Hello Eoin, I am particularly enjoying listening to your audio recordings as markets are so interesting. I was a little confused by something you said in Friday's audio compared to the previous Friday. In the latest audio, you were saying that there was a lot a bullishness amongst analysts on Wall Street and that this was a contradictory indicator which is how I would interpret it after a strong move up in markets. But if I remember correctly, the previous week you sounded very bullish yourself and seemed to be suggesting that the US indices were more likely to break out to the upside. I was left with the distinct impression that you felt this was imminent. Have I read you correctly? Even before Europe's swoon over the past few days, the US markets were looking a bit tired.

Eoin Treacy's view

Thank you for this email which may be of interest to the Collective. My comment on Friday was in relation to the fact that sentiment was extraordinarily bearish at the low in February while more recently there have been a number of high profile analysts predicting an imminent breakout. This suggests they were already positioned for such an outcome, so we can conclude there were less people with available cash to buy new highs. Scope for a pullback increased as a result and there was evidence at the end of last week that it was underway. 

Negative interest rates are inherently deflationary. Lending money with a guarantee of getting less back runs contrary to the interests of savers and to capitalism generally. In fact since it is deflationary upward pressure on both the Euro and Yen have, so far, been a result of negative rates in part because the supply of these currencies is reduced by the policy. That’s not exactly what the ECB and BoJ wanted when they announced the programs. 

The big question then is when are they going to decide that it is not working? Helicopter money is the most high profile item on the extraordinary monetary policy menu that has yet to be used. In other words, central banks flood the market with cash, bypassing the banking sector which until now has been hoarding it. With additional cash in their pockets consumers will be expected to spend which might kick start the credit multiplier. With such an outright inflationary policy looking more likely, the potential for stocks, property and precious metals to outperform would improve. 

That would suggest that while stock markets have been rangebound for 18 months and are currently pulling back, the medium-term outlook is for additional upside, assuming of course that central bank policy turns expansionary once more.