I have written that the Dow will orbit around the 16,800 level and not go much higher from there. My view is based on Effective Demand causing profit rates to peak and decline. Today we see the Dow back down to 16,719 on worries of global growth and profits which start coming out tomorrow.
As I see it, Europe, Japan and China are all hitting their effective demand limits. The US will be hitting within a few months as more data comes out. Yet, the important thing to realize here is that stocks have actually moved sideways since early June… that is 4 months. The stock markets are not growing like they did in the past 3 years.
Stop for a second and think about Fed policy… if global growth is slowing down, and Europe is on the edge of a recession, and profit rates are declining… then the Fed rate will be stuck at the ZLB… OMG!
Stop and think for a second about unemployment… Most see the recent drop in unemployment as a sign that the economy is picking up steam and recovering. They see the end of the business cycle far away. Whereas I see the drop in unemployment as a sign that firms are trying the best they can to maintain profit rates. I see the end of the business cycle within arm’s reach. The stock markets today supported my view.
And one more thing… Potential GDP in the US is much lower than the CBO says. It is even lower in other countries. Olivier Blanchard says so in a video that came out today. (1:35 to 2:10 minute point)
The economics profession is not prepared for a global slowdown. They did not see it coming… and they will expect the US economy to grow through it… Yeah ok, we’ll see… but I expect stronger headwinds going into 2015.