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The Market is Perfectly Set Up For Another 2008 Crisis

Phoenix Capital Research's picture




 

With
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!

 

 

http://home.comcast.net/~RoyAshworth/Mutual_Fund_Cash_Levels/Mutual_Fund...

 

That’s
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
Bubble.

 

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
today.

 

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.

 

If you’ve
not taken steps to prepare for the coming Crisis, you can download my FREE
report devoted to showing in painstaking detail how to protect yourself and
your portfolio from the coming ROUND TWO of the Financial Crisis (round one
wiped out $11 TRILLION in wealth).

 

I call it The
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.
And its 17 pages contain a
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(this “insurance” paid out triple digit gains in the Autumn of 2008).

 

Again, this
is all 100% FREE. To pick up your copy today, go to http://www.gainspainscapital.com
and click on FREE REPORTS.

 

Good
Investing!

 

Graham
Summers

 

PS. We also
offer a FREE Special Report on the inflation situation in the US. This other
FREE Special Report, The Inflationary
Disaster
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All in all
its 14 pages contain a literal treasure trove of information on how to take
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To pick up
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Thu, 07/07/2011 - 18:22 | 1434354 Busterfriendly
Busterfriendly's picture

Does any one know the reliability of the data presented?

Thu, 07/07/2011 - 17:43 | 1434265 IQ 145
IQ 145's picture

 I'm short right now at 12,700, the Dow; which is a cash setttlement contract on the CME. I love the chart at the top of the post; to me this is "fundamental". Remember "all the money sitting on the sidelines", that we listened to for months and months? That was more or less correct; what this chart says, is that money is no longer on the sidelines. What happens to a market, any market, when everyone who wanted one already bought one? price movements are unstable going up and down; falling prices attract sellers and vice versa. Aside from that; I don't pretend to know anything. I'll either lose $7500, my stop, or make a shit load of money; My timeline is December. This is not a bull market because it has not made any new highs since Feb. Fails the definition of a bull market. So, we'll see; but that's my story. for once, I like the guys post.

Thu, 07/07/2011 - 18:11 | 1434334 geminiRX
geminiRX's picture

You got a brass set of balls.....best of luck to you

Thu, 07/07/2011 - 18:37 | 1434378 mtomato2
mtomato2's picture

...Brass is one of the softer metals...

Thu, 07/07/2011 - 16:23 | 1433916 ThisIsBob
ThisIsBob's picture

Yea, those dumb mother fuckers have been buying since 666, while all the really smart money here on ZH has been calling for TEOTWAWKI.

Thu, 07/07/2011 - 17:06 | 1434120 css1971
css1971's picture

Huh? What you do is buy at the bottom and sell just before the crash. I thought everyone knew that.

Thu, 07/07/2011 - 17:21 | 1434193 akak
akak's picture

Yeah ... you just have to wait for them to ring the bell marking the perfect bottom or top of the market.  So easy, a caveman could do it!

Thu, 07/07/2011 - 17:46 | 1434276 IQ 145
IQ 145's picture

 I like to recall the J.P. Morgan reply, the gentlemen, not the Bank, to the question why didn't he have any distress from the stock market crash in 1929; answer--"Because I sold too soon". If there was a bell they rang, I would probably ignore it; I like JP's method.

Thu, 07/07/2011 - 16:06 | 1433842 TruthHunter
TruthHunter's picture

Compared to 99 and 07, it looks like a pretty whimpy peak.  Is

this a bubble or just spittle dribbling out of the blow machine?

 

Of course, it could be just a little pause before "Boom zoom to

the moon"

Thu, 07/07/2011 - 16:27 | 1433938 Bear
Bear's picture

More like the Gloom and Doom soon to the Swoon

Thu, 07/07/2011 - 15:56 | 1433798 dcb
dcb's picture

in support of the dud and the dollar thing, there has been a hell of a lot of central bank intervantion around lately, so that does screw up the charts.

Thu, 07/07/2011 - 15:54 | 1433788 dcb
dcb's picture

guy, you write a variation on the same thing every week. it's interesting, but you gotta mix it up. try writing on the long side for a change.

Thu, 07/07/2011 - 16:52 | 1434057 aerojet
aerojet's picture

He and Kunstler could get together and write some kind of magnum opus and then retire on the proceeds.

Thu, 07/07/2011 - 17:17 | 1434175 IQ 145
IQ 145's picture

 !LOL yeah, why not; they could still collect food stamps.

Thu, 07/07/2011 - 15:32 | 1433681 jack stephan
jack stephan's picture

 "The man who sold the world" Thanks Bennie...

Thu, 07/07/2011 - 15:32 | 1433680 MiningJunkie
MiningJunkie's picture

The Sky is falling; the sky is falling! This infomercial is a broken record for the last 100 S&P points. BUY BUY BUY!

Thu, 07/07/2011 - 15:08 | 1433572 oldmanagain
oldmanagain's picture

It is much worse than the charts show due to growth of  undocumented  derivatives, underwater loans. Failed governments. Stupid tea party contractionists forcing a collapse.

Thu, 07/07/2011 - 16:19 | 1433890 whstlblwr
whstlblwr's picture

How do tea party force collapse?

Thu, 07/07/2011 - 15:12 | 1433551 plocequ1
plocequ1's picture

"The market is perfectly set up for a 2008 crises"

Love to prove that, Wouldn't ya. Get your name in National Geographic

Thu, 07/07/2011 - 15:03 | 1433549 TexDenim
TexDenim's picture

This fellow writes better than he forecasts, alas. Also, bear in mind that perma-bear newsletters make the most money.

