Taps Coogan – March 1st, 2021

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Having covered the debate on whether the economy is headed for ‘inflation’ or ‘deflation’ for years, we can report that in the last month more prominent analysts and investors have switched to the ‘inflation’ camp than we can recall ever happening before.

There is no point for being contrarian for contrarian’s sake, but we have a saying here at The Sounding Line. When everyone is forecasting the same thing, it’s not a forecast. It’s an observation.

In that vein, inflation expectations have rocketed to decade highs in the past month, crushing long treasury bond investors, pulling yields higher, and spooking markets. Calling for rising yields is no longer a forecast. It’s already happened.

Here to remind us that the market may be getting ahead of itself in pricing in so much inflation and growth is David Rosenberg of Rosenberg Research. He recently spoke with CNBC and declared that the bond market is “radically oversold” and ignoring the massive excess capacity in the labor market (and elsewhere).

Some excerpts from David Rosenberg:

“Our proprietary bond duration models right now are flashing green. I know that sounds incredible because everybody is tripping over themselves telling you to dump your treasuries. But look, I’ve made a career out of not following the herd… The 50-day moving average on the 10-year note yield is 1.1%. The 200-day is 0.82%, just to show you how far we’ve come. This bond market is so radically oversold that if you’re going to ask me where we are right, now do you see 2% or 1%, I think we are going to peel back to 1%. If we go back to 2%…, that would be on a huge technical overshoot.”

As we recently discussed, whether the move up in yields and inflation expectations continues or not, it has already revealed the limit of where the Fed and Congress can provide endless stimulus without tangible costs to markets and/or inflation.

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