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We just received the biggest stock market crash warning sign we've seen in 2016, when economist Albert Edwards shared an ominous outlook for U.S. stocks and the economy.
The Societe Generale expert says if the U.S. economy tumbles into a recession led by low manufacturing output, the U.S. market will sink a whopping 75%.
A stock market correction is defined as a 10% drop from a market's high, and a bear market is a 20% drop. So what Edwards is forecasting is a full on stock market crash.
Many U.S. stocks have already dipped into stock market correction or bear market territory. And the major indexes are all close.
The broad-based S&P 500 Index is down 9% from its May 21 record of 2,130.82. The Dow Jones Industrial Average is down 9.8% from its May high. The Nasdaq is down 8% since then.
The S&P 500 ended Tuesday at 1,938.68. Edwards says it could potentially tumble below the 666 level reached during the 2008 financial crisis. He sees the benchmark possibly hitting a low of 550 in the event of a 2016 stock market crash.
Edwards' view is based on the fact that central bankers artificially inflated asset prices after the 2008 financial meltdown. That prevented stocks from sinking to the true lows they should have reached.
Central banks also caused a huge debt bubble in order to expand in emerging markets and China, according to Edwards. The result has been a sharp devaluation in emerging-market currencies, which could cause a deflationary spiral and a U.S. recession.
During a speech in France on Monday, IMF Managing Director Christine Lagarde said the world needs to adapt a new safety net for the new global realities. She asked for help for emerging markets that have been dramatically impacted by the monetary policies of developed markets.
These economists say central banks have exhausted their arsenal of monetary measures to cushion stocks and boost economies. So should a recession materialize, asset prices will drastically tumble.
Here's what investors need to know now about a potential stock market crash in 2016, including how to protect your money…
What Investors Need to Know Before Any Stock Market Crash
One of the biggest data points Edwards points to is manufacturing data. You see, when an economy is heading towards recession, bleak data from the manufacturing sector typically signals the start.
And the manufacturing sector has been contracting for months. The latest readings indicate the worst manufacturing climate since March 2009, just as the economy was clawing its way out the depths of the Great Recession.
But Money Morning Global Credit Strategist Michael Lewitt has been warning readers about these troubling signs in the markets for months.
Lewitt says damage from the commodities bubble, including the collapse of oil and commodities companies like Glencore Plc. (LON: GLEN), and the slowdown in China are just the beginning. That's because the global and U.S. financial systems are more leveraged than ever before.
U.S. nonfinancial corporations have 40% more net debt (debt net of cash) than they did in 2007, Lewitt explains. And seven years of near-zero interest rates coupled with several rounds of quantitative easing disguised "a lot of sins."
"They allowed China to play host to the biggest debt bubble in history," Lewitt said. "That bubble is now popping. And they allowed U.S. corporations to borrow more money than at any time before in history. Sooner or later markets get religion and sins get punished. That time is now."
And while the market may head lower in 2016, Lewitt says investors don't need to get caught off guard. In fact, he's written a complete guide on how to weather a potential $200 trillion credit collapse…
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