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All will be glad to see the end of 2018.  According to Deutsche Bank it has been the worst rout since 1901 with almost every asset class delivering losses.  The Bank writes $14,889,930,106,680 in equity wealth has evaporated.  This does not include the losses in the bond market.

The list of potential motivations for the selloff is long and includes rising geopolitical risks, trade wars, economic slowdown and interest rates.

I would like to briefly discuss interest rates and economic activity.  In my view, if the nominal increases in interest rates will impact economic activity as much as some are suggesting, corporations and businesses are on shaky ground.  Rates are still low by historical standards.

Can I suggest the rise in rates is impacting technology based trading models and the pundits are searching for a reason to explain equity weakness?  I think yes.

And then there is economic activity.  The Citicorp Surprise Index is posting the greatest number of positive economic surprises in nine months with the most recent surprise was November’s retail sales data, data that caused the Atlanta Fed to increase its estimate of fourth quarter growth to 3.2% from 2.4%.

Today is the commencement of the two day Fed meeting, a meeting in which they will publish its immediate and intermediate forecast.

Reiterating I think the primary catalyst for a miserable 2018 is the continued rise of economic nationalism and the demise of the mulitipolar/interdependent economy.  This is a global rise, partially the result of the financial crisis of 2008-09 that increased the power of the Administrative State.

The commoner knows what is best for one’s family not some unelected bureaucrat in some distant capital.  The issue at hand is the world economic system is based upon multipolarity/interdependency and the all that are in power will do everything in its power to prevent or stem such a change.

Are forces to great against yesterday’s economic system?  Rhetorically I think yes.

As noted above, today is the commencement of a two day FOMC meeting.  I think the Committee will increase rates by 0.25% for two simplistic reasons.  First, if an increase does occur the markets will be spooked under the guise “the Fed knows something we don’t know.”  Second is reason is too maintaining the perception of independence from political pressure.

Yesterday was another ugly day making this December the worst December since 1931.  In some companies/sectors an argument can be made there was capitulation, defined as indiscriminate selling.

Last night the foreign markets were down.  London was down 0.39%, Paris down 0.14% and Frankfurt up 0.35%.  China was down 0.82%, Japan down 1.82%  and Hang Sang down 1.05%.

The Dow should open nervously higher as the markets are oversold.  Many are hoping the Fed will take no action as the central bank historically does not increase rates during such market turmoil.  As noted earlier, I think the Committee is in a box, will increase rates and offer a dovish commentary.  The 10-year is up 8/32 to yield 2.83%.


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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.