It was only a few short months ago I was looked upon as if I was suffering from paranoia, seeing monsters in every corner of the market. No many of my subscribers think I have gone mad because I don’t see the obvious signs of a U.S. recession. Meanwhile, equity fund manager and/or strategist after another is on the air waves telling us to that there is no fundamental reason for equities to sell off. A JPM Funds strategists was in CNBC late Thursday afternoon telling viewers to not pay too much attention to the bond market as it was “manipulated.” As I heard this while listening in my truck I could not see what see looked like, but by the youthful tone of her voice, she sounded as if her biggest financial worry during the last period of market volatility (2007-2008) was about catching the latest sale at American Eagle (how are they doing lately?).

Although central banks might influence the interest rate markets more than in the past, trust me, the 10-year UST yield would not be sub-1.70% if bond market participants were not concerned about disinflation. More telling is the yield of the 30-year U.S. government bond. At the time of this writing, the yield of the 30-year government bond stood at 2.52%. This is significant as the so-called long bond is the ultimate arbiter of inflation. It also has the least amount of central bank influence of all U.S. Treasury notes and bonds. Thus, can often be the purest measure of the bond market’s inflation expectations. It is often even a better inflation pressure than TIPS breakevens as TIPS prices are often influenced by retail investors, either directly or via mutual funds and ETFs. With the 30-year yielding around 2.50%, it is a good indication that bond market inflation expectations have fallen.

This in itself is not all that alarming as it signals lower inflation and not necessarily slower growth. However, the fact that one central bank after another has adopted negative interest rate policy indicates that the source of low inflation might have shifted from low energy prices to lower rates if of growth. I believe that many investors, advisors and market participants have become accustomed to extreme central bank accommodation. They now see low policy rates, even ZIRP, as normal. Those under the age of 30 know nothing else! This is surprisingly similar to what has transpired in Japan. Two generations of Japanese have come to see very low interest rates and low rates of economic growth as normal. They have adapted to these conditions so successfully that the Bank of Japan has had to engage in multiple rounds of QE and, finally, NIRP.