We Are Living In A Period Of Tectonic Change

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By: Kent Engelke | Capitol Securities

Many times I have opined the world is undergoing a tectonic change where yesterday’s rules no longer apply. The issue at hand is most investors are playing by yesterday’s rules, the result of algorithmic trading and indexing which accounts for over 90% of total volume. There is no macroeconomic or geopolitical analysis.

As I noted several times, I believe the mega-capitalized technology firms, specifically five companies that comprise an incredible 28% of the NASDAQ’s capitalization and 19% of the S & P 500’s value, have generally been exempted from the rules and regulations that would have sunk mere mortal companies.

Is this exemption about to change given the rising calls that these companies are monopolistic, crushing competition and to heck with customer confidentiality, further believing there is too much power concentrated in just a few?

Last week the WSJ discussed the rising number of “reeducation camps” in China. At the current pace, the number of “reeducation camps” would match the number present during the “Cultural Revolution” of the early 1970s.

Domestically, there are ample reports that today’s social media companies are attempting to “reeducate” American and western democratic societies to their view of equality. Anyone who disagrees is immediately branded as a bigot, uneducated and an unenlightened Neanderthal, dehumanizing anyone who believes in the traditional Judeo Christian ethics.

I ask what the difference between a Chinese reeducation camp is and today’s social media companies other than one is government run? I do think it is noteworthy that China has similar companies as Google, Facebook and Amazon such as Bajdu, Alibaba and Tencent that will assist in Chinese surveillance.

It could be of great market significance if greater scrutiny of today’s mega-sized social media companies occurs.

And then there is the attitude of these companies towards taxation. Greater taxation and social engineering is okay as long as they are not impacted. Is this attitude changing, utilizing Amazon’s reaction to Seattle’s headcount tax? Seattle’s city council voted unanimously to assess a $295 tax per employee on any company that has over $20 million in revenue in an attempt to resolve various social issues. Amazon is very displeased.

Yesterday it was reported cities in the Bay Area, including San Francisco, are considering a similar tax amounting to $250 to $300 per head. The corporate response is similar to that of Amazon’s.

Are these corporate behemoths beginning to adopt the attitude of the electorate that it is not okay that government dictates social policy via taxation and redistribution?

This potential change in attitude can be of great significance.

Perhaps another issue of great consideration, yesterday the IRS warned taxpayers to proceed with caution after high tax states including New York, New Jersey and Connecticut approved “workarounds” to the new federal limits on deductions for state and local taxes via the ability to declare such taxes as charitable deductions to offset federal taxable income.

In my view, this is yet another example that taxes and social engineering are great just as long you are not the one whose income is being redistributed.

Enough of the socio economic rant, the Minutes from the recent Fed meeting were released. Generally speaking, the Minutes were dovish indicating another interest rate hike will occur “soon” and the Committee would “welcome” a modest overshoot of their 2 percent inflation target, indicating they are in no rush to tighten more aggressively.

Equities erased losses, closing mixed. Treasuries were nominally higher in price, but the yield on the 10-year is still over 3%.

Last night the foreign markets were mixed. London was down 0.15%, Paris was up 0.35% and Frankfurt was down 0.11%. China was down 0.45%, Japan was down 1.11% and Hang Sang was up 0.31%.

The Dow should open nervously unchanged navigating escalating geopolitical and trade issues. The 10-year is unchanged at 3.0%.

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