🚨 [Answer Edition] Dissecting the deep question from an intelligent reader: 'The end of AI mania and the $1.5 trillion credit contraction' using primary sources
The other day, I received a very thought-provoking and passionate message from a reader.
They mentioned that they personally delve deeply into corporate balance sheets (BS) and profit and loss statements (PL). I read it with a sense of awe, struck by the intelligence and deep insight into the market that overflowed from their writing.
If I were just tracing general economic news or analyst reports, I could probably provide an answer. However, the reason they posed this grand question to me is likely because they are seeking a deeper resolution—one that strips away the 'layers of psychology,' such as Wall Street's greedy motives and the madness of the crowds, to reveal what lies behind the financial statements, which are otherwise just rows of numbers.
'What will happen when the $1.5 trillion in margin debt in the current U.S. stock market unwinds?'
'What is the trigger that will wake us from the AI euphoria, and what will remain in the scorched earth that follows?'
To answer this high-level question with speculation based on secondary or tertiary media information would be an insult to the questioner's intelligence.
On my desk right now, leaving only enough space to open my laptop, there is a towering stack of FINRA margin debt statistics, the latest reports from the Financial Stability Board (FSB), and raw SEC filings (Form 10-K / 10-Q) from various hyperscalers.
This time, I would like to spread out these solid facts—these 'primary sources' issued by national and public institutions—and unravel the logic and psychological story derived from them, one by one.
First, let's start with a 'fact check' to grasp the accurate scale of the current situation.
1. Scale of U.S. stock margin debt
The reader estimated it at 'around $1.5 trillion,' and this market view is surprisingly accurate.
Latest primary data (as of June 2026): 👉️ FINRA brokerage accounts customer margin debt has reached $1.502072 trillion (approx. $1.50 trillion).
It has surged by over $86 billion in one month from approximately $1.42 trillion in May, officially breaking through the $1.5 trillion mark pointed out by the reader. Even in terms of GDP ratio, it is at an extremely high alert level, equivalent to or higher than the dot-com bubble (2000) or the eve of the Lehman Shock (2007). Objective primary data proves that the magma that will trigger a negative chain reaction of 'margin calls → forced liquidation' when the market turns downward is becoming even more massive.
2. Market size of private credit
Private credit, where funds and others lend directly to companies without going through traditional financial institutions like banks, is expanding rapidly as the center of shadow banking.
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Data source:👉️FSB (Financial Stability Board) 'Report on Vulnerabilities in Private Credit' (May 2026), and 👉️U.S. Office of Financial Research (OFR) briefing (based on February 2026 / SEC Form PF etc.)
Global scale: According to FSB estimates, it has reached a scale of $1.5 trillion to $2 trillion.
Within the U.S.: In the U.S. alone, it has exceeded $1.6 trillion, and has already grown to a scale that rivals or surpasses the leveraged loan market (approx. $1.4 trillion) and the high-yield bond market (approx. $1.3 trillion).
As the FSB also warns, this $2 trillion private credit market carries a major vulnerability: it has 'never been tested in a severe economic downturn.' Liquidity is low, and it is unclear how losses will propagate to the entire ecosystem (pension funds, insurance companies, banks) when corporate default risks surface.
1. What is the 'trigger' that will wake us from AI euphoria? (Both economic and psychological aspects)
[Question from a reader ①] We are currently in a state of euphoria, completely infatuated with AI, but what could be the trigger that wakes us from it? I would like to hear about both the triggers in the economic environment and the triggers in human psychology.
The trigger that will cause the AI euphoria currently covering the market to collapse is by no means the 'decline of AI technology itself.' Technological evolution will continue. However, the trigger that wakes the market always comes from the extremely cold 'reality of numbers.'
[Economic environment trigger: Divergence between CapEx and Operating Cash Flow] The economic trigger is when the 'limit of ROI (Return on Investment) for AI investment' is exposed to the light of day as numbers in SEC filings (financial statements).
Looking at the cash flow statements in the latest Form 10-Q (quarterly reports) and 10-K (annual reports) of the giant IT companies (hyperscalers) I have on hand, 'CapEx (capital expenditures)' for building AI infrastructure is ballooning at an abnormal pace. Huge amounts of cash are being continuously poured into GPUs and data centers.
