The story goes that in the Winter of 1928 Joe Kennedy, father of President John F. Kennedy, went to have his shoes shined. When the shoe shine boy finished he offered Kennedy a tip. “Buy Hindeburg,” he said.
Kennedy promptly sold off all of his stock holdings. Within a year the United States saw a massive stock market crash that wiped out the life savings of millions of Americans and ushered in a decades-long Great Depression.
When asked why he sold all his stocks Kennedy replied, “You know it’s time to sell when shoeshine boys give you stock tips. This bull market is over.”
Throughout history there have always been critical warning signs in the midst of financial exuberance that signaled the bursting of the bubble.
According to a report from Bloomberg the warning siren may have just gone off again.
Main Street and Wall Street are moving in opposite directions.
Individual investors are plowing money back into the U.S. stock market just as professional strategists say gains for this year are over. About $100 billion has been added to equity mutual funds and exchange-traded funds in the past year, 10 times more than the previous 12 months…
“If Wall Street, after poring over all known data, comes up with a target and we’re already there, and you still see individual investors buying and they’re typically the ones that are late to the party, it would seem there is limited upside,”
“As institutional investors, we’re always concerned when the retail investor is actually arriving in the market,” Skiming, who helps manage $10 billion at Ashburton, said by telephone from Jersey, the Channel Islands. “The retail investor arrives when they can only see blue skies.”
But that’s not the worst of it.
Here’s the kicker, and it’s one that could potentially lead to massive losses for all of these folks piling into stocks and exchange traded funds.
According to market veterans, average investors are heavily leveraged right now. That means they are actually borrowing money to buy more stocks in the hopes of making huge gains, an effect that could lead to extreme stock market volatility very soon.
Big moves in a handful of stocks provided traders with a worrying signal—an “ultra-high” level of leverage in the stock market, a veteran trader told CNBC.
“People must be three or four times normal leverage,” the trader said. “We’ve seen margin accounts go up. … If we start to get a protracted move, it could get very volatile.”
The Elliot Wave Financial Forecast noted that earlier this year investors had an unprecedented leveraged debt load of $466 billion. Though investors have slightly reduced that leverage since February, Elliot Wave notes that a very similar divergence was observed back in 2007, shortly before the implosion of the global financial system:
At the October 2007 stock market high, The Financial Forecast cited a similar divergence between rising stocks and a slump in margin debt as a clear signal that the market’s advance was at or near an end.
The Financial Forecast had foreshadowed the severity of the decline by noting that the then-record total of $381 billion in July 2007 was “well beyond the old record of $278.5 billion set in March 2000.” The 37% increase in borrowed money to trade stocks that occurred from the 2000 peak to the 2007 peak led to a 54% decline in the Dow. At this point, the latest record is 67% higher than the 2000 extreme.
What all this means is very simple. Investors have borrowed nearly half a Trillion dollars in an effort to realize multi-fold gains during the unprecedented rise in stock markets over the last several years.
After all, who wants to miss out on this one shot to early retirement?
What they may not be counting on, however, is that an economic recession is soon to be announced. Though not spoken about in most public financial circles, the elephant in the room is the deteriorating state of the American consumer who is cash-strapped, jobless, and maxed out on their personal credit.
Without that spending there can be no economic growth. The first quarter of this year, though initially touted as an economic success, turned out to be a total dud when the government announced that the economy actually shrank 3 percent.
Now it’s just a matter of time, because that negative growth trend hasn’t changed and at some point in the next several week it’s going to be making headlines, revealing the purported economic recovery to be nothing more than fantasy.
Those leveraged investors who have piled into stocks over the last twelve months should take heed.
Once the panic starts there’s going to be a stampede for the exits and all of those large-scale economic collapse simulations the U.S. government has been preparing for may soon become real world scenarios.
Hattip Durango Kidd