SPX to go to at least sub 400 if nothing done

The savings rate is rising - no doubt and most would agree we aer past 3% and headed towards 7%. Likely we will go through 10% and considering the environment such a savings rate will give us - not peak until past 15%. I mapped out savings rate and the obvious effect that will have on consumption (65% plus of GDP) in this graph:

The green line which was only a few billion for many recent years and actually negative recently as folks liquidated savings to maintain lifestyle as home equity and revolving credit became unavailable, and is now on a sharp upward trajectory. The orange line is obviously effected and assuming a small drop in consumption in terms of share of GDP and the drop in consumption being matched to some degree from the rise in savings, I come up with a $1.2 trillion hit to the economy. The blue line tracks the history of the saving rate showing a return to 10% being the norm before we had "securitized nation", and then likely going on to 15% as fear and loathing develops.

Trade imbalances have suddenly "improved" - but really they reflect to rise in savings and the drop in consumption. The rapid improvement of the trade imbalances from about $70 billion deficit towards $38 billion deficit per annum shows a large drop in consumer goods and finished product imports - along with oil.

I move the annual trade deficit from $700 billion per annum deficit to $300 billion deficit per annum.

It is highly unlikely that China has positive GDP this year which from their stated views would result in an incredible - 7% output gap.

The grid of the major variables to derive the Kalecki-Levy identity for corporate profits from a macro perspective is:

The 740 bil per annum is the amount of derived corporate profit for the USA suing this identity, about 40% of earnings close 2007.

I then try to figure out the share of SPX earnings over time of the corporate earnings for the whole country - should be similar to earnings ratio of Wilshire versus SPX.

I then calibrate the above and find that SPX earnings graph out to $30 for 2009.

Hard to not to see SPX at a single digit multiple in that environment and the index sub 300.

This is a real market way to examine how important it is to provide a stimulus offset to that rise in savings and drop in consumption. By definition has to be at least $1 trillion assuming a money multiple of 1. Most I have read is a tax cut multiple if it is "demand side" will have a multiple of .2 and spending around 1. So H.R. 1 might possibly provide about $400 bil of offset to this drop in consumption which would be about $45 SPX 2009 earnings.

Lastly the texture of the equity market is dangerously stressed. While VIX has waxed and waned and seems well off the 70% plus levels of the worst of November, the long dated vol, 1 year plus is over 40% and has stayed over 40% since November. This implies a 2 1/2 % move on average for the next several years in the daily SPX. Untenable. Something will break to move volatility for the long run to sub 1%. Usually some cataclysmic natured event occurs which just eliminates all reasons to speculate, to defend or to prosper is what will move long dated vol back down.