Heading into today’s inflation data, the prospects of German 10-year government interest rates going negative had added to the heightened risk aversion in global markets. And we’ve been talking this week about how markets are set up for a positive surprise on the inflation front, which could further support the mending of global confidence.
On cue, the euro zone inflation data this morning (the most important data point on inflation in the world right now) came in better than expected. We know Europe, like Japan, is throwing the kitchen sink of extraordinary monetary policies at the economy in an effort to reverse economic stagnation and another steep fall into deflation. And we know that the path forward in Europe, at this stage, will directly affect that path forward in the U.S. and global economy. So, as we said in one of our notes last week, the world needs to see “green shoots” in Europe.
With the better euro zone inflation data today, we may be seeing the early signs of a bottom in this cycle of global pessimism and uncertainty. German yields are now trading double the levels of Monday. And with that, U.S. yields have broken the downtrend of the month, as you can see in the chart below.
Source: Billionaire’s Portfolio, Reuters
With that in mind, today we want to talk about how we can increase certainty in an uncertain world. Aside from the all-important macro influences, even when you get the macro right, when your investing in stocks, you also have to get a lot of other things right, to avoid the landmines and extract something more than what the broad tide of the stock market gives you (which is about 8% annualized over the long term, and it comes with big drawdowns and a very bumpy road).
In our Billionaire’s Portfolio, we like to put the odds on our side as much as possible. We do so by following big, influential investors into stocks where they’ve already taken a huge stake in a company, and are wielding their influence and power to maximize the probability that they will exit with a nice profit.
This is the perfect time to join us in our Billionaire’s Portfolio. We’ve discussed our simple analysis on why broader stocks can and should go much higher from here. You can revisit some of that analysis here. In our current portfolio, we have stocks that are up. We have stocks that are down. We have stocks that are relatively flat. But they all have the potential to do multiples of what the broad market does. And for depressed billionaire-owned stocks, a broad market rally and shift in economic sentiment should make these stocks perform like leveraged call options – importantly, without the time decay. Join us here to get your portfolio in line with ours.
We talked this week about the way markets are set up for a significant positive perception shift. It’s been led by oil, which had its third consecutive close above $40 today. Yields are another key brick in the foundation that may be laid tomorrow.
As oil prices have been a threat to the global economic and stability outlook over the past few months, yields have also been sending a negative signal to markets. The yield on the German 10-year got very close to the all-time lows this week, inching closer to the zero line (and negative territory). And U.S. 10-year yields, following the Fed’s last meeting, have fallen back from 2% down to as low as 1.68% — just 30 basis points above the all-time low of July 2012, when Europe was on the edge of a sovereign debt blow-up. And remember, this is AFTER the Fed has raised rates for the first time in nine years.
So yields have been signaling an uglier path forward, if not deflation forever in places like Japan and Europe. Of course, the move by Japan to negative interest rates in January was a strong contributor to the perception swoon about the global economy. But a key component in Japan’s move, and in the coordinated actions by central banks over the past two months, has been the threat from the oil price bust. And that is now on the mend. Oil is up 58% from its February low.
To follow the stock picks of the world’s best billionaire investors, subscribe at Billionaire’s Portfolio.
Still, global yields are hanging around at the lows.
Tomorrow we get euro zone and U.S. inflation data. As we’ve said, when expectations and perception has been ratcheted down so dramatically, we can get an asymmetric outcome. Earnings expectations are in the gutter. Economic growth expectations are in the gutter. Same can be said for expectations on the outlook for inflation data. In a normal world, hotter than expected inflation is a bad signal for the risk-taking environment. In our current world, hotter than expected inflation would not be a good signal, it would be a very good signal. It would show the economy has a pulse.
Yields in the two key government bond markets are set up nicely for a bottom on some hotter inflation data.
Here’s a look at German yields…
Source: Billionaire’s Portfolio, Reuters
Tuesday, German yields touched 7.5 basis points. Remember, earlier in the month we talked about what happened the last time German yields were this low.
Bond kings Bill Gross and Jeffrey Gundlach said it was crazy. Bill Gross called the German bund the “short of a lifetime” (short bonds, which equates to a bet that yields go higher). He compared it to the opportunity when George Soros broke the Bank of England and made billions shorting the British pound. Gundlach said it was a trade with almost no upside and unlimited downside.
They were both right. In the chart below you can see the explosive move in German rates (in blue) away from the zero line. In the chart below, you can see the 10-year German bond yields moved from 5 basis points to 106 basis points in less than two months — a 20x move. U.S. 10 year yields (the purple line) moved from 1.72% to 2.49% almost in lock-step.
On the move down on Tuesday, the yield on the German bund reversed sharply and put in a bullish outside day (a key reversal signal). Could it have been the bottom into tomorrow’s inflation data?
Coincidentally, the U.S. 10-year looks like a bottom may be in as well.
Source: Billionaire’s Portfolio, Reuters
U.S. yields have a chance to break this downtrend tomorrow on a hotter inflation number.
As we said yesterday, in addition to oil, these are very important charts for financial markets and for the global economic outlook. A bottom in these yields, as well as the continued recovery in oil will be important for restoring confidence in the global economic outlook.
This is the perfect time to join us in our Billionaire’s Portfolio. We have just added the billionaire’s macro trade of the year to our Billionaire’s Portfolio — a portfolio of deep value stocks owned by the best billionaire investors in the world. You can join us here.
