Proprietary Trading May Cause October Crash: Investor

Updated 2:15 PM PST, Tue, Jul 7, 2009

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Global stock markets could crash in October, as by then it will be clear that the economic recovery many people pinned their hopes on will not materialize, the stimulus option will no longer be a viable one, and proprietary trading desks will decide to go short, economist and investor Enzio von Pfeil, CEO of EconomicClock.com, told CNBC.

"The economic time has to worsen and so these green shoots will morph into black shoots very badly, culminating probably in an October crash," Pfeil said.

"People will finally accept that the unemployment rates will have to keep rising, that productivity will have to keep falling," he added. That in turn will make earnings expectations "fall through the floor."

But another analyst rejected his claims, saying predictions of a crash are exaggerated. Anko Beldsnijder, senior portfolio manager at MainFirst Bank, disagreed with the October crash theory.

"A crash - I think that is, in the short term, quite difficult to see because the main problem is a lot of investors are still not in the market, are still very defensively positioned," Beldsnijder told "Worldwide Exchange" in the same segment.

"The key problem is: who should sell for a crash, where should the main disappointment be," he added.

With a backdrop of rising unemployment and an excess supply of goods, Pfeil cited three other key reasons for expecting stocks to tank this winter.

Firstly, he thinks the much hoped-for economic recovery will not materialize and governments will be unable to keep showering the global economy with stimulus packages.

"What will become very apparent by then (October) is the so-called global recovery just is not going to happen. The governments have run out of ammunition, they cannot go on stimulating the economies," Pfeil said. "On top of which, you will find that China itself will be running out of ammunition."

The big proprietary trading desks have been making money on a bull run, but "the only thing that is going to be out there is to have major, major short positions," he added.

A third reason to expect declines in October is simply the seasonal factor, according to Pfeil.

"Stupid as it sounds, this is normally when crashes occur, in October. I cannot tell you why," he said.

The declines are set to start in the U.S. and affect Western markets more than Asia, according to Pfeil.

- Watch the full interview above.

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