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The world is standing at the edge of the financial abyss while most
investors are entirely in the dark. However, specific indicators
suggest the market is one giant RED BLINKING LIGHT. One of these
indicators is the amount of margin debt held by investors. What is
quite surprising about the level of investor margin debt is that it has hit a
new record high even though the market has sold off 2,500 points from its
peak in February.
It seems as if investors no longer believe in market cycles or
fundamentals. Instead, the Wall Street saying that “This time is
different” has become permanently ingrained in the market
psychology. For example, it doesn’t seem to matter to the market that
Amazon makes no money on its massive online retail business. The only
segment of Amazon’s business that made a decent profit last quarter was from
its Cloud hosting services.
So, the new Amazon way of doing business in the United States is
to destroy the retail industry so it can break even. I gather
once many of the retail chains have gone out of business; Amazon might then
increase its prices and shipping costs. But for now, the mighty online
retail chain is firmly entrenched in the U.S. RETAIL CANNIBALIZATION mode.
Unfortunately, if Amazon is successful in destroying a significant portion
of the brick and mortar retail industry, it will spell bad news for Americans
when the next financial collapse takes place. Why? Well,
the simple answer is that we can’t go backward. Think about this for a
moment.
Mom and Pop retail stores in the downtown areas were the backbone of the
early U.S. retail market. However, they were largely destroyed by
Walmart. But, at least Walmart employed a lot of people and had stores
all over the country, easy for customers to access. Now, with Amazon’s
door to door delivery system, you don’t need thousands of stores in all
cities throughout the country.
So, what the hell happens if Amazon goes belly-up during the next market
crash and economic depression? The U.S. retail infrastructure will be
destroyed to such a level that Americans will have a lot fewer places and
options for purchases goods. The market has no idea that this is taking
place. Instead, they believe that the Amazon miracle of selecting
millions of products online and getting them delivered right to one’s
front door will last as long as the 1,000 year Third Reich.. .which only
lasted 12 years.
Regardless, the economic and financial markets today are setting up for
one heck of a fall. According to FINRA, the Financial Industry
Regulatory Authority, investor margin debt reached a new high of $669 billion
in May:
Investor margin debt is up from its previous high of $665 million in
January when the Dow Jones Index topped 26,500 points. However, as I
mentioned, the market has sold off several thousand points while investors
placed an even higher amount of margin bets in May. Below we can see
that the Dow Jones Index continues to trade in a range between 23,800 and
25,400:
I stated in several articles and videos that the Dow Jones Index was not
likely to surpass its high, but remain in a trading range. So far, this
is exactly what is taking place in the market. Although, I am surprised
that investors piled more margin into this market knowing that we are overdue
for a massive correction… at the very least.
If we look at the Advisor
Perspectives updated chart, the total Margin Debt is nearly
$170 billion higher than the peak in 2007:
Also as you can see in the graph above, we are almost ten years
into a business cycle without a significant correction. Back
at the beginning of 2016, when the Dow Jones Index lost 2,000 points,
investors, who thought this was the beginning of the next bear market, plowed
into gold and silver. Flows into Gold ETF’s spiked the second highest
level Q1 2016 during the brief correction. The quarter with the most
Gold ETF inflows was Q1 2009, as investors panicked when the Dow Jones fell
to 6,600 points.
It’s hard to forecast how these markets will move anymore, but due to the
massive debt and leverage in the system, I believe we are going to start
seeing major Fireworks during Q3-Q4 2018.
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