E Edward Lambert's Recession Equation Warning

Edward Lambert, who has contributed to the study of effective demand, has produced an equation that indicates recession. The Cobra Equation predicts recession, as profits fall in relation to wage increases. It will be displayed at the end of this article. It results in the chart below, with the red line showing profit rate based on capacity utilization and the yellow chart showing profit rate based on unemployment. They are remarkably similar.

Utilization of capital reached its peak at the end of 2014 as you look at the chart below. The significance of this chart is that the Fed should have attempted to normalize rates while the business cycle was on the upswing, showing the yellow line descending on the chart. By the time the peak of the profit cycle hit in late 2014, the Fed should have normalized rates. Dr. Lambert believes that the Fed does not have the tools he offers to measure the business cycle correctly.

As Dr. Lambert has said:

The utilizations of labor and capital reached profit maximization, slid along the max limit, and have since backed off which is setting the stage for a recession type scenario.

Dr. Lambert talks about Tim Duy and his statement that GDP is falling while the labor market is improving. The chart above and the equation below measure that reality. However, Tim Duy has something else to say that is much like what I have seen from others. He said that interest rates are simply not enough. He believes that the conundrum is still in place and that just focusing on short term rates will fail:

The flattening of the U.S. yield curve as investors see little chance of rates rising in the longer term should serve as a red flag that their focus on short-term interest rates may be doomed to failure.

I have also believed that the Fed simply wants interest rates to remain low on the long end so that more long bonds will be bought and used as collateral, creating more prosperity. The collateral must be protected and the Greenspan conundrum still likely exists based on real bond demand. But clearly, the Fed did miss the business cycle and seeking to raise rates now, according to Dr. Lambert, would make things worse, having missed the cycle. But Tim Duy had more to say regarding flattening of the yield curve:

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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