Originally, if you make this much investment, the 'operating cash flow (earnings from core business)' must explode later to make the ends meet. However, reading through current financial statements, we are beginning to see companies where the cash flow growth curve of actual demand (monetization) purely generated from AI is not keeping up with the massive CapEx.
'After investing this much, when will we ever recover it?' When this inconvenient truth becomes the market consensus as numbers in cash flow statements that cannot be faked, the premise of the economic environment will crumble.
[Psychological trigger: Reversal from blind faith to 'suspicion of cash']
On the other hand, the psychological trigger is the moment when investors' perspectives are forcibly pulled back from 'top-line (revenue) growth' to 'bottom-line and FCF (free cash flow).'
When the market is in euphoria, people buy stocks based solely on 'future growth stories.' However, when the aforementioned doubts about investment recovery grow, psychology suddenly becomes conservative. They face the harsh reality of, 'Forget the story, how much cash is this company actually earning right now?' This moment, where blind faith in growth reverses into intense suspicion, is the end of psychological euphoria.
2. What to watch closely and the 'initial signs' of it
[Question from a reader ②] Regarding the triggers above, what should we watch closely? Also, what kind of signs appear at the initial stage?
Many people tend to worry about the rate of stock price decline or the surge in the VIX index (fear index), but those are all just 'results.' The primary information we should really be watching is in a much more mundane and cruel place.
[Primary data to watch: Credit spreads and gate closures]
The first thing to watch is the 'credit spread' that can be confirmed in data such as the 'H.15' published by the FRB (Federal Reserve Board). In particular, we look at how much the yield on high-yield bonds (junk bonds) is added on top of safe assets like US Treasury bonds (how much the spread has widened).
Second is the trend in the 'private credit market,' which the Financial Stability Board (FSB) warns has ballooned to a scale of about $2 trillion. This is a world of direct lending that does not go through banks, where unlisted mid-sized companies and others borrow funds at high interest rates. What we should watch here is the 'redemption trend' of funds reported in SEC Form PF and similar documents.
[Initial signs: The canary in the coal mine sings in the 'bond and loan markets']
While the stock market is still floating in high-price territory, the initial signs appear quietly but surely in the 'bond and loan markets.'
The specific initial signs are the following two.
The quiet widening of credit spreads: Even if the stock market is calm, interest rates on loans to high-risk companies are gradually rising, and the bond market is beginning to price in the deterioration of cash flow (increased default risk).
Frequent 'gate closures' of funds: In illiquid funds dealing with private credit or real estate, notices stating 'we are temporarily suspending redemptions' are beginning to circulate as they cannot keep up with withdrawal requests from clients.
When these events appear in the corners of news or in regulatory reports, it means that a 'liquidity drought' has begun beneath the surface. This is the sign of the 'ebb tide' of the massive tsunami that will later strike the stock market.
④ Ripple effects and scale of the unwinding (chain reaction to the market, real economy, and psychology)
[Question from a reader ③] Assuming the unwinding has begun, how, in what flow, and on what scale can we expect it to ripple through various market elements (stocks, bonds, foreign exchange, interest rates, etc.), the real economy, and human psychology?
This is where the 'reality of leverage collapse' begins, not just armchair theory. The $1.5 trillion (over 200 trillion yen) in margin debt published by FINRA and the $2 trillion (about 300 trillion yen) in private credit. When these start to rotate in reverse, the market will be governed not by 'valuation' (fair price) but by 'mechanism' (forced systems).
The flow of the ripple effect proceeds in four major phases.
Phase 1: 'Margin calls' and forced liquidation in the stock market When the decline in AI-related stocks and others exceeds a certain threshold, brokerage firms systematically demand 'margin calls' (additional cash) from investors. Positions of investors who cannot provide cash are forcibly liquidated (sold) without question. This creates the next decline, triggering 'self-propagating selling' that calls for further margin calls.
