THE TALE OF TWO ECONOMIES

Barron’s wrote yesterday US technology firms are and will continue to bear the grunt of the trade war.  In my view this is just the acknowledgment of the obvious given the current supply chains and methods of production for many technology products and services.

Many times I have commented about the beginning of the massive transition of wealth from Wall Street back to Main Street.  Silicon Valley is synonymous to Wall Street.

Yesterday’s data indicated Main Street economy is continuing to accelerate. Retail sales were considerably stronger than expected.  Wal-Mart who defines Main Street posted results considerably stronger than expected and raised year end guidance.

Wal-Mart is about 10% of non-automotive retail sales whose on-line sales increased by 37%.  Amazon’s revenues are less than half of that of Wal-Mart whose revenues are rising at the mid-single digits.

Weekly jobless claims are hovering around 50 year lows and home prices in the secondary and tertiary markets are rising around double digits while home prices in “Wall Street America” are stagnant at best.

During the last two great economic eras of 1982-1987 and 1996-2000 where growth exceeded 4% an annual basis, ninety percent of job creation occurred via small business, defined as companies that employ less than 400 employees.

From 2009-2016 about 90% of job creation was from the mega corporations.  Around 2014 for the first time Gallup reported the greatest fear of small business was government intervention and regulation as opposed to economic fears.

The pages of the Federal Registry increased four fold during the Obama Administration with the greatest surge occurring in the financial industry…a 10 fold increase.  Such an increase stifled small businesses and small business creation for these firms cannot afford attorneys and accountants to navigate such complex issues.

I will write conspiratorially big government and big business are one in the same; big business using government to stifle competition, a theme that is partially used by all 24 Democratic Presidential candidates as well as the President.

As indicated above, Main Street America is jubilant as measured by the near historical highs in various sentiment indicators, indicators that are suggesting the biggest issue is finding qualified workers and the fear of the federally mandated increase in minimum wage.

In my view Wall Street…Silicon Valley is doing everything possible to ensure the President will not be reelected under the simple guise that there is no interest like self-interest.  As Barrons wrote the greatest sector at risk in the trade war are the technology concerns.

It is wildly accepted the Establishment does not like the President.  All other manners of attempting to remove him from office or limit his influence have failed.

The electorate historically votes their pocket book. If the economy is in a recession or a pronounced slowdown, the odds of the President being reelected are greatly lowered.

As suggested, a Tale of Two Economies is perhaps arising…Main Street vs. Wall Street.  Main Street was decimated from 2007-2016.  Most data is suggesting Main Street is rising from the ashes.

As noted many times the markets are entirely dominated by technology based trading where momentum is the only parameter.  To hell with value. Because of the narrative of a slowing economy because of trade, there has been an incredible and incomprehensible rally in Treasuries.

The 30 year is now yielding 1.94%.  The 10 year Treasury was yielding 2.45% sixty days ago.  Today it is 1.49%.  Wow!  I must write two weeks ago the Federal Reserve described the economy as “robust” with the recent data points indicating acceleration.  However the Committee did write there are considerable “headwinds.”

I think I can safely write simply based upon Treasury yields, fear is at the greatest level in at least a generation maybe in three generations.  Are these fears real or are the yields the result of something that we don’t yet understand or comprehend?

I must write historically the US does not follow the global economies.  If the US slips into an economic slowdown because of trade it would be another long line of “firsts.”

One cannot make up today’s narrative.  What will tomorrow’s narrative read?

Markets were again volatile as the S & P 500 swung more than 1% from its high too low for the 12th straight day.  Treasuries continued their unending advance, an incredible feat given the explosion of federal debt.

According to the WSJ, more than 50% of America’s $22 trillion in outstanding debt matures in the next three years.  The weighted average cost of that debt rests at less than 2%.   A rise to 3% would increase the deficit by an astounding $220 billion a year.  Wow!!!

Last night the foreign markets were up.  London was up 0.62%, Paris up 1.06%  and Frankfurt up 0.92%.  China was up 0.29%,  Japan up 0.06%  and Hang Sang up 0.94%.

The Dow should open moderately on economic optimism.  Because of the latest data, consensus now is expecting a third quarter growth rate between 2.1% and 2.4%.   Wow!  This is the inverse of what the bond market and the media is suggesting.  The 10-year is off 4/32 to yield 1.55%.  The thirty year is now yielding 2.02%.

kent
The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. 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. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.