Crash Alert

Tivoli, New York – We hadn’t even had our morning coffee on Friday when we got an alarming message from Stephen Jones, who does stock market research for us.

Stephen – a former equity analyst at Value Line – has been working on a proprietary indicator. The aim is to give us a better understanding of the expected returns on stocks, given today’s rich valuations.

We’ve already reported on his long-term forecast: He expects the U.S. stock market to fall, on average, by 10% a year for the next decade.

So, if the Dow is somewhere close to 6,030 points in August of 2025 (the result of a compound loss of 10% a year over that period) Stephen will be proven right.

But what about now? What can we expect in the short term?

We don’t know. But on Friday, Stephen sent us a “Crash Alert” – his first ever.

A “Large and Dramatic Downturn”

Writes Stephen:

Back-tested to 1952, Stephen’s indicator has been at this level only 7% of the time. And after that happened, investors took big losses.

Cronies on the Run

We take no pleasure in a stock market rout. Not personally anyway. We make our living by offering economic commentary and financial advice. This will be bad for business.

Still, we can enjoy it vicariously. And okay… maybe a little dark smile crosses our lips. The kind the Germans have a word for –Schadenfreude (which literally translates as “harm-joy”).

The cronies are on the run. Mr. Market, Main Street, and the real economy are finally striking back.

The trillions of dollars of stock buybacks at or near record-high prices are beginning to look like what they were all along: looting of corporate treasuries by the insiders.

All that blather about central banks stimulating a recovery via monetary interventions is beginning to sound like the B.S. it always was.

Plus, at the Diary we have a deep and abiding amor fati. We like it when what should happen actually does. It settles our nerves. Pope Francis is at the Vatican. Janet Yellen sits in the comfiest chair at the Fed. And stocks are falling. All is right with the universe.

But Friday’s market break has made everybody jittery… running scared… sweating. MSN Money on Friday afternoon, after the Dow registered a 531-point drop:

Should You “Buy the Dip”?

Not so!

As expected, Wall Street came out on the weekend explaining why you should “buy the dip.”

“Stock sell-off looks overblown to three Wall Street strategists,” assured a headline on Bloomberg on Sunday.

“Biggest U.S. Stocks Look Like Global Havens to Bank of America,” said another.

MSN Money explains why there is nothing to worry about…

Get it?

A pause in the market’s march higher.

Financial adviser Suze Orman – about the smartest financial expert on the planet (next to Janet Yellen, of course) – was quick to go to the heart of the matter.

Via Twitter, Orman reminds us that the fix is in:

Oh, Saint Janet! Patron saint of bubbles. Touch us. Heal us. Give us more cheap credit. Give us more EZ money.

Have faith, dear reader. Have faith. Saint Janet will not forsake us.

Regards,

Bill