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.