Thu, 07/07/2011 - 14:57 | 1433524 pitz
pitz's picture

lol... 

Thu, 07/07/2011 - 14:46 | 1433487 New American Re...
New American Revolution's picture

oh,... comment inflation.... now we could use a bit of deflation...

Thu, 07/07/2011 - 15:05 | 1433559 akak
akak's picture

Thank God that leo doesn't post like that!

Thu, 07/07/2011 - 18:14 | 1434342 Manthong
Manthong's picture

Or CD.

Thu, 07/07/2011 - 14:45 | 1433480 New American Re...
New American Revolution's picture

WTF happen?

Thu, 07/07/2011 - 17:15 | 1434164 Frankie Carbone
Frankie Carbone's picture

Fat finger?

Thu, 07/07/2011 - 14:44 | 1433477 New American Re...
New American Revolution's picture

Isn't this the guy who said the dollar was taking off,... a few weeks after he said it was going in the proverbial 'shitter'?    Weeeellllllll!!!!!!    I'm waiting for the dollar to take off,... and I'm long the PM's (lightly) because, yes, its summer and people aren't watching so carefully at the Euro starting to unwind, which is going to take a bail out of somekind,.... and its the dollar that has bailed out the Euro since after WWI,... and President Barry Soetoro said we had to stand by the Euro...., while China does whatever.... on a tower of borrowed money.    At least America prints her's.   But isn't that how we got here in the first place???   But what good is a bail out,... it just creates another bubble.... yes?   

Ohhhh,.... now your catching on.... no?

Thu, 07/07/2011 - 18:45 | 1434388 Ripped Chunk
Ripped Chunk's picture

Isn't this the guy who said the dollar was taking off,... a few weeks after he said it was going in the proverbial 'shitter'?    Weeeellllllll!!!!!!    I'm waiting for the dollar to take off,... and I'm long the PM's (lightly) because, yes, its summer and people aren't watching so carefully at the Euro starting to unwind, which is going to take a bail out of somekind,.... and its the dollar that has bailed out the Euro since after WWI,... and President Barry Soetoro said we had to stand by the Euro...., while China does whatever.... on a tower of borrowed money.    At least America prints her's.   But isn't that how we got here in the first place???   But what good is a bail out,... it just creates another bubble.... yes?   

Ohhhh,.... now your catching on.... no?

 

MORON ^6th

Thu, 07/07/2011 - 18:08 | 1434327 Ponzi Unit
Ponzi Unit's picture

Are you drunk or stupid?

Thu, 07/07/2011 - 18:08 | 1434326 Ponzi Unit
Ponzi Unit's picture

Are you drunk or stupid?

Thu, 07/07/2011 - 18:08 | 1434325 Ponzi Unit
Ponzi Unit's picture

Are you drunk or stupid?

Thu, 07/07/2011 - 17:15 | 1434162 Frankie Carbone
Frankie Carbone's picture

His high frequency posting algo just went non-linear. 

Tyler. What' the penalty here for post stuffing? 

Thu, 07/07/2011 - 14:58 | 1433526 fonestar
fonestar's picture

fractal printing algo gone wild?

Thu, 07/07/2011 - 15:34 | 1433692 bill1102inf
bill1102inf's picture

lol, wtf /\

Thu, 07/07/2011 - 16:56 | 1434067 Ying-Yang
Ying-Yang's picture

Damn... the New American Revolution died atop the save key.

Thu, 07/07/2011 - 15:51 | 1433770 Hugh G Rection
Hugh G Rection's picture

Hey Michael J Fox. Try to hit the Save button... ONCE!

Thu, 07/07/2011 - 16:35 | 1433970 Sambo
Sambo's picture

He is saving too much...

Thu, 07/07/2011 - 16:46 | 1434027 akak
akak's picture

Must be one of those damned Asian oversavers.

Thu, 07/07/2011 - 14:41 | 1433435 radarthreat
radarthreat's picture

I liked this report back when it was called 'The Deflationary Disaster'

Thu, 07/07/2011 - 15:50 | 1433768 Hugh G Rection
Hugh G Rection's picture

The sequel is going to be a lot more action-packed.

Thu, 07/07/2011 - 16:16 | 1433883 whstlblwr
whstlblwr's picture

This is what I wonder. The levered borrow from Bernanke if in trouble. They make threat we lose money, we take market down and he put up some secret lending facility together. Presto. Print more money.

Thu, 07/07/2011 - 17:08 | 1434134 eureka
eureka's picture

WHSTLBLWR - What are the odds that - and conditions required for - simultaneous and parallel crash of US stock markets and USD ?

I don't mean a 10%-20% correction - I mean A CRASH - like 40%-50% drop in a few weeks.

What are the odds - and the conditions required?

ANYONE'S PERSPECTIVE AND ANALYSIS IS APPRECIATED. THANKS.

Thu, 07/07/2011 - 18:15 | 1434344 I am more equal...
I am more equal than others's picture

Nassem Taleb would say it is incalculatable because these risks are in the tales and by there very nature unpredictable.  Both are fragile systems so shock could crash one or both.  In essence black swans cannot be predicted.  Like the turkey story, things will go on like every other day until it doesn't. 

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