At a time when bullish investor sentiment has soared to extreme levels, we can see some storm clouds coming:

At a time when bullish investor sentiment has soared to extreme levels, we can see somestorm clouds coming. Yesterday’s market reaction to the +0.3% MoM print in U.S. retail sales attests to the view that a whole lot of growth is being priced in. Meanwhile, the real economic data are going to be deflated by a surging deflator — U.S. import prices of food has risen at a 30% annual rate in the past three months and fuels by a whopping 60%. That will surely cut deeply into spending power insofar as these costs get passed on. A flat reading in the NationalAssociation of Home Builders index at a depressionary 16 level confirms that the housing sector is going nowhere fast (see Banks Push Home Buyers To Put Down More Cash on the front page of the WSJ — median down payments are up to 22%!). If you are looking for real estate that is hot, it would seem as though the “ag” sector is in a full-fledged secular bull market (see Rising Crop Prices Lift Farmland Values on page A2 of the WSJ).

Meanwhile, U.K. inflation has already risen to a two-year high of 4% — double the Bank of England’s target. The central bank is caught in the box here because the run-up in inflation has occurred alongside a Q4 contraction in the economy. In fact, growth was surprisingly weak across the continent — a mere 0.3% inch-up in eurozone real GDP in Q4. The ongoing unease in the Mideast should also command a higher risk premium in the markets from a geopolitical standpoint (all the more so if the Muslim Brotherhood were to ever emerge victorious in Egypt).

Looking for an asset class with possibly way too much risk priced in? Try muni bonds — they are probably going to like to see more articles like this too — State Cuts Rattle Unions on page A3 of the WSJ and Minnesota Considers Top-Tier Tax Boost on page A5 (the Governor is aiming to boost the top marginal income tax rate to 13.95%, which would be the highest in the country).

….to read more items in this mornings dispatch register at Gluskin Sheff HERE