The stock market crash followed this event in 1929, 2000 and 2007: is it happening again?

What do the years 1929, 2000 and 2007 have in common? Those were years when there was a big increase in the debt margin of equities. In each of those years, in order to take advantage of sky-high stock market values, investors became heavily leveraged in their accounts. And investors lost a lot each time. “The rise in margin debt was quickly followed by a horrible stock market crash.” Well, it’s following the same pattern again.

In April 2013, a record high was reached in Margin debt (last number we have). It was in July 2007 when we had the previous maximum. Equity debt spread is up 29% more than just a year ago, which is quite a jump. Since the fall of 2012, the S&P 500 has posted gains of more than 20%. Although key economic fundamentals continue to worsen, the stock market continues its rally to record highs. Some economic forecasters say a significant bubble is rapidly forming, when will it burst is the remaining question? We are in for a market crash if the story plays out as before, when this same pattern played out.

Twice since 2000, “whenever the debt spread exceeds 2.25% of GDP, the stock market crashes.” That’s a big red flag,

although by itself it does not predict a stock market crash anytime soon.

Some commentators claim that because investors are so leveraged, some experts in the world of financial investments see this as a positive.

The huge increase in margin debt is seen as an ominous sign by others. The spread on debt in investor accounts has risen to nearly 2.4% of GDP (end 2013), while the New York Times has claimed that “whenever we’ve gotten this high before a market crash has always followed…”

In the midst of the tech stock bubble in 1999, it was the first time in recent years that total margin debt exceeded 2.25 percent of GDP. After the bubble burst, margin debt fell lower. Another surge began in the 2000-2005 housing boom, when it emerged that investors borrowed from their investment accounts to buy houses. That earlier rise in margin lending ended badly in 2007-2008, following the same pattern as in 2000.

A chart of the performance of the S&P 500 over the last twenty years can be found online. It can be compared to the debt margin charts that the New York Times has published on the Internet. You will find a very strong correlation between them. “Every time margin debt has spiked to a dramatic new high in the past, it has always been followed by a stock market crash and recession.” Some commentators ask if a similar accident awaits us.

Several things not seen since 2009 in the economy are starting to happen again, which makes all of this even more alarming.

The warnings are being voiced by leading economists to warn of the oncoming economic tsunami.

Alan M. Newman, a renowned investor, gave a specific example of cautious investor sentiment when discussing the current state of the market in the summer of 2013:

“If anything has changed yet in 2013, we certainly don’t see it. The early post-fiscal cliff rally notwithstanding, this is the same beast we rode to the 2007 highs for the Dow Industrials. The US stock market is overleveraged, overvalued, and has been dominated by mechanical forces to such an extent that all holding periods are now plagued by more risk than at any time in history.”

It is very unfortunate that many Americans do not see that clearly sinister warning. Many people rely on regular media and regular internet sources to think for themselves. Currently, the mainstream media insists that we are not in a big stock bubble… Who should you believe…? Historical patterns say it will happen again.