I and a growing number of my fellow traders are now beginning to believe that we are heading towards a major crash in 2014.
Firstly, I don’t blame you if you think I’ve lost my mind.
After all, a market crash or a crisis just does not make sense right now: stock markets are rising to new highs, there are signs of improvement in the economy and investors seem to be happy.
However, people thought I was crazy too back in December 2006 when I warned that the “bubble” was going to burst and that we would have a crash on our hands within a few years.
Ask yourself this: what was the reason for the last financial crisis?
Answer: debt. Uncontrollable debt and heavy borrowing was the reason behind why the markets crashed in 2008.
Well, you might be interested to know something that the financial media is not telling you right now…
You see, debt has once again gone out of control. Take a look at this chart of investors’ margin debt (i.e. how much investors are borrowing to invest):
According to figures released from the NYSE, investors’ margin debt is now WORSE than it was before the 2008 financial crisis.
Margin is money that most brokers give you to “borrow” so you can buy more stocks. When investors “borrow” money from a broker to invest, this is called “margin debt”.
For example, let’s say you deposit $10,000 in your brokerage account. Your broker will sometimes give you another $10,000 to borrow so you can buy more stock. If you use all the extra $10,000 then you are using 100% of the margin.
Margin is OK when used responsibly and it is normal for traders to use this. Using no more than 50% of your margin is reasonable in my view, but never 100%.
Right now the combined “net worth” of investors is nearly NEGATIVE $100 billion. Notice that this is even worse than what it was in 2007, one year before the stock market crashed.
Over the past 10 years, there were only two other times when the debt was this bad: June 2007 and March/April 2011. Both came right before a major crash in the financial markets.
Now I want to make this clear: I am NOT expecting any big crash this year. Although this October could see some headaches, I believe that the markets will continue to rise from November till May 2014.
But after May 2014 we need to be prepared…
Alessio Rastani is a stock market trader at www.leadingtrader.com