Good Morning,

 

For years, the world has wondered aloud about inflation.  After all, in the old world, economic cycles were “known” by all the experts.

 

Recession would be cured by easy money (read: low rates), confidence slowly returns, money begins to flow, fears fall in stages, business gets back on track, investment begins anew, expansion takes hold, confidence rises at an ever-increasing rate, old fears are lost, old lessons forgotten, over-investment begins, too much stuff is being built, everyone who was afraid before is now pedal to the metal – and bang – inflation  arises, then it rises some more as too much activity floods the system, the Fed begins to get nervous, bubble talk seeps into the commentary, then it abounds, rates rise, rates rise further, rates finally choke off growth and….the cycle begins again.

 

I am simplifying of course so forgive me.

 

That was the old world.

 

For years – we have been covering the new world.

 

The world where corners are cut – for the good.  The world where layers disappear.  The world where tech changes everything.  The anywhere, anytime, any place world.

 

The Barbell Economy world.  The Generation Y tectonic shift.

 

While too many worry about the perils of October crashes, the Fed still cannot figure out why inflation is not evident.  Yes, that was the old world.

 

The new world is changing all we “know” about how economies will work in the future.  Expect many “rules” to be broken.  Expect many experts to be confused.  No one has ever experienced the pace of change which is just beginning.  Nowhere in our past have we a “conceptual diagram” of where Gen Y and technology will take us.

 

The waves are set to be huge.

 

We can fear them – or, we can ride them.

 

In a world where 50 cent apps have replaced six-figure software programs, we can expect more massive deflationary pressures from Gen Y as the shift continues to roll in.  As they move into management years into the future, the changes will pick up pace.

 

This is not tomorrow or next week or next year.  This is setting the stage for the next 25 years – a long-term trend.

 

Here is the issue though:

 

The longer that trend is mis-perceived, the shorter the time to benefit from it.

 

Time, discipline and patience are your assets.

 

Fears are your costs.

 

Anemic Recovery?

 

Even today, we still see the headlines saying what a poor recovery this has been.  Yes, indeed, it could have been far stronger.  Regulations and taxes, along with redistribution experiments for years have squelched many areas of potential.

 

While that is all hindsight stuff, it is hard to argue with facts:  records almost everywhere – even with the 200-pound weight on our backs as business continues to build, create, expand, solve and serve.

 

Harvey?

 

I thought it interesting that the manufacturing data just released this morning out of Texas was up – far more than expected.  This in the face of extreme conditions placed on the region by Harvey:

The Storm(s)…..

 

As is expected, many fears surround major events like Harvey and Irma.  Indeed, they are shocks – but almost immediately they become more like adrenaline or steroids for the region as covered in recent morning notes.

 

The latest general business activity index for Texas factory activity came in at 21.3, up even further from 17.0 in August.  Its general business activity index increased to 21.3, its highest reading in seven months. The company outlook index posted its 13th consecutive positive reading, jumping nine points to 25.6.

Continued improvements were widespread. The indexes of future general business activity and future company outlook also remained elevated at 34.5 and 39.9, respectively.

 

The Dallas Fed on the importance of TMOS:

 

“Texas is important to the nation’s manufacturing output. The state produced $159 billion in manufactured goods in 2008, roughly 9.5 percent of the country’s manufacturing output. Texas ranks second behind California in factory production and first as an exporter of manufactured goods.

Texas turns out a large share of the country’s production of petroleum and coal products, reflecting the significance of the region’s refining industry. Texas also produces over 10 percent of the nation’s computer and electronics products and nonmetallic mineral products, such as brick, glass and cement.”

 

Retail “Dead”?

 

I always get a kick out of things that become “obvious.”  Market history is littered with elements that were “completely clear.”

 

The latest of course is the “Amazon will obviously kill every retail outlet period” line of thinking.

 

For us older guys, just replace Amazon with Wal-Mart and you get the 80’s and 90’s theme on retail.  Ho hum.

 

Employment is solid.  Confidence is solid.  Records set in job openings and retail sales?  Well, they are on a nice steady pathway as the latest data show (again):

And Housing?  Solid as well.

 

The epic shortfall we face in dwellings still not even yet part of the conversation for most as old battles are fought for years after they are relevant.  Stay confident – and pray for that correction.  The pipeline is filled with surprising opportunity:

And yet – even as the fretting over rates continues, the bond buyers battle fears.  How do we know?

 

Keep it simple: look at the rates.  Oh, and the $10 trillion sitting idle in the bank for consumers:

Somewhere….

 

On the road ahead, there will be a time when fears fade more.  The thawing of mortal terror will become scarred over.  The $10 Trillion worth of fear sitting in bank accounts will eventually fall to $9 trillion….

 

When those dollars stop being idle, oddly enough, data will improve further.  That improvement will bring more thawing of fears and less demand for cash.  It works in a cycle.

 

Don’t under-estimate this reality:  This one was simply seared so deeply into the minds of the audience that it will take far longer to subside.

 

And by the way, as the fear thaws and the demand for cash in hand falls with it, you will likely note the perception of our “anemic recovery” will disappear as well.

 

In Summary

 

Slow and steady wins this race friends.  No way around that.

 

As Ken likes to say, we need to remain focused on demographics – not economics.

 

The former creates the latter.

 

Demographics Rule The Long-Term Game

 

Planning is critical as always.  Stay focused on the right pitch.  It is early in the game.

 

The important part?

 

Long-term currents – not short-term, emotional waves.

 

One more thing:  Pray for a correction.

 

Until we see you again – may your journey be grand and your legacy significant.