The stock market has reached stall speed. What is a stall speed?
“An aircraft flying at its stall speed cannot climb, and an aircraft flying below its stall speed cannot stop descending. Any attempt to do so by increasing angle of attack, without first increasing airspeed, will result in a stall.” (wikipedia)
What does it mean for the stock market to reach stall speed?
The research on effective demand has been saying for a year that real output would reach its natural limit in 2014. When real output reaches its natural top level, output tends to slow down and monetary momentum is directed into increasing prices. So the economy does not naturally want to climb anymore. Yet, it need not fall either if enough speed can be maintained at the top limit.
So, do we see inflation rising? Even though wage inflation is still flat at 2.1%, inflation is ticking up. Today the core CPI rose to 2.0% from a previous trend at 1.6% to 1.8%. However, inflation will not rise toward 3%, because wage inflation is low and consumption by capital income will back off.
What about output? Well, 1st quarter output was down quite a bit, but the weather caused that, right? Still, output has been moderate and sales/consumption has been moderate too.
From Irwin Kellner’s Is the Economy picking up?… Not Likely.
“Folks, this is not an environment conducive to 4% growth. Neither will it get us 3% growth. This feels more like growth with a 2% handle… And this is for the second quarter. The rest of the year could be even lower.”
In my effective demand blog, I said 2 months ago in a comment to JimH…
“My view now is that the Dow Jones will make a publicity effort with hopes to get back up to 16800, then come down from there.”
Well, we see the Dow hovering right at 16,800… You will not see Paul Krugman and other prominent economists making claims about the stock market. Yet, to me it is an important guide, if you get a feel for it.
So, what will happen next? The stock market gets nervous at stall speed. The stock market is not designed for a steady state mentality. It needs movement to know how to adjust its prices and feed the adrenaline junkies. Yet, over the ensuing quarters, the market will be heading down.
So, we will see some erratic movements fairly soon as the stock market gets jittery in stall speed. It will try to speed up or change its angle of attack. But the jitters will not lead to any big movements. The bigger movements will come in a couple quarters. Then an economic contraction will start forming around the beginning of 2015. We will see increasing policy attempts to forestall the contraction.