The Wall Street Journal reports Margin Debt Hit an All-Time High in February. Given that Margin debt has a history of peaking right before financial collapses this seems like a warning to me but analysts say it’s different this time.
Margin debt climbed to a record high in February, a fresh sign of bullishness for flummoxed investors trying to navigate the political and economic crosscurrents driving markets.
The amount investors borrowed against their brokerage accounts climbed to $528.2 billion in February, according to the most recent data available from the New York Stock Exchange, released Wednesday. That is up 2.9% from $513.3 billion in January, which had been the first margin debt record in nearly two years.
Before January, the previous record high for margin debt was $505 billion in the spring of 2015. Margin debt then started falling, months ahead of a summer swoon that sent major indexes down more than 10%.
Analysts Say Don’t Worry
MarketWatch reports Record Margin Debt May Be a Red Flag, but Analysts Say Don’t Worry.
The latest warning sign — following underperformance by small-cap stocks, record inflows into exchange-traded funds and high levels of political uncertainty — is margin debt, which is seen as a measure of speculation and just broke a record that has stood for nearly two years.
According to the most recent data available from NYSE, margin debt hit a record of $513.28 billion at the end of January, topping a previous record of $507.15 billion that had held since April 2015. Margin debt refers to the money that investors borrow to buy stocks, and high levels of it, in periods of market volatility, and can lead to sharper declines. Records preceded both the dot-com market crash and the financial crisis.
However, expecting a similar correction because debt is at a record now would be “naïve,” said Jeff Mortimer, director of investment strategy for BNY Mellon Wealth Management.
“This isn’t a signal to me that markets are reaching an exuberant level like they did in the 1920s or 1990s, when speculation was rampant,” he said. “What our clients are doing is borrowing against the portfolios because interest rates are so low. They’re not leveraging up because they see the market exploding to the upside; they’re using leverage because they can pay it off at any time.”
Borrowing Against Portfolios
Don’t worry, clients are just borrowing against their portfolios because rates are low. Allegedly, they can pay this back anytime.
Excuse me for asking, but what if they spent the money?
Consumer Confidence a Leading Indicator of Market Tops?
In response to Consumer Confidence Strongest Since December 2000: A Strong Contrarian Indicator? I received an interesting chart from Doug Short at Advisor Perspectives.
Once again, here is a chart from John Hussman to which I added vertical bars.
For now, I am sticking with consumer sentiment as a coincident, not leading indicator unless the markets make a fresh set of highs.
Hussman Tweeted, and I strongly agree, “Multi-year highs in consumer confidence are less a sign of forthcoming consumer spending as a sign of forthcoming investor losses.”
- Consumer Sentiment Statistical Noise: Modern Day Snake Oil.
- Consumer Confidence Strongest Since December 2000: A Strong Contrarian Indicator?
Sentiment peaked just before the 2001 recession. It would be a fitting irony if the same happened again.
Mike “Mish” Shedlock
Conscience of a Conservative said:
And yet the Federal Reserve has refused to alter margin requirements for decades even when the signs point to excess speculation
Not completely disagreeing about the margin debt but probably should also ask how much it is as a % of assets. One thing to borrow 10K on margin when your account is worth 100K, another when its worth 250K.
More at Doug Short’s site:
Indeed. To guage how extreme the margin debt is you need more metrics, such as the ratio to GDP or Gross Value Added, the ratio of funding cost to yield and/or total returns, whatever. Absolute records are always poor metrics in a country/economy that is growing. At least the numbers were adjusted for present-day estimates of dollar buying power, though not for the absolute amount of dollars in existence.
Mike (not that Mike) said:
“Excuse me for asking, but what if they spent the money?”
Isn’t that exactly what the Fed wants them to do? Spend, stimulate, pay no heed for tomorrow…
To make a valid comparison versus 2000/01 I believe you have to consider, now vs then, the availability of trading on margin for smaller retail clients. I was on Wall Street at the time, and margin was something available to our more ‘sophisticated’/wealthy clients. It could be that availability of margin has since ‘moved from Wall Street to Main Street’. For example there are online discount brokers that now offer viable margin a/c fees for clients with $100k of assets, but I don’t recall any such product back in the dot.crash era.
Bankers are confiscating stuff from the majority, and lending the confiscated stuff to gamblers. What could be a better plan than that?
