Largest Increase in Margin Debt Since 2007 Fuels Stock Market

Mish

Margin debt is on the fastest rise since 2007 and before that, 1999, right before the dotcom bubble burst.

Everything Rally 

The "Everything Rally" is underway, fueled by borrowed money.

As of late February, investors had borrowed a record $814 billion against their portfolios, according to data from the Financial Industry Regulatory Authority, Wall Street’s self-regulatory arm. That was up 49% from one year earlier, the fastest annual increase since 2007, during the frothy period before the 2008 financial crisis. Before that, the last time investor borrowings had grown so rapidly was during the dot-com bubble in 1999.

Best Quotes

  • “It fuels bull markets and it exacerbates bear markets and to a certain extent you put it on the list of irrational exuberance,” said Edward Yardeni, president of consulting firm Yardeni Research. “The further that this stock market goes, the higher that margin debt will go, and when something blows up that will be one of the factors for why stocks are going down.” 
  • “Speculative short-term trading is always risky, but mixing it with unfamiliar products and markets, leverage, and advice from anonymous individuals is a recipe for disaster,” the CFTC said.
  • “The lack of transparency in this market makes it not possible for the average market participant to know what is going on,” said Josh Galper, managing principal of Finadium, a research and advisory firm. 

The article points out that some of the borrowing may be for other things such as vacations.

Regardless, it's very risky business.

Once again people have been trained that stocks only go up. 

Mish

Comments (38)
No. 1-16
caradoc-again
caradoc-again

Jamie Dimon shareholder letter: "This boom could easily run into 2023 because all the spending could extend well into 2023."

Does he think there will be no market bust and the negative wealth effect not kick in? What does he know?

caradoc-again
caradoc-again

Dimon might be right but any bust, whenever it occurs, will be super epic. Stocks, housing, bitcoin, you name it. Even labour will deflate with mass immigration. Meanwhile Dimon and friends will be immune to it all.

Sechel
Sechel

This is because there isn't a huge pent up demand for investment funds so it all goes into paper assets and real estate

TechLover
TechLover

Does this margin debt include leverage used by sophisticated parties like Hedge Funds? E.g. how Archegos Capital leveraged their portfolio by 10 times and then went bust all at once?

If that type of lending/debt is not included in the first graph, is there a source where we can get that data (delayed or approximate is fine) so we can figure out the total leverage in the system.

I have a feeling that the way many Hedge funds and other sophisticated players use leverage has changed since 2008 and if we include that, it will show that the true current leverage is huge and way past 1999 or 2008.

The bust following this will be truly epic! Buckle your seat belts!

lamlawindy
lamlawindy

Articles like this give me an eerie feeling of deja vu. If you take out "margin debt" and insert "home equity loans," I think I read this same article 15 years ago.

Eddie_T
Eddie_T

This is what happens at market tops. But I expect there is a bit more upside, before the pain. The stimulus will keep it going for a while.

If we were going to have a big correction later this year, I would expect to see more topping in the spring......and we’re here....So where are the waterfall drops?

I’m happy to have zero exposure to stocks. At some point it has to unwind.

Roger_Ramjet
Roger_Ramjet

I think it was Charlie Munger who said, "show me the incentive and I'll show you the outcome".

When the Fed directly states that they will backstop the financial economy, more debt of all varieties, and in vast quantities, is what you get. Unfortunately, all of that additional debt, added to an already ultra-leveraged economy, does nothing to drive growth in the real economy. In fact, you get the opposite.

Gsorter
Gsorter

I suspect any market crash will be a crash UP. Why would the market crash down anytime soon? All that newly created Fed money with no end in sight, plus Treasury's TGA money had to go somewhere. Real estate, stocks and commodities to the moon. Even Weimar Germany had a stock boom the first couple of years

TCW
TCW

What exactly popped the Nikkei bubble 30 years ago, was it interest rates?

Six000mileyear
Six000mileyear

Once again, nice chart. The Elliott waves are very clear. The margin rally out of the COVID lows is in wave 3. There should be one more slight consolidation followed by a slight rally to new margin highs.

Indications of 60 year low in the interest rate cycle continues to supported by time in an uptrend.

martiantim2
martiantim2

Nice chart!

FooFooFed
FooFooFed

Debt finance isn’t a solution. Money growth last year was 20-25% while velocity of money was decreasing. Money supply is trapped and won’t make it into the economy. For every 1$ debt it now only generates 40cent GDP. Corp profits after taxes over last 9 years is unchanged. And now we come out of recession and encounter inflation and rising interest rates!!
So yeah don’t worry, everything’s fine. Just add more debt. Why not just pile on MMT and everyone stay at home? Greenspank Berspanky old Yeller and JP are selling out our standard of living at the expense of the young adults, and everyone is cheering!! WTF!

nicholasdouglas
nicholasdouglas

What could be the solution in this unstable stock marker! Different people have different opinions regarding the house inspectors and the current market situation. I hope we all make all the laps and gaps in this current unstable marketplace!

nzyank
nzyank

I don't share Mish's concern. The total market cap of the US stock market increased by a greater percentage than margin debt during this time period, and margin debt is a tiny fraction of this overall value, so it does not seem as if margin debt is excessive. Also, there is a tremendous amount of cash sitting on the sidelines. It seems that from a supply and demand standpoint, there is a significant supply shortfall of investment opportunities, and this is likely to continue for foreseeable future.


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