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What Happens if Nominal Growth [Inflation Plus Real GDP] Spikes to 8%. Is This an Outlandish Thought?

Last weekend I watched Ground Hog Day, thinking is this not occurring in the equity markets?  Every day it is the same narrative.  The Fed may/may not increase interest rates.  Oil is going to continue to drop.  China is going to bring the world to its economic knees. 

In this era of instant analysis and reaction, one would think a new narrative will arise.  While I do not know what the Fed will do, I think it is foolish to believe that it may be “one and done.” 

What happens if the data consistently surprises on the upside?  What happens if nominal growth [inflation plus real GDP] spikes to 8%.  Is this an outlandish thought?

Real growth during the second quarter ex oil was 4.5%, the greatest gain since 1Q06.  As noted yesterday and based upon Economics 101, four out of the five major components are suggesting growth should accelerate.  8% nominal GDP is about as plausible of suggesting $45 oil a year ago.

Speaking of oil, it was one year ago today Goldman Sachs predicted oil will average $100 in 2015.  Last week, Goldman stated oil could potentially fall to $20, albeit this is not their downside target.

I printed this report and filed it with the July 2008 Goldman report suggesting oil could advance to $200 on the “peak capacity argument,” an argument that I did not accept then just as I do not accept this $20 possibility today.  [Note:  In 2008 oil was on a relentless climb, the narrative was the inverse of today.  My rational then…higher prices will force innovation.  Today, lower prices will cause production cutbacks and/or civil unrest threatening production]

Many are focused upon China.  While I do think China is significant, I do think the narrative has become too intense.  What are the odds the narrative will switch from China to the Middle East?  Wow!  That is a new and unsuspecting topic.

What is the significance of the Russian buildup of forces in Syria?  What about the incredible belligerent attitude of Iran?  How will the unfolding humanitarian crisis impact global markets and economies?  And then there is ISIS, the Sunni/Shia 1,400 year hatred, and the potential financial collapse of half of OPEC.

Is this an outlandish thought?  To the best of my knowledge, today is the only time oil prices have plunged in the face of Middle East violence and I will argue that there are an infinite number of outcomes because as America voluntarily “disengages” in this region.

If oil does rally, how will this impact inflation and monetary policy?  If one excludes energy from the inflation indices, inflation is already around the 2% FOMC downside target.

Many attempt to simplify the markets and the economy.  However all must remember both are complex and interlinked where the variables affecting each change on a daily basis.

It is universally accepted that change is the only constant and I will now ask will the narrative suddenly change because of some externality?

It has often been said to be careful in what one asks/writes as it may come to fruition.

There was little to comment about yesterday’s market action.  Equities closed quietly lower as the banter about the upcoming Fed meeting is becoming an unbearable deafening roar.

Last night the foreign markets were mixed.  London was down 0.12%, Paris up 0.69% and Frankfurt up 0.30%.  Japan was up 0.34% and Hang Sang down 0.49%.

The Dow should open quietly higher ahead of retail sales data.  Do I have to remind everyone there is a Fed meeting this week?  Futures are suggesting China’s 3.5% decline will not overly influence trading.  The 10-year is up 2/32 to yield 2.18%.

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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.