Over the last few years, there have been periods where the economy seems to be in something of a mini-boom phase.  The GDP numbers have remained low (but still mostly positive), but certain sectors seem to be booming.

To be sure, it hasn’t been an overall boom for the American middle class.  The only good news is that unemployment rates have dropped, although even these numbers are sketchy.  Some Americans have just given up looking for work, or have decided it isn’t cost effective to send a spouse back to work.  If incomes are low enough, the after-tax income of a spouse could be not much more than the cost of daycare for the children.

The primary areas for the boom have been stocks and housing.  Some might say we have a boom in bonds, but interest rates were already low.  Even in stocks and housing, it depends.  Some of the big names have done well, such as Apple and Amazon.  There have been some bad ones too.  It is just that the big stocks have tended to pull up the overall market.

In housing, it all depends on the location.  Some places, particularly in California, are probably in another bubble.  In most areas, there has been significant appreciation over the last 6 years or so, but still not up to levels that were seen 10 years ago.

The boom in stocks and housing has benefitted some in the middle class, but it has also hurt some in the middle class.  If you don’t own a house or stocks, then it doesn’t do you much good.  In fact, when it comes to housing, it is a detriment to anyone who doesn’t own.  They are priced out of the market, and they are likely paying higher rents.

When it comes to stocks, most middle class Americans don’t own stocks except for the mutual funds in their retirement accounts.  Unfortunately, they are going to see a good portion of the gains wiped away when the bust finally hits.

The problem with this mini-boom – especially in these two sectors – is that it is built on the Fed’s previous loose monetary policy from 2008 to 2014.  The appreciation in asset values can quickly vanish.

I think the consumer price index (CPI) numbers are not all that accurate.  The CPI doesn’t account enough for asset prices.  And low CPI numbers can deceive us in terms of the damage that the Fed is doing.  Even if the Fed’s monetary inflation doesn’t immediately result in high consumer price inflation, it is still misallocating resources.

Still, I think the CPI is useful for trends.  It can also somewhat tell us the demand for money.  The CPI numbers had been trending down, which threw up a cautionary flag for an impending bust.  It was signaling that maybe consumers had slowed down spending.  When consumers are spending less (not bidding up prices as much), this can result in lower consumer price inflation, all else being equal.

However, the latest CPI numbers for August 2017 show a bump up in price inflation.  The August CPI was up 0.4% from the previous month.  The more stable median CPI was up 0.2% from the previous month.

The year-over-year CPI is now at 1.9%, while the year-over-year median CPI is at 2.2%.

This is a slight reversal from the previous trend.  Since the CPI has picked up again, it indicates that this mini-boom may have some more legs.  Anyway, it seems that most asset bubbles last longer than what seems likely.  Therefore, even though I am light on stocks, I would not be surprised to see stocks run higher before the bust.

We can continue to keep an eye on the Fed’s monetary policy coupled with the CPI numbers.  It is also important to pay attention to the yield curve, as a flattening yield curve could indicate a coming recession.

Meanwhile, I am in cautious mode.  I don’t want to get too sucked into the boom, but I am also not ready to massively short the market.  This is why I recommend a permanent portfolio.