…were greatly exaggerated.

Rates are not likely to go much higher from here. I got ahead of myself in my latest posts, when I projected the rate rise a little too far. Although that scenario is still in play, I no longer think it is the most likely outcome. It’s likely that the narrative surrounding our newly elected and wild card president Trump will not stand the test of time… Nor will this massive jump in inflation expectations.

Consensus has simply turned bullish way too way too fast.

At the same time, a world not long ago on the cusp of deflation now finds itself worried about things going in the other direction. Higher inflation is now expected by a net 85 percent of the fund managers surveyed by BofAML, a 12-year high.

The narrative around Trump and other presidential candidates of the past has been proven wrong time and time again. After 8 years of gridlocked government it’s easy to see why investors are so hopeful for a return to efficiency in our bureaucracy. But hope isn’t a strategy and consensus is too bullish on the US government efficiency. Trump has already encountered trouble with his transition team and congressmen on both sides of the aisle are preparing to fight him on a number of issues. The US is a long way away from any stimulus plan. And the stimulus plans being discussed will likely be marginal and ineffective at best. The real growth from Trump’s plans will likely come in deregulation and tax code simplification, but those effects are still years away.

Let’s not forget the US consumer who is by no means healthy with debt levels hovering at record highs. The double hit from higher mortgage rates and Obamacare premiums is likely to be too much for them too handle. And yet investors are now piling into risky bank stocks at a record pace. Consensus is now bullish US equities and bearish bonds, ignorant of the fact that the stock bubble is supported by the bond bubble. Such a paradoxical narrative will likely be proven incorrect.

The push higher in both equities and interest rates seems to be one big head fake. The stronger dollar will hurt US international company earnings. The Fed is tightening interest rates in response to inflation expectations that are unlikely to be met. Important to remember, the rate hike has already been priced into the US dollar. US treasuries are exceptionally cheap to their foreign counterparts as well.

This bullish illusion we find ourselves in should quickly fade as the US economy slows, and inflation expectations fall, effectively dragging interest rates down with them which will temporarily weaken the dollar.