A dramatic crash seems imminent - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 24 August 2015
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A dramatic crash seems imminent A  A  A

- By Bill Bonner

Bill Bonner
Tivoli, New York

Dear Diary,

We hadn't even had our morning coffee on Friday when we got an alarming message from Stephen Jones, who does quantitative research for us.

He has been working on a simple system to tell us when markets are over- or under-valued and what the likely returns will be going forward. We've already reported his LongTerm Forecast to you: he expects US stock prices to lose about 10% per year for the next 10 years. So, if the Dow is around 8,500 in August of 2015, 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" - the first time he's ever issued such a signal. Stephen's alert:

    ...the evidence suggests that a very large and dramatic downturn is imminent for the equity markets. What do we mean by "large," "dramatic" and "imminent"? By "large," we mean a decline in excess of 50%. By "dramatic", we mean a period of less than three years. Examples include the 21-month decline from January, 1973 to September, 1974, the 25-month tumble from August, 2000 to March, 2009, and 17-month fall from October 2007 to March, 2009. "Imminent" is the most difficult part of this forecast; however, we will provide evidence...why the decline appears likely to start within the next three months...

    The Minsky Moment:

    As historical returns slow, investor sentiment slows. Soon, a point, or "moment" is reached where investors turn negative. After this point, a self-fulfilling decline ensues

    The similarities [between the crashes of 2000...2008...] are quite striking.... Our current environment suggests the same.
Back-tested to 1952, the indicator has only been at this level 7% of the time. And when that happened, investors took big losses.

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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...well, maybe a little dark smile crosses our lips...the kind the Germans have a word for - schadenfreud. The cronies are on the run. Mr. Market, Main Street, the real economy, working people are finally striking back. All those stock buy-backs - at record high prices - are beginning to look like what they were all along: looting the company treasuries by the insiders. All that blather about stimulating a recovery is beginning to sound like the BS it always was.

Plus, here at the Diary we have a deep and abiding 'amor fati.' We like it when what should happen actually does happen. It settles our nerves. Pope Francis is in 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 534 point drop:

    The Dow Jones industrial average fell more than 500 points, into correction territory for the first time since 2011 as all blue chips declined. In the last five years, the index has only had four instances with closing losses of more than 400 points.

    The Nasdaq Composite lost more than 3 percent, also closing in correction territory and joining the other major averages in negative territory for the year.

    Apple lost about 6 percent, into bear market territory, and the iShares Nasdaq Biotechnology ETF (IBB) plunged 2.5 percent.

    "Right now there is a feeling of fear in the marketplace and all news is interpreted negatively and it's interpreted indiscriminately," said Tom Digenan, head of U.S. equities as UBS Global Asset Management.
Not so! As expected, Wall Street came out on the weekend explaining why you should 'buy the dip.'

    "Sell-off looks overblown to 3 Wall Street strategists," said one Bloomberg headline 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...

    Is there more selling to come? No one knows, but corrections are natural in a bull market, a pause in the market's march higher, and this one is long overdue. They usually come about once every 18 months. The last one was four years ago.

    The big trigger for selling this week was yet more evidence of a slowdown in China's economy, but there were plenty of other worrisome developments weighing on the market. A look at a few of them, and why you may not want to panic, yet.
Get it? A "pause" in the "market's march higher."

And 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. She reminds us that the fix is in:

    "I am taking this year off but it is hard to sit silently and watch these markets. Fed Chair Yellen help us out."
Oh Saint Janet! Patron saint of bubbles. Touch us. Heal us. Give us more credit. Give us more money.

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

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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