Dow pricing in future disappointments
Dow Jones stock index continues downward. Why? The future will be disappointing. So these future disappointments are already being priced in. Why wait for the bad data? We know its coming.
- Europe is in trouble.
- China is slowing.
- Oil prices are going to low for many producers.
- Retail sales are weak due to capital income slowing down its consumption.
- Fed policy is dead in its effectiveness.
- There is no fiscal stimulus in the works.
- Real GDP has hit the effective demand limit.
If an economist does not know when the business cycle will end, they will make serious errors in judgement. My advantage over the great economists of our time is that I found a theory of effective demand that determines the end of the business cycle. I could see things that they could not.
For example, this year’s fall in unemployment was due to firms trying to salvage their profit rates right before the effective demand limit hit. Firms were vulnerable. Economists erroneously thought the economy was recovering. Yet the fall in unemployment was a sign of vulnerability instead.
I have been saying for over a year that the end of the business cycle would come when real GDP reached the effective demand limit at around $16.100 trillion. Real GDP reached that level this quarter. A recession will form from this point forward. I see a recession forming when real GDP reaches $16.250 trillion, which looks to be in the first half of 2015. An official recession would start within a few quarters later.
From now on, it is useless to talk about the Fed rate rising next year. The economy is in trouble. The Fed rate will not rise. Monetary policy will change its focus from supporting growth to managing decline. That means more accommodative policy, possibly even more QE.
The stock markets are aware that the business cycle has ended. The Fed and prominent economists are simply behind the curve in understanding that.
Well that’s one explanation of a stock market dive, but it doesn’t make room for the roller cycle ride that the market has been lately. What goes down has been coming up and vice versa. I’d sure like to have a peak at the early ins and outs when the coaster gets moving, as it did today. Is it anything to do with economic expectations? Or, is it just as likely to do with market control by a handful of institutional traders, including bank trading depts. and hedge fund traders. Coordinated large scale selling at a point thought to be high enough to start a stampede followed by
bargain hunting by the same stock herders, I mean traders.
What’s that you say? Such activities would be found to be illegal or something like that? I seem to recall that a big time hedge manager had a hand in choosing the junk that went into one of Citibank’s CDOs and immediately placed significant bets against those very instruments of mass destruction. That was legal? Someone went to jail? Someone was even prosecuted?
There is little economic sense to the market activity on any short term basis. Sometimes it baloons out of proportion to over all economic circumstances over a some what long period of time, a year or two or three. Then when someone, or small group, notices that PE ratios are nuts the market implodes. And again the big time traders make their killings. The current screwball activity of the market is less a result of economic forecast and more so the result of big players playing the ups and downs of the news cycle and taking advantage of the rubes we all are otherwise. How’s your 401K doing lately? Are you expecting the fund managers to give back their 1%-1.5% they rake off the top?
Edward,
I usually ignore stock market movements but this month’s losses seem to be building. Perhaps there is no specific cause, just the increasing number of risk factors.
And this makes you wonder ‘Why now?’ :
From: http://www.reuters.com/article/2014/10/11/us-banks-derivatives-regulations-idUSKCN0I00T720141011
————————————– Start extract from Reuters 11 Oct 2014 —————————————
“The International Swaps and Derivatives Association (ISDA) and 18 major banks that dominate the market will now allow financial watchdogs to apply temporary stays to prevent a rush to close derivatives contracts if a bank runs into trouble, the ISDA said on Saturday.
A delay would give regulators time to ensure that critical parts of a bank, such as customer accounts, continue smoothly while the rest is wound down or sold off in an orderly way.”
————————————– End extract from Reuters 11 Oct 2014 —————————————
Would we see a chain reaction if some derivatives failed to pay off? Can derivatives really be separated from other obligations of a bank?
I would ignore Europe, China, and falling oil prices. We are the net importer and we are not dependent on oil revenues. Europe, China, and the oil producing countries should really be concerned about our economy. And there can be no doubt that the US economy is in trouble.
I sincerely hope you are wrong. Assuming you are not, is the only policy prescription, given what the Fed has already done, the seeming impossibility of fiscal stimulus? And, would even that work in the face of
the limits of effective demand?
Seems to me it’s mostly about Europe and China.
Peter K.
The US market is be held up by Fed promises of continued ZLB. Hiding underneath the US market are problems of vulnerable profit rates and marginal firms being strung along by banks. The stock market is riding a fragile high upon this. The stock market will start to come down as people realize that the economy will not be able to grow beyond this point which I match to the effective demand limit.
Dropping Oil and gas prices will be a boon for economic growth in the coming quarters as people will find themselves with more disposable income.
(right near where I live gas is about to drop below $3, granted its that low only at Cash only stations, but still, its glorious, and add in my job’s reimbursement for travel and I’m actually making money by driving)
axt:
Fracking is good at $90 to $100/ barrel. It will slow down fracking also.
Edward–
You write: “The stock markets are aware that the business cycle has ended. The Fed and prominent economists are simply behind the curve in understanding that.”
This suggests that markets are rational. In truth, markets are only as
rational as we are (not very). Market are driven by greed and fear.
As a result it is impossible to forecast what the market will do over the short or medium term.
Over the long term, it’s easy to forecast– bull markets will be followed by bear markets, will be followed by bull markets. But those cycles can
last 10 years or longer.
Thanks Maggie for bringing us back to my point noted above, though that may not have been your intention. Look at the Dow over the past four days. How can anyone’s analysis of economic conditions current, future or past have anything to do with the instability of the market’s activity over any short period of time? Maybe the SEC, or whatever agency is responsible for fair play in the stock market, doesn’t have the ability to track the trade activities of the biggest traders. That seems very unlikely to me, but we never hear or read anything about how these wild gyrations of stock market activity get started or come to an end. That seems extraordinary to me. What is clear from the past decade or two of explosive stock market performance and the conjoined growth of the trading desk industry is that huge quantities of wealth are going from those who save (not cash in the bank, but funds in your retirement account) to those who manipulate.
Jack–
It is true that Big Money (money managers running Big Money and
pension funds ) are in a better position to turn the market than
smaller individual investors.
They (the big investors) just have more money –and what they do can send stocks up or down
(I wrote about this in my book about the stock market “Bull” (HarperCollins,2003)
.