Consensus is expecting the FOMC to lower the overnight rate by 0.25%. Is such necessary? Recent data is suggesting one of growing strength not weakness. As noted Guggenheim stated yesterday that it thinks the Fed should raise rates to avoid inflationary growth. [Note: historically negative real—inflation adjusted–interest rates are associated with inflationary growth. There has never been a time in history when there was $13.5 trillion of negative yielding debt. Over 40% of global bonds yield less than 1% according to the WSJ

I generally disregard consumer sentiment surveys for such are regarded as the ultimate feedback indicator. Historically they have little predictive qualities given that these surveys only tell us where we have been not to where we are going. A strong case can be made sentiment surveys are contrarian indicators.

My view has nominally changed. July consumer’s sentiment is very close to the record high achieved several months ago with levels greatly exceeding in all categories.

These lofty sentiment levels are contradictory given the constant extremely negative diatribe on a multitude of topics ranging from Washington to trade to geopolitics. At this juncture either the media has it wrong or the sentiment surveys are vastly misleading. I will argue the media.

Another area of strength is housing which is also greatly exceeding expectations as well as inflation which is very close to the Federal Reserve mandate of 2.0%. A recent headline read “Housing crisis deepens as prices soar past buyers reach.” Most measure their net worth by the value of their home. If prices are rising, sentiment also rises.

I must write that home prices are greatly skewed by the largest markets as most surveys are only focused in 7 or 20 markets. However with this written, prices are now rising in the secondary and tertiary markets, markets that will have a direct influence upon the sentiment of many Americans.

As noted above consensus is expecting a 0.25% increase in the overnight rate and I will write that if the Fed does not act, volatility will rise. Can I remotely suggest the next possible narrative is that the Fed could be falling behind the proverbial curve if growth continues to defy forecasts?

Speaking of environment that is difficult to explain or goes against “Natural Laws” is long term interest rates. Economics 101 dictates greater supply of debt dictates lower prices.

In my view the growth in the federal deficit is unsustainable. The US Treasury will issue over $1.2 trillion in Treasuries in 2020 to fund the deficit. Last year the Treasury issued about $1 trillion. Such supply should dictate higher longer term interest rates not lower.

If one was taking an Economics 101 exam and if the question read what would be the result if debt increased from $8.5 trillion in 2006 to $22 trillion fifteen years later, what impact would such huge issuances have upon interest rates? Every student would answer rates would be substantially higher given the natural law of greater supply dictates lower prices.

As widely known the yield on the 10-year Treasury has plummeted from around 6% in 2006 to around 2.0% today.

What is more astounding is the massive explosion of sovereign debt during the same period and the interest rate on a lot of this sovereign debt (over $13.5 trillion) is negative.

Negative interest rates have never occurred and such is violating another natural law of economics.

As widely known a lot of this debt is purchased by the same or comparable central banks that is originating it and paid for by figuratively printing money. Wow! Talk about the ultimate Ponzi scheme.

How will this end?

Speaking of another discount, oil has more than doubled since its 2016 nadir. Energy’s weight in the S & P 500 is continuing to slip even further from around 7% then to an all-time low of about 4.8% today according to Bloomberg.

Forbes recently published a graph that over laid oil shares to that of the NASDAQ. In 1999 oil shares were around 6.5% of the S & P and technology was about 20%. Three years later it was about 12% and 10% respectively.

Today the extremes are even greater.

Goldman has written that oil shares have never been this discounted to the price of oil in history. Wow! Talk about the ultimate value trade.

I can continue to write about other absurdities such as $1 trillion capitalized companies are regarded as “explosive growth opportunities” and today’s investing mantra is all about revenue growth at the complete expense of profits.

Historically the most obvious conclusions are those which are ignored and the extrapolation of the present into infinity believing there will be no change.

In 1981 all thought long term interest rates would never fall below 10% given that such were yielding over 14%. Today the yield is 2.59%.

Returning back monetary policy, seven months ago consensus was expecting 3 interest rate increases in 2019.  Today it is the inverse. Will consensus change in the next 7 months?

Last night the foreign markets were mixed. London was down 0.72%, Paris up 0.09% and Frankfurt up 0.27%. China was down 0.67%, Japan down 0.86% and Hang Sang down 1.31%

The Dow should open mixed but the outcome of the Fed meeting could greatly affect closing values. The 10-year is up 3/32 to yield 2.05%.


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.