A Quiet Day

By: Kent Engelke | Capitol Securities

Markets were quiet following April’s jobs report that all but guaranteed a June rate hike and the perceived convincing defeat of populism in France’s presidential election. Oil was essentially unchanged even as Russia and Saudi Arabia stated supply cuts will be extended.

Commenting about oil, three mega-sized investment banks commented that the backdrop for crude will and is quickly improving, with two of the three firms (Goldman and Scotia) using almost the same verbiage of “traders losing sight of the forest for the trees by focusing on US production growth and not in the context of declining global supply.”

As widely discussed, oil is down about 15% for the year, the result of American shale production. Inventories however have declined for four consecutive weeks.

Will crude and oil shares be the next beneficiary of massive funds flow, the result of algorithmic and technology based trading? Several firms have noted the bifurcation between oil and technology shares with the former as grossly undervalued and the latter grossly overvalued.

Perhaps the greatest over-valuation in the markets exist in the Treasury market. As written last week, based upon the CPE real Treasury yields, they are negative through 10 years.

About 10 years ago, I wrote an inverted yield curve has a 100% correlation to a slowing economy and all recessions were preceded by an inverted yield curve. I also wrote this has been the longest and steepest inversion in history thus suggesting the odds are very high a severe recession will occur. [Note: I did not remotely suggest the face of American capitalism would change almost on a daily basis].

Ten years later and as indicated above, today is also historical. The absolute dollar amount of bonds with negative real interest rates is at a record. Typically negative real yields are associated with inflationary growth. This is not the case as the economy has not grown by 3% per annum for 10 years, eclipsing the previous record of 4 years from 1930-34.

As noted many times, excess bank reserves are at historical proportions. Additionally, monetary velocity is anemic.

It is against this backdrop — negative real yields, excess reserves, a potential rise in monetary velocity – that I believe a 3% growth rate is achievable, perhaps even greater if the robust sentiment surveys translate into economic activity, partially the result of tax and regulatory changes.

Last night the foreign markets were mixed. London was up 0.60%, Paris was up 0.28% and Frankfurt was up 0.65%. China was up 0.06%, Japan was down 0.26% and Hang Sang was up 0.27%.

The Dow should open flat. The 10-year is flat at a 2.38% yield.

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