mauldineconomics.com / BY JARED DILLIAN / AUGUST 10, 2017
If you are in the business of forecasting the stock market, you have to think about a concept known as spot-dependency.
You might have heard of skew, where out-of-the-money put options are more expensive than out-of-the-money call options.
That’s (partly) a function of spot-dependent volatility—if the market declines to the strike of the put, it is likely to be more volatile than if it goes up to the strike of the call.
So, if you think we’re going to have a bear market, and that stocks are going to decline 30%, you then have to think about the spot-dependent Fed, spot-dependent politics, and spot-dependent economics.
What I’m saying is: nothing happens in a vacuum. If stocks decline 30%, we will be living in a vastly different world than we are today.
I am bearish. I have been bearish since 2435 in the S&P 500, when I called the top. I think the market will decline.
How much it will decline is anyone’s guess, but let’s just pick a number—30%—and do some thinking about what the world looks like if that happens.