By: Kent Engelke | Capitol Securities
In my view, the markets have been ignoring the great divergence between value and growth as well as escalating geopolitical tensions. Both topics have been covered greatly in many venues suggesting great complacency.
Many times I have commented about the velocity of change and to expect the unexpected. The status quo is never maintained. There will be some event that will shatter today’s complacency, an event that is so obvious that most will comment why it was not recognized earlier.
Contrary to many, I think the surprising event will be growth stronger than expected that questions all assumptions. I reiterate the catalysts for this growth is a rise in the velocity of money, stronger than expected jobs data, rising home values, reduced regulations, greater confidence in tomorrow and tax reform. All but one — tax reform — is present today.
This growth – growth that is focused on Main Street versus Wall Street – coupled with the sudden acknowledgement that the world today is not the world of yesterday, may cause a massive transition in all markets. A transition perhaps commencing in the bond market.
The complacency in the Treasury market is at historic proportions. During the past six years, many have commented about the risks, risks that have not evolved. It can be argued once the bond market begins to unravel, so will the passive trades in the momentum technology growth issues that have dominated performance.
This is not a radical thought. It is one echoed by many luminaries.
And then there is the geopolitical environment which in my view is deteriorating daily. Will there be an oil disruption that causes crude to spike, a spike that questions inflationary assumptions?
What about North Korea? All have discounted the statements as baseless rhetoric. If Kim Jong-Un is as crazy as many leaders state he is, he may launch a strike to prove to the world that he is not just a windbag bellicose toothless tyrant. Radical thought? Not according to the periodical Foreign Affairs, especially if he believes the world is against him.
How will such an event impact the markets? Obviously the outcomes are infinite. On a different note, North Korea is desperate for money. The current environment is great for North Korea’s arms marketing program. There are reports that Jong-Un is courting other rogue nations such as Iran and Syria for potential arm sales.
Last night the foreign markets were down. London was down 0.0.6%, Paris was down 0.14% and Frankfurt was down 0.16%. China was up 0.07%, Japan was down 0.30% and Hang Sang was up 0.59%.
The Dow should open nominally lower as there is a chorus of high profile luminaries questioning valuations and the narrowness of both the equity and Treasury markets. The 10-year is off 2/32 to yield 2.27%.