Crash, Recession, Profits, Deficits, Re: Markets Closed…..What A Ride

As I told a Finance MBA 10 days ago it is not to late to buy puts (a bet that stock prices will decline). I was thinking “When China catches a cold, USA catches pneumonia.”
http://yaleglobal.yale.edu/content/china-sneezes-will-world-catch-cold

He recited textbook stuff about how people buy too much, get too optimistic, and then when the market starts to decline they panic and sell too much causing a crash.
Everybody has been talking for years about how this bubble is going to burst.
We are overdue a correction.
The question is how bad will it get.
Corporate profits are high and will stay high unless there is a recession.
So stock prices should not fall very much unless there is a recession.
The question in the near term is psychology.
Excessive fear could cause an excessive crash and bring on a recession that would further push down stock prices.
Also a derivatives foul-up can push down stock prices and the economy but we should expect that financiers learned to handle derivatives better than in 2008.

I expect downward pressure on Stock Prices for the remainder of Obama’s term and at least a slowdown if not a recession around election time thus helping Trump.
Another big question is the deficit and interest rates.
Fiscal policy and monetary policy are stimulative right now.
So what will Yellen Obama do if we have a stock market crash and slide into recession?
More deficits and debt?
Negative interest rates?
They may have run out of ammo, already highly stimulative before the recession begins!
Will have to wait until 2016 to see if a recession develops and then in 2017 what they will do about it.
I cannot rule out a 3 year recession or longer.
There are big disequilibria in the economy that will take some time to work off.
They may kick the can down the road, but some issues such as rapidly growing student debt needs to stop.
Illegal immigration needs to stop.
Interest rates need to rise.
Government deficits need to be reduced.
The longer they wait to fix the diseases, the more painful the cures will be.

On Aug 24, 2015, at 3:46 PM, Lothar

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