The Market is Perfectly Set Up For Another 2008 Crisis

Phoenix Capital Research's picture

analysts and commentators everywhere coming up with all kinds of nonsensical
“fundamental” reasons why the market has rallied (strangely performance gaming
and manipulation never seem to get mentioned), I thought it worth seeing if
indeed there were investors who were “buying” stocks today.


Few metrics
gauge this as well as mutual fund cash levels. With over $10 trillion in
assets, stock-based mutual funds are a decent benchmark for the “herd.” With
that in mind, it’s worth noticing that mutual fund cash levels are at their
lowest levels in over 40 years!


right, mutual fund cash levels are lower than they’ve been in 40+ years. Lower
than they were during the Tech bubble and lower than they were when the market
put in an all time top at the peak of the housing bubble. Put another way,
mutual funds are more “all in” than they’ve been in 40+ years.


On top of
this, the financial system is even MORE leveraged than it was during the Tech


Source: Diapason Commodities Management

The above
chart shows the level of leverage in the financial system: essentially how much
borrowed money exists relative to actual capital. The first large peak is the
Tech Bubble. The second large peak is the Housing Bubble. The third peak is


In simple
English, this chart shows us that the financial system currently has even MORE
leverage than during the Tech bubble. Put another way, asset prices today are
being held up by borrowed money. This
is also known as a Bubble.


The last two
times we were at these levels or higher, the financial system suffered a severe
Crash (the Tech Bust and 2008). I full believe we are fast approaching another
Crisis… however, this one will be different for one key reason: people will
finally give up hope in the Fed’s ability to manage the financial system.


Taken in the
context of the mutual fund cash levels chart I showed before, this indicates
that not only is the financial system more leveraged than during the Tech
bubble, but mutual funds are more heavily invested than at any time in the last
40+ years.


To say that
the potential for a full-scale market collapse is high would be a gross
understatement. Should the market begin to crater, the margin calls (when an
investor has to put up more capital to cover a losing position that was bought
using borrowed money) could be absolutely enormous.


This is what
happened in 2008 when the market entered a free-fall: large institutional
investors who were overcommitted to the market had to sell positions to meet
redemptions (when investors pull their money).


This, in
turn, forced other large investors (especially those who had borrowed money) to
sell positions to cover their losses and return the funds they borrowed. And
thus we entered a negative feedback loop in that the lower the market fell, the
more investors had to sell.


This is how
Crises take place. Ad the next Crisis is not far away. Indeed, Europe is
already beginning to experience it. 
Interbank lending rates there are now on par with the levels that
occurred in the wake of Lehman Brothers’ collapse. Put another way, European
banks no longer trust each other enough to lend to other banks.


This is
precisely what hit in the US in 2008. And it will come to these shores again in
the near future. The leverage levels and the mutual fund cash levels are
already warning us of this.


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