August 7, 2026
Not investment advice.
In the next few weeks, it all comes down to inflation.
There are two types of productivity booms—inflationary ones and non-inflationary or deflationary ones. The 1996–2001 boom was non-inflationary. The 1970s tech boom (the beginning of more widespread use of computers) was inflationary, as you can see below. Much of it depends on how much money goes to labor, the most significant input into any inflation model. Of course, oil shocks don’t help.
We are in a productivity boom and, when it comes to stocks, a frenzied boom. Kate’s measures of US growth are hot, for the reasons I have said before—big fiscal deficit, significant corporate spending. Equity valuations (in aggregate) are elevated, thus vulnerable to a tightening.
If inflation accelerates, the Fed will have to raise rates multiple times. While it won’t bite the first time, the third or fourth hike will probably end the equity rally, perhaps violently. But inflation measures are not accelerating. At least, not yet, despite fast growth. The prime culprit is average hourly earnings, below. They are clearly decelerating.
Fed chief Warsh doesn’t want to raise rates and some who get down into the details of CPI, see high odds the next few prints will be benign. The difference between 0.15 versus 0.30 a month matters. The next inflation data comes out next week. If it’s 0.2 or below, poof, there goes the September rate hike, currently at 42% odds.
In the 1970s, bonds got hammered. Stocks had big booms and busts and went nowhere for…14 years (68-82). A rise in inflation may still occur given how strong growth is, but timing matters and for now the inflation pot is off the boil, which is bullish bonds and reduces the risks on stock valuations.
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