Phase 2: Ripple effect to multi-assets (liquidation and currency turmoil)
What do investors and funds chased by margin calls do? They sell not what they 'want to sell,' but what they 'can sell.' As a result, not only stocks but also high-quality government bonds, gold, and crypto assets are mechanically liquidated. At the same time, in the foreign exchange market, a 'carry trade unwind,' typical of risk-off scenarios, occurs. Because funds that were borrowed at low interest rates and poured into risk assets are rapidly withdrawn, exchange rates fluctuate wildly regardless of fundamentals, and global volatility spikes.
Phase 3: Freezing of private credit and direct hit to the real economy
The turmoil in the financial market ripples to the real economy with a time lag. This is where the $2 trillion private credit market bares its fangs. When funds are forced into gate closures, mid-sized companies that borrowed from this market can no longer roll over their debt. Companies with short cash flows are forced to carry out 'employee layoffs' to ensure business survival. Here, for the first time, the financial crisis appears in the numbers as a 'cooling of the real economy' in the BLS (U.S. Bureau of Labor Statistics) employment report.
Phase 4: Complete atrophy of human psychology
When an unwinding of this scale occurs, the psychology of market participants shifts completely from 'buying the dip' to 'securing cash.' No one wants to take risks, and liquidity disappears from the market. The scale of wealth destruction caused by this chain reaction is expected to reach the multi-trillion dollar (hundreds of trillions of yen) level.
④ Time frame required for the environment to 'normalize'
[Question from a reader ④] How much time do you think it will take for the above ripple effects to subside and for the environment to return to normalcy?
In conclusion, I expect it will take at least 'a year and a half to two years' of painful time.
Many investors are clinging to memories of the 2020 pandemic shock. At that time, central banks printed money on an unprecedented scale (supplying liquidity), causing the market to make a V-shaped recovery in just a few months. However, the structure is fundamentally different this time.
While the pandemic was an 'acute liquidity shock,' what is expected this time is a crisis involving 'liquidation of excess leverage and balance sheet repair.'
It takes physical time for the $1.5 trillion in margin debt that once ballooned to be liquidated through forced sell-offs, for the bad debt lurking in the private credit market to be processed, and for the balance sheets (BS) of damaged investors and companies to return to a healthy state.
Looking back at history (the dot-com bubble burst in 2000 or the Lehman Shock in 2008), it takes at least an 18 to 24-month cycle for the 'pus of debt' accumulated in the system to be fully drained and for the market to return to a normal state where it can correctly evaluate 'actual cash flow' rather than 'expectations'.
Even if central banks lower interest rates, no one will want to borrow money and take risks immediately after the landscape has been scorched. The 'time to heal wounds' itself is the only process toward normalization.
⑤ What remains after the scorched earth, and the 'next protagonist'
[Question from a reader ⑤] After all of the above is over, what will remain, and what will become the center of the recovery?
After trillions of dollars in leverage are unwound and the market becomes a scorched earth, what remains is a very simple and, in a sense, 'boring' truth.
The 'grand stories' that drove people into a frenzy during the euphoria and metrics like 'adjusted EBITDA' conveniently processed by Wall Street will be of no use in the face of a credit contraction wave. What remains after everything is over and becomes the center of the next market cycle is 'companies that do not rely on external capital (debt) and continue to generate pure free cash flow (FCF) from their own operations'.
If you pull Form 10-K from the SEC database (EDGAR) and scrutinize the balance sheet (BS) and cash flow statement (CF), it will be obvious who will survive.
Ironclad balance sheet: Companies with abundant liquidity that do not need to 'rollover' debt in the private credit market or the high-yield corporate bond market.
Cash generation power based on actual demand: Business models that possess products that society and corporate core systems 'cannot help but use' even after the AI mania has faded, and that can reliably collect cash.
In a panic market, even these truly excellent companies are mercilessly sold off as they get caught up in fund liquidations. However, when market normalization begins, capital always returns to the 'most reliable cash flow.' The center of the recovery from the scorched earth is always, in any era, the group of companies that possess this 'power to earn cash from their core business'.
Looking back at history, when the IT bubble (dot-com bubble) burst in 2000, many IT companies disappeared, but the 'communication networks like fiber optics' they laid across the world during the frenzy remained as physical infrastructure and became the solid foundation for the subsequent internet society.
