The Rest Will Read Like Fiction and Why S&P Can Drop to 550 (or lower)

In an interview today on CNBC, Michael Lewis said two things that were exceptional:


 My favorite comment was how we're starting to go through Act II of the 2008 crash and as more investors realize this "the rest will read like fiction." 

He also said the following:

“A banking system is an act of faith: it survives only for as long as people believe it will.”

While I'm not happy to be down, I'm actually quite pleased by my return so far this year: -2% vs. -12%+ for the S&P and -22%+ for the Russell 2000. This is how real money is made. Waiting for crashes and buying.

Why S&P Can Drop 50%

I'm out of time for why I think the S&P can drop to 550, so I'll summarize in abbreviated bullet form:

• S&P trades at 1099 right now. 
• Analysts estimate that the companies represented will generate 90 in earnings so ~12x earnings.
• Cheap, right? Wrong.
• Profit margins are at or near a record high. One way to show this is how U.S. Corporate Profits (pre-tax) are near a record high relative to Gross National Income (13% vs. average of lets guess 10%). See chart below.
• Based on this if we assume S&P earnings come down 25%, then the S&P will generate ~70 in earnings.
• Historically bear markets have bottomed closer to 7-10x. An 8x multiple would imply 550 on the S&P. Not good.