Just Smacks of Phoniness

 | Jul 15, 2014 | 10:46 AM EDT
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It drives me crazy when the cross-currents are so thick that they smack of phoniness.

Here's the prime example: There are people who think you should sell the market because the economy is so strong that it will produce inflation if interest rates on U.S. Treasuries stay this low. This camp says that Federal Reserve chief Janet Yellen cannot be taken seriously because she doesn't understand that, when JPMorgan Chase (JPM) reports double-digit growth in commercial real estate and credit-card loans, it's time to raise rates. They know inflation has to be right around the corner.

But then there's a second group that says oil's drop below $100 per barrel is disconcerting because it shows that the economy must be weaker than expected. That group says this means you have to sell the manufacturing companies.

What should the reaction be? Inflation is tame, as demonstrated by the collapsing oil price. At the same time, hiring isn't robust enough to tighten, especially given that we have some real impediments to growth showing up in 2015, namely in the Affordable Care Act. How could any Fed chief possibly tighten ahead of an action that puts pressure on business not to hire? What kind of prudence would that demonstrate?

So we have a very healthy situation in which wage inflation is under control and commodity inflation is fine -- don't forget that soy and corn are robust this year, sending prices down dramatically. In addition, the Fed is silently worried about the Affordable Care's impact on job growth.

That's a terrific, holistic approach to the market. It simply doesn't get discounted for some time after the initial reactors, who so often wrong in this environment, are repudiated.



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