Largest Increase in Margin Debt Since 2007 Fuels Stock Market

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

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nzyank
nzyank
3 years ago

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.

FromBrussels
FromBrussels
3 years ago
Reply to  nzyank

….Right ! The only way is up ! Let’s put them all in, our chips, into the stock market and NOBODY will have to toil and moil any longer! Life is GREAT in the CBs run land of Oz !

RonJ
RonJ
3 years ago
Reply to  nzyank

“Also, there is a tremendous amount of cash sitting on the sidelines.”

As Mish has mentioned, there are no sidelines. Money moves to where ever people want it at the time. Someone has to sell a share of stock for someone else to own it.

Dominic69
Dominic69
3 years ago
Reply to  RonJ

I agree but stocks can also increase in supply to accommodate demand.

FooFooFed
FooFooFed
3 years ago

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!

martiantim2
martiantim2
3 years ago

Nice chart!

Six000mileyear
Six000mileyear
3 years ago

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.

TCW
TCW
3 years ago

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

Mr. Purple
Mr. Purple
3 years ago
Reply to  TCW

It’s complicated. It had to do with Japan’s 1980’s export-based economy, the US forcing the Yen to rise to eradicate the trade imbalance, the subsequent strengthening of the Yen and the BOJ’s clumsy and doomed attempts to weaken the Yen through monetary easing then panicking and tightening too much. There are also aspects of Japanese tax policy that exacerbated the problem.

TexasTim65
TexasTim65
3 years ago
Reply to  TCW

And don’t forget the rise of China as the worlds preeminent exporter.

Dominic69
Dominic69
3 years ago
Reply to  TCW

What popped the bubble was the decision of the Bank of Japan to curtail lending for Real Estate and everything crashed down. BOJ shut down what was called “Lending Guidance” for the banks. It was an engineered crisis. Rising interest rates have little to do with it.
There is a beautiful, well documented 2014 documentary (the best on the subject made with the collaboration of an economist that was doing Research in Japan and witnessed the event first hand) called “Princes of the Yen” (and based of a 2003 book by the same title), currently freely available on Youtube. Definitely worth a watch.

numike
numike
3 years ago

oh hells bells stop worrying about it! National debt is surging higher. Here’s why worry is heading lower. link to csmonitor.com

Sechel
Sechel
3 years ago
Reply to  numike

Country had debt in the 19th century. Debt in itself isn’t bad. It’s what we do with it. And last few decades It’s not fueling investment but consumption

FooFooFed
FooFooFed
3 years ago
Reply to  numike

We are past point of no return. Debt does matter, its dividend is shrinking as a % of GDP. The stawk markit does not represent the health of the economy.
Fed has 784 PhDs on staff and it’s still a disaster if policy and targets.

Gsorter
Gsorter
3 years ago

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

Scooot
Scooot
3 years ago
Reply to  Gsorter

Good point, why indeed. The market has surely priced in the risks everyone’s been discussing for a while.

Forced sellers maybe? Maybe something like the Archegos Capital scenario? Or maybe a shock such as a major military conflict? It’s difficult to say, but most likely something that no one’s considered. The point is, that because the market is recognised as vulnerable to a shock, everyone will run to the exit at the same time. Many people are only sitting on paper profits against real debt, the gains could vanish very quickly.

Zardoz
Zardoz
3 years ago
Reply to  Gsorter

Because the bubble is so enormous that even all that newly created money is just enough to form a very thin skin to contain it?

Its really hard to get your head around ‘trillions’. I wonder if I’ll live to see the first quadrillion in debt and valuation.

Mr. Purple
Mr. Purple
3 years ago
Reply to  Zardoz

I think if you count derivatives and global debt we’re close. Like 0.917 quadrillion.

Roger_Ramjet
Roger_Ramjet
3 years ago

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.

Zardoz
Zardoz
3 years ago
Reply to  Roger_Ramjet

Numberwang played by Wall St.

Eddie_T
Eddie_T
3 years ago

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.

TexasTim65
TexasTim65
3 years ago
Reply to  Eddie_T

Lots of money still sloshing into the system. The stimulus is just a small part of it. Also don’t forget a lot free money went to business owners (as long as used on payroll) and expanded UI benefits too so that many were making more that they ever did before Covid (I know contracting people who were triple dipping).

Coming right up is Biden’s even bigger spending splash on infrastructure (detailed today) and presumably at the same time more spending on job promotion / social engineering (next week or two) and you can easily imagine another year or 2 of money sloshing into the system and since it has to go somewhere (hard assets) it will end up in real estate, stocks, crypto’s, collectibles etc.

Eddie_T
Eddie_T
3 years ago
Reply to  TexasTim65

If anybody had told me even a year ago that my net worth in my small RE portfolio could go up $650k in a month…I’d have said they were full of sh*t. But that’s exactly what has happened in the last 30 days. It’s gotten crazy …you have to worry about crashes when prices just keep going up and up with no end in sight.

My new plan is to build a house out at the little rancho…..and then flip my Austin house while the flipping is good. If local prices stay strong, I’ll cash out of the ranch when I retire in five years.

lamlawindy
lamlawindy
3 years ago

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.

caradoc-again
caradoc-again
3 years ago

TechLover
TechLover
3 years ago

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!

Sechel
Sechel
3 years ago

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

Sechel
Sechel
3 years ago
Reply to  Sechel

Capital investment

caradoc-again
caradoc-again
3 years ago
Reply to  Sechel

Its because the true value of money is out of wack, made so by making the cost of money artificially low.

caradoc-again
caradoc-again
3 years ago

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.

caradoc-again
caradoc-again
3 years ago

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?

wallstwise
wallstwise
3 years ago
Reply to  caradoc-again

he knows as much or as less as you do. He does not KNOW the future. He, like you, can guess at it and for him he has a very vested interest.

caradoc-again
caradoc-again
3 years ago
Reply to  wallstwise

Vested interest indeed. Tends to change the colour of the shades worn.

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