As I watch the Dow slip below my attractor level of 17,300, the Fed rate is expected to lift off this week, oil is near $36/barrel and Christmas is close. Usually the markets try to hold their value through the holidays, so this slipping in the stock markets is something to watch.
When the Dow goes below 17,300, I wonder if the markets will stay below that level and eventually just keep going down. The markets have hit their top. The aggregate profit-equilibrium level was reached about a year ago. Profits are down amongst oil producers but up elsewhere in the economy. However, if oil prices were higher, we would probably have seen the opposite… profits up amongst oil producers and lower elsewhere.
A recession will happen when a certain number of businesses start to contract. They then further cause other businesses to contract. What can cause that? An overly strong rise in the Fed rate or even excruciatingly low oil prices leaving North American oil producers without extended credit.
Some say the economy can overcome these moments and that the future is bright. Others, like me, say a recession will happen before the Fed rate reaches its 3% natural level for a full-employment economy with stable inflation. It would be nice to reach that level, but when the business cycle has already passed its aggregate profit-equilibrium point, contractions in business are harder to overcome.
Ed, real consumption is hitting a cyclical peak when you adjust for the deflator.
Your really struggling in analysis with a decade+impacts of commodity inflation.
Oh, Edward, I ususally leave you alone, but there is just too much here that is questionable. I would say that you are being way too certain about a lot of things. The entire world financial system has been completely bent out of shape so that nobody knows what will happen after the Fed almost certainly “lifts off” on Wednesday (although if markets and the US and world economies react badly to this, which they very well might, that may be all there is to the liftoff).. But, I guess I cannot resist being more specific about how overly certain yoiu are here about a whole bunch of things. Think Keynesian uncertainty, which this is definitely a moment for.
That low oil price is going to help tank the economy? I think its day to day negative impacts on the stock markets reflects more expectations of a future weak economy. But please do not forget that while oil producers and exporters and oil producing regions of oil importing economies (applies to US) will hurt, we know that the overall short-term impact of lower oil prices on oil importing economies is favorable, and it is clear that not all the declines in crude oil prices have been passed on to consumers yet. IF these low prices hold, after all the doomy hits on the stock markets eventually this stimulative effect of the lower gasoline prices will kick in.
I have long evinced skepticism regarding your model, which I shall not expostulate on in this message, but let me simply say that I do not remotely take seriously your estimate of the “atrractor” of the stock market. And this is indeed a moment when forecasting even the near term behavior of the stock market is really unwise. I expect it to go down prior to Wednesday’s meeting out of fear and uncertainty about what will happen, but remember the old adage, “Sell on the rumor, buy on the news,” and it may well prove to be the case that all the bad effects of the liftoff have already been capitalized into current market prices, even more than capitaliized, although I suspect not. But it may not take too long for that to happen, and while we may see a soaring dollar and crashing markets and economies all around the world, we may not, and may even see the bloody markets go up once the news is in and the markets really have already capitalized it in. It is not at all out of the realm of possibility that some longer term interest rates might go down and the stock markets will go up, although the uncertainty is so high that the opposite may happen. You may be right that the markets might keep falling, unless, of course, they do not. In any case, your “attractor” is not likely to be all that attractive in the near term.
I simply reject thta idea of either a “natural” or the more current term, “neutral” target rate. But I suspect that we shall not see a 3% rate in the foreseeable future. The Fed may have talked themselves into the idea that we are returning to some sort of “normalcy” with a 3 or even 3.5% rate, but I do not think so. On this I may be in agreement with you, that the economy is likely to fall seriously into recession if they really make an effort to get it up to that level, and this will force them to stop trying to do so before they get there.
Watch this show from today on Boom Bust… Mosler will tell you why lower oil prices mean lower aggregate demand. He was right a year ago, and most others were wrong. The show will also show you that profits have peaked.
We have hit the end of the business cycle. I have foreseen it because of my model of effective demand. I have learned a lot with my new model. But in the end the model performed great.
Here is the link to the show which speaks to exactly what my model has been foreseeing…
For the bottom 90-95% , it’s always been just one long recession , punctuated by a few years of relief facilitated by NINJA loans. Those with stock portfolios have been able to maintain a sorta-middle-class facade by tapping into their until-recently growing equity , but at the expense of depleting funds that were once considered untouchable “retirement savings”.
So now it’s all about those at the top. They might as well rejigger the Michigan and other consumer surveys to target only the top 5% – that would improve sensitivity to the movements that will matter from now on.
