Guest post by Bruce Carman.
He first comments on an article from Jeremy Grantham who says that a coming bubble is likely.
“. . . There are massive reserves of labor in the official unemployment plus room for perhaps a 2% increase in labor participation rates as discouraged workers potentially get drawn into the workforce by steady growth in the economy. There is also lots of room for a pick-up in capital spending that has been uniquely low in this recovery, and I use the word ‘uniquely’ in its old-fashioned sense, for such a slow recovery in capital spending has never, ever occurred before.
“. . . I would be licking my lips at an economy that seems to have enough slack to keep going for a few years.â€
(Now Bruce Carman writes…)
I suspect that Grantham does not understand the implications of effective demand. He assumes much more slack in the economy than there likely is.
I infer that he also assumes that the economy won’t experience the risk of recession until after the Fed raises rates and the yield curve inverts. But the yield curve does not invert before recessions and bear markets during debt-deflationary regimes, as in the 1830s-40s, 1880s-90s, 1930s-40s, Japan since 1998, and the US and most of the rest of the world in 2008 to date. Japan has experienced 4 bear markets and 3 recessions since the country’s yield curve last inverted in 1992. The US experienced a similar pattern from 1931 to the early to mid-1950s.
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Moreover, the price of oil has accelerated YTD, yoy, and q-q annualized, resulting in CPI accelerating from 1.5% at the end of 2013 to 2.5% YTD and 3.8% q-q annualized for Q2, accelerating to a rate faster than yoy and annualized nominal GDP and reducing q-q annualized real income and wages for Q2 to ~0%. Therefore, we are experiencing a mini-oil shock (by duration so far) to an economy at a much slower secular trend rate of growth, risking no real growth or recessionary conditions most economists do not perceive (not publicly, in any case).
