressures.

But we actually don't. Not now, and not in the last 10 years.

Nor is it likely to be the case in the next 20 years.

We can thank Generation Y and the rapidly growing tech world for that.  And consider this: Instead of burning the growth down, note the long-run change.

It's a new world, and in time we will wish there were inflationary pressures to fret over.

As the collapsing oil price will show in the chart below ‘It’ was the cause of the very temporary ‘inflation flare-up’ we have seen this year, if 2.1% year-on-year cost pressures are now deemed to be ‘inflationary concerns.’

Remember folks, we’ve lived through much worse.

And I have a hunch that the US Federal Reserve just doesn't get that…again.

Worry not.

The market will fix that perception in time.

It always does.

Speaking of the Market…

Man has it been ugly and choppy, the latter point being the more important piece of the puzzle.

Keep in mind that at this time last year, and into the early weeks of this year, we repeatedly noted:

"We would not be at all surprised to see a 2014 type year where the market meanders back and forth - going nowhere - frustrating both sides of the game - in an effort to digest the last couple years and build the foundation for the next leg up.  It's that next leg up that will likely continue to surprise most."

So let's see where we are:

Rubber Chart1

The gyrations of the last 5-6 weeks have indeed been significant - and led to many a soothsayer suggesting the end of the world is nigh.

I suspect not, even if it feels pretty ugly right this second.

What we’re witnessing is a ‘growth scare’ even as records continue to be set in almost every category.

The crowd has suddenly become terrified that the dominos will all fall down and topple ‘the recovery – the same recovery we’ve feared will end since - well - before it started.

While the fear is evident, we’d be remiss to miss (as the chart above shows in price action) to confuse activity with accomplishment.

The economy has not broken. 

All of the volatility and chop has left us in the middle of a lower trade range – the type of trade range that builds a foundation for the next leg up.

Sure, that's a scary thought when you are out over the tips of your skis or staring over the ledge, but the data suggests this period we are trekking through is one of ‘those periods’ – those places in time when we look back and see them for what they were: Long-term opportunities.

Not Armageddon.

It's times like these that separate the traders from the investors, that move stocks from weak hands to strong ones, and shifts the ownership of future upside to those who have patience; and away from those who do not.

While that won’t sell many online ‘clicks’ it’s based on fact.

And facts are your friend when everyone else is making up the story as it goes.

Mike Williams
Founder and Managing Partner of Genesis Asset Management, New York