Is a recession coming ? Talk to your well-off friends. If they’re starting to cut back on spending , you’ll have your answer : yep , it’s happening.
Is there a capital surplus, or a lack of demand, or a surplus of real capacity? I say a lack of the latter 2 items, and capital is in search of demand. The world is awash in reserves as bad debts have been purchased by central banks, and the latter process drives short rates to zero, and is not a great mechanism to create demand IMO. Perplexing state of affairs.
Sorry not a lack of latter 2 lack of demand and a surplus of real capcity.
I knew what you meant. And that surplus of capacity is made of up marginalized workers due to the rising concentration of wealth at the top.
The low labor force participation is related.
Funny point, given the title of this post is that in the end the US stock markets ended up rising pretty smartly.
Stick around and watch… the market is exactly in the zone that I expected.
Your comment is a cheap shot.
This sounds pretty bad :
“….Ex-Financials, the median S&P 500 firm’s net debt/EBITDA is at the highest level in more than a decade, rising from 0.8 in 2010 to 1.0 at the start of 2015 to 1.3 today. ”
That’s for the median S&P firm , which seems to be doing about as well as the median household , i.e. not well at all. ( What does that suggest about the condition of SMEs ? )
The progression from .8 to 1.0 to 1.3 , at an accelerating rate , brings to mind the hedge > speculative > Ponzi progression of Minsky.
I have taken the position all year that the major market risk is poor earnings not rising rates.
this is what I sent my clients at the start of the month.
S&P reports that 2015 operating earnings are expected to fall 5.6%, but excluding energy, they are expected to rise 6.1%. This implies that if oil prices just stabilized, 2016 operating earnings could rise at double digit rates. This seems to be the main thinking behind expectations of a continued bull market.
But SEER sees evidence that earnings weakness is spreading beyond the energy sector. In particular, despite improved third quarter productivity growth, the negative spread between unit labor costs and business prices widened to 2.2%, as compared to a 1.2% spread originally reported, as unit labor costs rose to 3.0% while the business deflator remained at only 0.8 %. Moreover, in the individual industry models, SEER is repeatedly seeing signs of weak pricing and margin pressures,
Good work by you… I would suggest a change in your thinking. You said this… “This implies that if oil prices just stabilized, 2016 operating earnings could rise at double digit rates.”
The better way to think is that money not spent on gas goes to other purchases thus raising the earnings of those other purchases. If you raise the price of gas, earnings will come down for those other purchases.
I see that the economy has been against the effective demand limit for a year. At that limit, profits tend toward a zero sum game. When one company gets more profits, another company will lose them somewhere in the aggregate. Look how close your numbers are… -5.6% and 6.1%. There is a zero sum game in there. So if oil prices stabilize, I expect earnings in other areas to not grow as much as 2015. Thus, I do not see a bull market if oil prices stabilize.
Ed, I do not think I disagree with you.
The comment that EPS could see double digit increases was other peoples thinking, not mine.
Sorry I did not make that clear.
Stable oil prices and strong EPS in other sectors implies much stronger inflation than I expect.
I think it is much harder for firms to raise prices than most analysts do.
Good point Spencer…
Well, going by the flower shop indicator model, we’re not looking good for the future.
Last time we had a recession, the shop was indicating it a year prior. August of 2006 to be specific as the turning point. Then again, small business seem to always get the signals early being the closest to the daily consumption in their communities. It is not like we don’t talk to each other.
This year it’s a 10% decline after last year finally being flat compared to the year prior. Was the first and only time there was not a decline since the recession.
Or let me put it in more specific terms: It sucks!
Wow… what level consumer do you have? Lower, middle or high income?
Middle basically. I do admit, my location currently is struggling. Home of CVS/Caremark though. Fidelity in a town almost next door. Amica down the road. EMC 2 towns up the road (8 miles). And Foxboro/Gillette stadium/complex a couple towns over.
Shopping patterns have change in my immediate area drastically do to the town next door building a shopping center on 126 acres for a lousy 650K sq ft. (same old story, nothing new added just taken away from some other near by place, but that does not explain the 2 shops that are on more populace routes.
My business is 1/2 of what it was pre 2006.
My wife managed a garden center in a very affluent town–Lexington, MA —
and had just the opposite experience. When affluent consumers cut back it is on very expensive stuff — like travel — and they tend to compensate by shopping at the garden center for things for their home. So recessions never really hurt her business.