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.