Dave here. The markets have taken a beating in 2016, and while the fallacy of thinking the market=the economy seems like an oversimplification, this post provides a competing viewpoint that, without taking a position in affirmation or dissent, I thought I would offer up for discussion.
For some background, you can read Edward’s other posts at his blog.
By Edward Lambert, an independent researcher who discovered an equation for Effective Demand. Cross-posted from Angry Bear.
Most economists do not put stock in the stock market. That is to say that they do not include the stock markets in their analyses. Yet, economists should have a sense of what the markets will do if they are actually good economists.
Economists seem to think that the stock markets are ruled by psychology and irrationality. Maybe so, but they can still be understood. Economists do not seem to understand stock markets. However, Larry Summers says that economists and policy-makers should not ignore the stock markets. (link)
Tim Duy who is a respected economist stands by his prediction that there will not be a recession this year. (link) Yet he also predicted that the stock markets would rise modestly this year. (link) Who really thinks the Dow could make it back up to 18,000 this year? There would have to be massive easy monetary policy globally. Yet that would just make the markets that much more top heavy.
What economists really need is a way to measure the limits of the business cycle. I have the advantage of being able to measure an effective demand limit on the business cycle.
In 2014, I said that the Dow would orbit around 17,300 for the rest of the business cycle. Then I said last summer that the Dow would not go much above 17,300 and would eventually come down from that point into recession. After this past week, I can more easily repeat my prediction. It would take a lot of psychological healing from China to other parts of the world to bring back faith in stock markets to get the Dow over 18,000 before the next recession.
What did I do to make these correct predictions?
It is just an understanding of effective demand, which signals the natural top of the business cycle. My models are developing in order to foresee this top years in advance. I seem to be the only economist using a measure of effective demand to make correct predictions ahead of the markets. Other economists make correct predictions without using a measure of effective demand. But my point is that effective demand can be used to much easier.
If other economists are able to understand what I understand about effective demand, we might see better predictions and policies. Of course, the proof in the pudding will come if there really is a recession this year. Then my measure of effective demand hit spot on the natural top of the business cycle near the end of 2014.
Am I a great economist? No… but the great ones would be better if they understood effective demand.
Keynes emphasized effective demand in his great book, but does anyone but me put a number to it? Not that I see… and my numbers are hitting spot on… so far.