(07-10-2017, 09:05 PM)ChrisP Wrote:1. Because the market is overvalued and only a large adjustment will bring it back into line. My thinking is in accord with that of Benjamin Graham (Warren Buffet's mentor) who said that the market is a voting machine in the short term, but a weighing machine in the long term.(07-07-2017, 03:31 PM)Mikebert Wrote: My second published paper. This one is about the inequality turnaround of a century ago that was completed during the last 4T.
It does not yet bring the S&H theory into the mix, (this is for the third paper that I am still working on).
http://escholarship.org/uc/item/42p5m46m
I enjoyed the paper. Why do you believe the next recession will necessarily lead to an extremely large stock market correction (55%)? Why can't economic rents accruing to the market power of large corporations continue keeping profits elevated above historical means (correcting for recessionary effects, of course), as well as the Fed buying up debt, equities and who knows what else to keep the ship from sinking?
2. The share of output that goes to workers is already low, making the impact of recession on consumer demand greater than normal. A larger than normal stock market decline will have a similar impact on investment. Both of these will affect aggregate demand making for a stronger-that normal recession, which is turn feeds into a deeper bear market and greater job loss, which increases recession strength. That is, the normal recessionary cycle of reinforcing negative impacts will simply be strong, setting the stage for a stronger rather than weaker recession.
3. The Fed WILL intervene. But the effectiveness of such intervention has been declining. After the stock market bubble burst in 2000, Fed action converted what should have been a fairly strong recession into a mild one by stoking a "counter bubble" in real estate. But this led o a real estate bubble which after it popped, led to a much stronger recession. The Fed again acted but interest rate reductions were unable to reduce the recession strength. Instead there was financial panic and a seemingly permanent reset to a weaker growth mode. THe Fed followed with massive money creation during the expansion that worked only weakly. Next time the Fed policies will be even less effective.