OZY+GRI: The bull market’s still built on borrowed money… What could cause the crash?
GRI is pleased to present a new collaboration with innovative news provider OZY. We’re kicking things off with a series of five articles by Senior Analyst Jeffrey Moore, looking at Black Swan events. The third installment forecasts the next Wall Street crash.
On Friday, February 2 2018, U.S. equity markets hit the closing bell after suffering their worst weekly performance in two years. The soft patch followed a near parabolic ascent of markets extending back months and accelerating through January, so the bull market taking a breather was not terribly surprising or necessarily worrisome. After all, over the past couple of years these kinds of pullbacks consistently have been followed by higher highs.
As markets opened on Monday, February 5, though, they were not bouncing back. Instead, inflation concerns were continuing to drag on stocks as spiking interest rates persisted. The lower the indices dipped over the opening hours, the steeper the slide became. By afternoon the slide had turned into an extraordinary plunge, with the Dow Jones industrial average diving as much as 1,597 points. All charts looked like a straight line down. It was reminiscent of the unprecedented swings of the great financial crisis in 2008.
The nightmarish flashback to the previous economic meltdown may be warranted, especially when it comes to investors using their portfolios as collateral to buy more stocks and bonds on borrowed money. These investors want to stay in the game and participate in rising markets. It’s the Wall Street version of FOMO — and it’s powerful.
The portion of the purchase price that investors borrow is called the margin debt. And in December 2017, margin debts in U.S. securities markets stood at more than $642 billion — 3.25 percent of the gross domestic product. In total dollars and as a percentage of the GDP, margin debt has never been higher. So what, you say?
Read the full article on OZY here, and watch for the next in the series, out tomorrow.
