Germany's Outlook Is Terrible, Gold Could Be Playing Possum, And Multiple False Trends Look Good
London (Mar 1) Summary: •Interest rates near zero or negative around the world would seem to imply a very dark economic outlook, yet markets are in full risk-on mode.
•The macro picture is bleak but multiple false trends appear to look strong and offer opportunity to the long side.
•Gold has not gotten the job done, but the recent stall out could just be a pause before a larger move to the upside.
Think about how nutty markets are right now. Meaning we are really Cuckoo for Cocoa Puffs here. We do not say this as a form of sour grapes: We did quite well in 2014 and are in the black for 2015 as of this writing. But objectively speaking, the activity out there is just bizarre, relative to the way normal-function, halfway "healthy" markets might appear. This is the dazed aftermath of a toxic medicinal cocktail…
Take Germany for example. The Germans just sold five-year notes at a negative yield for the first time, following Finland.
You now have to pay Deutschland to lend them your money at maturity of half a decade (Switzerland had already gone negative on the 10-year). Why would anyone do this? Well, if you think deflation is coming, you might calculate that the cash you get back in 2020 will be worth more than the cash you are depositing today. But this is not just a German thing; Ireland 10-year yields are now below one percent. The ECB is paying out a yield of negative 20 basis points and there are concerns that, with the "euro QE" that is coming (to the tune of sixty billion euros per month), there will not be enough high quality sovereign bonds for the ECB to purchase.
Interest rates near zero or negative around the world would seem to imply a very dark economic forecast. There is little growth in Europe, and what little growth exists (e.g. German) is threatened by export currency wars and China slowdown. Yet the immediate focus is on QE and stimulus, not the awful message of global bond markets, so global equities are going near-vertical. The bulls are partying like the economic and corporate profit outlooks, for Germany and elsewhere, are the best they've ever been. Either we are missing something big, or this is a distortion-driven delusion based on faith in central banks and risk appetite inspired by lambada rates. You would think Germany has a bright medium-term future going off the DAX: Yet in fact the outlook is just horrible!