Last week, legendary investor Carl Icahn spoke to CNBC, reflecting on the market volatility that had been taking place over the last few days, and issuing an ominous warning to investors:
“This is something we’ve never seen before… I don’t remember ever seeing a market with this kind of volatility over two weeks…The market has become a much more dangerous place… it’s like 2008 where everyone was buying mortgages and CDS.”
With regard to the latter comment, Icahn was referring to investors piling into index funds and ETFs, “passive investment” vehicles that he believes are over-leveraged.
His main points:
- “Passive investing is the bubble right now.”
- “There is going to be a major, major, major correction.”
- “This is a manifestation of a real deep problem we have in our markets.“
- “There is a huge bubble of passive money flowing in… a sort of euphoria and a lot of people are going to pay the price just like in 1929.“
He then cranks it up with a dire prediction:
- “I do think the market will bounce back but these are the rumblings before the earthquake.“
- “The market is telling you something… it’s telling you it’s very dangerous…it’s way over-leveraged.“
We’ve heard this kind of talk before, though not in a manner that had identified index funds as a primary source of risk. But one thing we might be able to observe is the level at which investors are over-leveraged.
How much “margin” debt are investors taking on?
IF this chart is reliable, then it indicates that our current margin debt level is higher than any we’ve seen in previous years, including the years leading to the 1987 crash, the tech bubble, and the 2008 financial crisis.
And this is why Icahn believes that “A major storm is coming, could be 5 years, could be 5 months,” and that “there’s going to be a bigger problem than 2009 and 1929. “
Icahn took a step back, however, stating that “no one can tell you what the market is going to do – it’s almost farcical to think you can,” emphasizing that his forecasts are based on research, perhaps implying that research is not the same as prediction.
So do you think that a majority of these leveraged accounts are invested in index funds and ETFs? If so, do you think that a record-high margin level can cause the markets to come tumbling down?
If you feel that this poses a potentially systemic risk, what are you doing to position yourself, should the worst happen?
Watch the full video below: