When A Great Deflationary Bear Starts Turning Inflationary
by Tyler Durden
Over the past four years one of the dominant “deflationists” has been Gluskin Sheff’s David Rosenberg. And, for the most part, his corresponding thesis – long bonds – has been a correct and lucrative one, if not so much for any inherent deflation in the system but because of the Fed’s actual control of the entire bond curve and Bernanke’s monetization of the primary deflationary signal the 10 and certainly the 30 Year bond. The endless purchases of these two security classes, coupled with periodic flights to safety into the bond complex have validated his call. Until now.
In his latest letter the Gluskin Sheff strategist appears to be on the verge of a “tectonic shift” in his outlook and appears on the verge of transitioning to an inflationary view. The catalyst? The same one we have been highlighting for the past year – the central-planning induced breach of one of the most fundamental economic principles in the face of Okun’s law, which traditionally has been the basis for the Fed’s belief that based on current reads of output and GDP, the amount of slack in the system is still a very recessionary 6%, and that with further relentless monetization this output gap may be closed further resulting in a drop in the unemployment rate to the Open-Ended QE’s target of mid-6%. However, as we also pointed out previously, this does not jive with the recent surge in labor costs and drop in productivity, both of which are indicative of far less slack in the system and a far smaller output gap, than the Fed believes is present.
Naturally, the logical conclusion is that with the Fed injecting $85 billion in deferred inflation into the system and with the output gap substantially less than forecast, the reflationary inflection point is certainly closer than many have feared. Certainly closer than a great deflationist such as Rosenberg has feared. From his latest letter: