Tech Regulation, Tariffs, Net Neutrality And Indexing

By: Kent Engelke | Capitol Securities

In my view the end of net neutrality, tech regulation, and tariffs are interlinked. Technology/social media companies have become too powerful, a power that is negatively impacting society.

According to Facebook, 72% of Americans receive their news via Facebook. An issue at hand is that Facebook is not regarded as a publisher, therefore, is not liable for posted content. In my view, most posts are nothing other than rhetoric trying to incite one group against another. The content is partially delivered via Apple products, products that are manufactured in China.

And then there is net neutrality. Simplistically speaking, the large technology behemoths’ delivery channels have been subsidized by everyday Internet users. Crudely speaking, it is believed if AMZN, NFLX, etc. had to pay the appropriate tolls for their usage, cash flow for these behemoths would decline.

What does the above have to do with the markets? Everything. It appears every trade other than indexing has broken down. The much heralded AI/algorithmic trade has failed, evidenced by the ending of a hedge fund that was able to squeeze 1800 trading days into a few minutes utilizing “legions of computers.”

Bloomberg writes that almost the entire 2018 S&P 500 gain is concentrated in Amazon, Google, and Apple. Last month only 13% of large-cap core funds beat the S&P 500, the worst showing since Bank of America began compiling this data in 2009.

The technology/social media companies are under attack by powers that are greater than their sum total. Because of market dynamics that include rewarding the highest priced shares more than lower price shares, the danger for the indexing is rising. Is this the basis for Goldman’s warnings that the returns for the averages during the next 10 years will be lackluster at best?

There has been a race to the bottom regarding fees. A manner to achieve these fees is via indexing, the only trade that has not yet broken down but may give into rising political and societal pressures. It is a long time market axiom that the cheapest execution is the most expensive decision.

Should all head this warning or is it different this time?

Today is September 11. To me today is very personal as several of my friends and associates lost their lives. In many regards, the world today is more dangerous than in 2001.

Society is fractured, partially the result of social media. But we are better than this. We overcame 9/11 and will continue to overcome every other obstacle that is placed before us. Please remember all those who lost their lives 17 years ago in your thoughts and prayers.

Last night the foreign markets were down. London was down 0.59%, Paris was down 0.36% and Frankfurt was down 0.65%. China was down 0.18%, Japan was up 1.30% and Hang Sang was down 0.72%.

The Dow should open moderately lower on trade concerns.

The two-year Treasury or the instrument most sensitive to monetary policy is at a decade high of 2.75%. Seven years ago it was yielding 0.155%. One year ago it was yielding 1.32%. The 10-year is off 5/32 to yield 2.96%.

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