Edward Lambert — Stall Speed for the Stock Market

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....

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.

Angry Bear
Stall Speed for the Stock Market
Edward Lambert