The essence of this AI bubble is exactly the same. Even if the euphoria collapses and the mania cools down, the 'massive data center clusters' and 'computing resources' that giant IT companies built by investing enormous CapEx will certainly remain as next-generation infrastructure.
The ones that will become the protagonists of the recovery after the scorched earth are only those companies that can use this remaining infrastructure as actual demand and steadily monetize it.
⑥ The 'optimal solution' and preparation as an individual investor
[Question from a reader ⑥] Regarding all of the above, what should an individual investor prepare, and what behavior would be the optimal solution?
$1.5 trillion in margin debt and $2 trillion in private credit. In a ruthless system where these begin to rotate in reverse, what we as individuals should prepare and how we should behave can be summarized in the following three points.
1. Thorough elimination of all leverage (margin trading)
This is the most important. Even if there were times when you utilized leverage to ride short-term momentum, in a phase where a 'system unwinding' like this is anticipated, leverage that involves carrying positions overnight will be a fatal wound. This is because it is not the market decline itself, but 'forced liquidation due to margin calls' that is the biggest factor causing investors to exit the market.
2. Securing overwhelming liquidity (cash)
Wall Street's giant funds and institutional investors are forced by discipline and algorithms to sell, no matter how excellent a stock may be. However, individual investors who are not in debt have the ultimate option: to 'wait.' In the midst of a market crash, holding cash is both the greatest defense and the greatest offensive weapon.
3. The 'eye' to decipher primary sources and identify the essence
In a market ruled by fear, noise (secondary and tertiary information) overflows from every media outlet. Do not be swayed by it; instead, open SEC filings yourself and calmly continue to read the balance sheets, P&L, and cash flow statements. Find those 'truly cash-flow-generating companies that have been unfairly left cheap' which funds have been forced to let go of in tears.
'Being in a position to buy by your own will when others are being forced to sell'
This is the one and only optimal solution for an individual to defeat giant capital in the game of capitalism.
Furthermore, the answer provided so far assumes that you are a high-literacy individual like the questioner, who can 'read financial statements and gauge the current position of the market,' and thus I have presented 'preserving cash and picking up bargains at the bottom' as the optimal solution.
However, for general investors who find it difficult to stay glued to the market daily, the nuance is slightly different. If you are investing in excellent index funds or ultra-high-quality companies with no debt and solid cash flow using 'non-leveraged physical assets,' the worst move to make when a major crash occurs is to 'panic and let go (panic selling).'
If it is difficult to read market waves perfectly, then even if a storm comes, never sell; just 'stay in the market and ride it out.' This is another excellent optimal solution that only an individual who can make time their ally can take.
Conclusion
The question received this time was by no means naive; it was a very sharp and thought-provoking one that sought to peer into the abyss of the market. It was a valuable opportunity for me to once again stare at my data sheets and organize my thoughts.
As someone facing the same market, I hope this analysis helps you fill in the 'final piece' of your investment decisions.
I will continue to thoroughly uncover the 'backside of the numbers' that never appear in news headlines, using primary sources. Thank you very much for such a wonderful question.
Note that this article is, so to speak, a 'thought edition' for grasping the overall picture and risks of the market from a macro perspective.
Next time, I plan to deliver the 'practical edition' where we finally apply this hypothesis to micro financial analysis!
I will show you practical analysis by dissecting the raw numbers of actual companies (10-K and 10-Q), answering 'So, specifically which numbers should you look at and how should you act?' so please look forward to it.
Thank you very much for reading until the end.
Everything for the readers!!!
[Global Notice] The 'dissection of capital schemes based on primary sources' revealed in this analysis will not be limited to the Japanese investment community; we plan to distribute it globally on major overseas financial platforms (such as Substack) in the future. Our perspective, which hacks Wall Street's deceptions, is finally moving to a world-class stage. To all investors seeking the real truth, both in Japan and abroad—please look forward to the next stage.
(Disclaimer: This text is for informational purposes only and does not constitute solicitation for specific stocks, investment advice, or a guarantee of the completeness of financial analysis. Investing involves risks. Please always make final investment decisions at your own responsibility.)
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