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Many times I have commented the geopolitical changes are tectonic.  Globally, the policies and politics that have dominated since the conclusion of WWII are under attack as the commoner feels abandoned by government.  There is general distrust of all governments, the result of regulatory fiat instituted by unelected bureaucrats.

In many dimensions it is urban vs rural.  Elitist versus commoner.  A case can be made four of the five largest democracies are in the beginning throes of a gun less revolution.  England’s May.  France’s Macron.  Germany’s Merkel. America’s Trump.

In many regards instability is the order of the day hoping that this instability does not lead to widespread violence.

What does the above have to do with the markets?  Everything.  The markets are dominated by multinational technology companies.  The assumptions surrounding their business models have been shattered and the companies are fighting to maintain the status quo.

For example, Apple states that if Chinese tariffs rise to 25%, Apple would relocate its production facilities.  As noted several times, over 90% of iPads and iPhones are manufactured in China.  Wow!  Talk about impacting profits, an impact perhaps magnified by slowing sales.

The above paragraph perhaps partially explains the volatility based upon trade comments, volatility amplified by the market dominance of these companies.

Radically changing topics, globally speaking, there is $7.76 trillion of negative real bond yields, up $2 trillion from October according to Barclays.  In mid-2016 there was a record $12 trillion of negative real yields.  Typically negative real yields correspond with inflationary growth as funds gravitate to the real economy from financial assets.

Bloomberg writes after hedging out currency risk, the yield on the 10-year Treasury dropped to minus 0.4%, the lowest since the funding markets blew up during the 2008 financial crisis.

Some would argue the surge in the amount of bonds with negative real yields is the result of trade fears that will slow global economic activity.  Some would also argue the rapid selling of investment grade rated debt over the past month that has created the greatest surge in investment grade credit spreads since 2016 is also the result of fears of a slowing economy.

The issue at hand is the economy is not slowing.  Quoting several Federal Reserve officials the current economic environment is “robust’ and is expected to remain robust for the next several quarters.

Simplistically speaking, there is a disconnect.  The other day I referenced JP Morgan research commenting about the proliferation of fake news and research reports that is greatly influencing trading, trading dominated by computers and six word headlines.

Can I remotely suggest that such is occurring today in an attempt to sway public opinion about the dangers of changes in trade policy?  Wow!  This is conspiracy theory stuff.

If JP Morgan is correct about the massive proliferation of questionable news and research reports, the above does not sound outlandish.  In my view, if any “credible” analyst writes comments that is found today in the blogosphere, comments that would make Henry Blodget blush, that analyst would be quickly cashiered.

Enough of the conspiracy rant, for the fourth straight day equity gains were cut in half by market close thus suggesting selling into any type of strength.

Just as an aside, late yesterday according to the LA Times, the California Public Utilities Commission will vote next month for a “texting tax” to provide funds for phone service to the poor. State regulators have proposed the tax would be retroactive going back five years.

Various business groups including Silicon Valley Leadership Group and the CA Chamber of Commerce is fighting the proposal, calling such as “dumb and unneeded.”  Several consumer advocacy groups are also protesting stating it would unfairly impact those who are “less fortunate.”

Wow!  If passed, would this be viewed in a similar manner as France’s fuel tax?  Government data states over 80% of California have a cell or smart phone.

Last night the foreign markets were mixed. London was down 0.40%, Paris down 0.37% and Frankfurt down 0.12%.  China was up 1.23%, Japan up 0.99% and Hang Sang up 1.29%.

The Dow should open nervously flat.   The 10-year is up 2/32 to yield 2.91%.


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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.