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WOW!  What else can I write?

We will spend the next few years trying to unpack what happened in the 2016 election.  The Democratic Party, once viewed as the “People’s Party” is supported by the educated elites which include those in academia and highest echelons of the largest businesses on the one end and those in the lowest socio economic group on the other end.  The Democratic Party has essentially abandoned the center.

The Republican Party is now the party of the middle class, the group that believes the odds are stacked against them in two different directions.  On the one hand, there is great resentment to the advantages given to immigrants and minorities.  On the other hand the anger is intense towards crony capitalism where the odds are stacked against small businesses, the result of regulatory fiat where small businesses do not have the monies to challenge and fight.

How will the changing political structure impact the markets?  In my view the interdependent/multipolar world that has favored the mega capitalized growth issues is dead for so many reasons including the total obliteration of foreign policy where in 2010 America publically abdicated its 70 year unspoken role of the global policemen.

As noted many times market performance has been one sided for about eight years favoring these issues where fundamental analysis is no longer valued.  Investing decisions is made entirely upon size.

Perhaps the great Warren Miller quote “Size Matters in Every Aspect of life” is appropriate at this juncture.

In my view one of the greatest issues the markets will face in the next 12 months is rising interest rates and the impact upon the $20 trillion deficit, a deficit that doubled during the past eight years.  Currently the debt service coverage is around $325 billion or about the same amount as it was in 1996 when the federal deficit was about 25% of today.

Former Fed Chair Greenspan warned late last week the 10-year can easily spike to 3% to 4% in quick order.  If yields rose to the 4% area, the debt service coverage will increase to around $850 to $900 billion or about 26% of the $3.5 trillion federal budget.

Wow!  What will be the macroeconomic implications? In a smaller context, how will the mega capitalized growth issues respond given that interest rates are the largest component of valuation formulas?

Perhaps the only absolute comment to make is the ultimate outcome is one that no one has yet discussed.

Last night the foreign markets were down.   London was down 0.06%,  Paris down 0.73% and Frankfurt down 0.74%.  China was down 0.62%. Japan down 5.36%and Hang Sang down 2.16%

The Dow should open sharply lower as the Establishment has been fired.   The 10-year is off 25/32 to yield 1.95%.

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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.