Due to margin calls, will we get a black Monday?

Over the past two days, I've been shorting US stocks and made a killing, counting money until my hands were numb. I'm not bragging because I like showing off; I just want to mock Trump supporters, since they're the ones who elected Trump and keep defending him. If I don't make fun of them, how will they ever admit a mistake? But it might not have much effect; once a Trump fan, always a fan.

Although I've made money, I know many people have lost money, especially those hedge funds that usually borrow from banks to trade stocks, which is leveraged investing. These stocks are typically held at banks along with some of their other assets as collateral, also known as margin. When the stock market crashes, and they suffer losses, the value of their collateral at banks also depreciates. At this point, the banks that lent them money get nervous, fearing that these funds might lose so much they could even go bankrupt, so they demand more collateral. These funds are already losing money, and now they have to put in more money, which means they need to sell off other assets to provide additional margin to the banks. The banks chase them for money, they have to sell, which usually leads to further stock market declines, asset values continue to fall, more margin calls, a vicious cycle, potentially leading to a stock market crash.

This weekend, based on the significant drops of the past two days, the risk control departments of major banks are probably working overtime to review the asset values of their fund clients and issue margin calls, so there will be a lot of stocks sold on Monday, causing share prices to drop. In fact, this might also be one of the reasons why the stock market continued to fall on Friday after Thursday's decline. Clients just added margin on Friday, lost money on Friday, and have to sell on Monday.

This time is particularly serious because it has set the largest two-day drop since the 2020 COVID-19 crisis, wiping out more than $6 trillion in market value, thus triggering massive margin calls and forced asset sales, and raising concerns about systemic market risk.

What's worse, if investors (funds and individuals) can't make the margin payments on time, financial institutions will force liquidation, selling investors' assets on the market to reduce their own risk of not being able to recover the loans they made to clients.

At the beginning of a market downturn, margin calls are a normal risk control mechanism, but if they occur in a concentrated manner, they can lead to a massive wave of asset sales, further exacerbating market panic and declines.

According to multiple media reports, Wall Street banks have issued the largest margin calls to hedge funds since the 2020 pandemic, forcing these funds to quickly sell their holdings to raise funds.

To cope with liquidity tightness and margin calls, many funds have even begun selling traditional safe-haven assets—gold. So, gold, which had risen a lot in the previous days, has also fallen by 2% these two days, likely because these funds had to sell their gold holdings to meet the margin calls.

This is not a denial of the inherent value of gold itself but rather investors being forced to sell the most liquid assets to meet urgent cash needs. This is also why good stocks are falling, and even the so-called defensive stocks are falling, because funds need to sell them to meet margin calls. Similar situations occurred in 2008 and 2020, usually indicating that systemic market pressure is spreading.

Sometimes, market psychology has a highly contagious effect. When assets are sold off, prices fall, and margin calls follow, it creates a "stampede effect"—even if some assets' fundamentals haven't changed, they may plummet due to technical factors.

Whether this will happen, which funds are busy looking for margin, and whether it will cause a Black Monday, let's wait and see.

However, Asia has had the Qingming Festival holiday, and the market will definitely take a big hit on Monday when it opens. It's the Qingming season, with rain falling, and Wall Street is in despair, all because of Trump supporters.