Stock Market Leverage Spikes in Historic Manner: Another WTF Chart of A Zoo That Has Gone Nuts
The comments below are an edited and abridged synopsis of an article by Wolf Richter
Today, when valuations don’t matter because they will be even greater shortly, supported by the Fed’s interest rate repression and $3 trillion in asset purchases, and by the US government’s trillions of dollars of handouts and bailouts—in this perfect world, there is a fly in the ointment: Vast amounts of leverage, including stock market leverage.
Margin debt is one indication of stock market leverage. Other types are not reported at all, or are disclosed piecemeal in SEC filings by brokers/banks that lend to their clients against their portfolios. No one knows how much total stock market leverage there is. But margin debt shows the trend.
In February, margin debt jumped by $15 billion to $813 billion. Over the past four months, it has soared by $154 billion. Compared to February last year, it has skyrocketed by $269 billion, or nearly 50%.
Margin debt is not cheap, especially smaller amounts (e.g. 8.325% on margin balances of less than $25,000; 4.0% on margin balances of $1 million or more).
And it’s risky for the borrower. It seems risk-free when stocks go up, but when they tank, your broker will ask you to put more cash into your account or sell stocks into the tanking market, and you then join the legions of forced sellers.
In the past, a big surge in margin balances tended to precede history-making stock market declines.
Leverage is the great accelerator of stock prices, on the way up and on the way down. Purchasing stocks with borrowed money creates buying pressure, and prices rise; rising prices increase the margin balances a portfolio can support, and this encourages more stock-buying on margin.
Selling stocks to deal with margin calls adds more selling pressure to an already declining market. The more prices fall, the more selling pressure there is from forced sellers trying to deal with margin requirements.
The historic surge in margin balances recently is an indicator of how hyper-speculative the bubble has become. All kinds of new theories are being offered on why fundamentals and valuations are meaningless, and why prices of all assets will shoot to the moon, no matter what.