Except for the majority who is having their stuff confiscated by bankers, of course.
IMHO, the stock market is either:
a) Insanely over-valued
b) Accurately predicting a severe episode of hyper-inflation in the near future.
Take your pick.
Also keep an eye on Initial Jobless Claims and Continuing Jobless Claims. The worker is the canary in our coal mine.
The FED does not want speculation to go parabolic and is working hard at preventing that. They know that if speculation gets out of hand a crash is inevitable, but they also know that consumer confidence will turn rapidly if people start getting laid off.
We’ve had four straight weeks of Initial Claims coming in over expectations. Retail businesses and restaurants are starting to close/fail in increasing numbers.
I do not envy the FED or Donald Trump.
BillyBob Texas said:
Looking at the charts of where the ‘lines cross’ which have been foreboding of bad times in the past………..were the interest rates at the Fed (or the market) similar? Often I see these things – that are used to show us the end of the world….but “things are completely different this time”….yeah, I know that cliche……
Tony Bennett said:
“However, expecting a similar correction because debt is at a record now would be “naïve,” said Jeff Mortimer, director of investment strategy for BNY Mellon Wealth Management.”
Well, Mr Mortimer YOU are the “naive” one … or a typical scumball sell side pitch man.
First thing I always do is check the track record. Hhmm, what was Mr Mortimer saying, er, pitching just before last recession.
April 27th, 2007
“Mortimer, who also serves as CIO of equities for Charles Schwab Investment Management and lead portfolio manager of Laudus International MarketMasters Fund, said investors should not put much emphasis on the Dow’s record this week: “It’s just a 13 with three zeroes after it,” he said.
Mortimer advised stock buyers to diversify, and said that “on a P/E level,” the stock market “might be more reasonably valued now than at the start of this bull market.” He predicted that a continuing stream of good earnings will lead the market even higher.”
Correct me if I’m wrong but I thought Margins were capped at 50% of market value. So if you borrow and spend it on crap, the broker sells your securities to pay off your debt. Unless prices fall more than 50%, no problem.
Borrow to spend? Any evidence spending jumped a quarter trillion recently? Wouldn’t such a sudden stimulus increase incomes, jobs etc.?
You are right, since 2007 the nominal value of margin debt has tracked the nominal value of SP500. If it had been plotted as a percentage of SP500 you would have had a flat line.
Why anybody is still quoting Hussman is unbelievable, if you had followed his advices you would have missed out on a fantastic bull market.
John Liska said:
Looks like the wealth transfer is about to be taken up another notch……
Is there any breakdown of short vs. long margin debt? Wouldn’t this make a difference?
Multi level highs in consumer confidence are less of a sign of forthcoming consumer spending as a sign of consumer wishing.
This militates against the long slow decline in equities theory. If rates rise with excessive leverage margin calls go out to the market at large. Stocks are sold to cover making prices fall generating more margin calls. So far this has been halted by central banks stepping in to support prices. The market seems confident they will do so again. I think they will and long slow decline is the plan. A controlled market demolition by the worlds central banks. Look at Japan for the pattern.
A) CNBC is just an infomercial for money managers.
B) how high can margin debt go? The
C) the real “what if” is if we have a flash crash that does not recover the same day-but follows thru to downside and accounts have to be liquidated.
Bill Fawell said:
Great article Mish, you’ve been upping your game. Way to go dude!
There is an easy way to figure out how coincident margin is with the markets. Compute the correlation between the two of them. Anything over 80% is a strong reading.
The margin chart shows clear Elliott waves since 2009. This pattern is nearly complete, so I’d give a sell signal. There is no point in holding and watching the market crash 50%.
CzarChasm Reigns said:
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Michael X Donovan said:
“they’re using leverage because they can pay it off at any time”. I feel like the author is trolling us with this statement? But assuming he’s not…what an overconfident, dangerous argument…”Leverage your money, because you’ll always be able to pay it back whenever you need to”. How about a flash crash in the market, or even just back to back to back down days of 1% or more…what happens when a margin call is made and the investor doesn’t have enough savings to cover it? THEY ARE FORCED out of their position and owe the difference. The market has gone up for so long it’s as if the possibility of it going the other way isn’t even on anyone’s radar.
Be smart, don’t use leverage. Risking more than you can afford to loose is a fools game and you will loose like all fools do.
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