Economists Are Saying This is Not a Stock Market Bubble, But Margin Debt Says Otherwise


As  Michael Snyder so aptly points out. “What do 1929, 2000 and 2007 all have in common?  Those were all years in which we saw a dramatic spike in margin debt.  In all three instances, investors became highly leveraged in order to “take advantage” of a soaring stock market.  But of course we all know what happened each time.  The spike in margin debt was rapidly followed by a horrifying stock market crash.  Well guess what?  It is happening again.  In April (the last month we have a number for), margin debt rose to an all-time high of more than 384 billion dollars.  The previous high was 381 billion dollars which occurred back in July 2007.  Margin debt is about 29 percent higher than it was a year ago, and the S&P 500 has risen by more than 20 percent since last fall.  The stock market just continues to rise even though the underlying economic fundamentals continue to get worse.  So should we be alarmed?  Is the stock market bubble going to burst at some point?  Well, if history is any indication we are in big trouble.  In the past, whenever margin debt has gone over 2.25% of GDP the stock market has crashed.  That certainly does not mean that the market is going to crash this week, but it is a major red flag.”

“The funny thing is that the fact that investors are so highly leveraged is being seen as a positive thing by many in the financial world.  Some believe that a high level of margin debt is a sign that “investor confidence” is high and that the rally will continue.  The following is from a recent article in the Wall Street Journal…”

While the latest rise has been fueled by low interest rates and a 15% year-to-date stock-market rally, have you noticed every time the FED has hinted at letting interest rates rise to normal levels, the market gets very jittery, as well they should.  The IMF also sees the folly of the incompetent CONgress letting the sequester take its course, calling it “excessive and ill-designed.” For 2014, the IMF is forecasting growth of 2.7%, however, that’s a downgrade from an earlier forecast of 3%.  “When we forecasted 3%, we had assumed that sequestration will gradually be removed and reformatted more intelligently,” Lagarde said, explaining the pullback.  “We feel that we are not going to see that in the near term, which is why we believe that sequestration will actually impact growth in the United States in 2014.” Read more: http://www.foxbusiness.com/economy/2013/06/14/imf-lagarde-recovery-could-be-better-sequestration-will-hold-back-growth/#ixzz2WaAR2JZV

Others, however, consider the spike in margin debt to be a very ominous sign.  Margin debt has now risen to about 2.4 percent of GDP, and as the New York Times recently pointed out, whenever we have gotten this high before a market crash has always followed…

The first time in recent decades that total margin debt exceeded 2.25 percent of G.D.P. came at the end of 1999, amid the technology stock bubble. Margin debt fell after that bubble burst, but began to rise again during the housing boom — when anecdotal evidence said some investors were using their investments to secure loans that went for down payments on homes. That boom in margin loans also ended badly.

Posted below is a chart of the performance of the S&P 500 over the last several decades.  After looking at this chart, compare it to the margin debt charts that the New York Times recently published that you can find right here.  There is a very strong correlation between these charts.

margin debt

s&p responses to margin debt

Again as Michael Synder points out: “The following are 12 clear signals that the U.S. economy is about to really slow down…

#1 The average interest rate on a 30 year mortgage has risen above 4 percent for the first time in more than a year.

#2 The decline in the number of mortgage applications last week was the largest drop that we have seen since June 2009.

#3 Mark Hanson is reporting that “mass layoffs” have occurred at three large mortgage institutions…

The three large private mortgage bankers ALL had mass layoffs recently to the tune of 25% to 50% of their operations staff (intake, processing, underwriting, document drawing, funding, post-closing). Rrefi apps being down 65% to 90% in the past 3 weeks are far more accurate than the lagging MBA index, which is likely on its’ way to print multi-year lows in the next month.

#4 It was just announced that average hourly compensation in the United States experienced its largest drop since 2009 during the first quarter of 2013.

#5 As I wrote about the other day, the Institute for Supply Management manufacturing index declined to 49.0 in May.  Any reading below 50 indicates contraction.  That was the first contraction in manufacturing activity in the U.S. that we have seen since 2009.

#6 The inventory to sales ratio has hit a level not seen since 2009.  That means that there is a lot of inventory sitting out there that people are not buying.

#7 According to the Commerce Department, the demand for computers dropped by a stunning 9 percent during the month of April.

#8 As I noted in a previous article, corporate revenues are falling at Wal-Mart, Proctor and Gamble, Starbucks, AT&T, Safeway, American Express and IBM.

#9 Job growth at small businesses is now at about half the level it was at the beginning of the year.

#10 The stock market is starting to understand that all of these numbers indicate that the U.S. economy is really starting to slow down.  The Dow was down 216.95 points on Wednesday, and it dropped below 15,000 for the first time since May 6th.

#11 The S&P 500 has now fallen more than 4 percent since May 22nd.  Is this the beginning of a market “correction”, or is this something much bigger than that?

#12 Japanese stocks are now down about 17 percent from the peak of May 22nd.  Japan has the third largest economy on the planet and it is one of the most important trading partners for the United States.  A major financial crisis in Japan would have very serious implications for the U.S. economy.”

So be wise and don’t buy into the Lame Stream Media economists who are saying “nothing to see here folks, move along, the stock market rally is fine.  Thanks to decades of incredibly foolish decisions by our leaders, an economic collapse is inevitable.  This is especially true considering the fact that our leaders in Washington D.C. and elsewhere will not even consider many of the potential solutions which could help start turning our economic problems around.

People will be devastated if the markets do crash this time.  Just as it seems they have made some recovery from the 2008 crash in their 401Ks and retirement funds.  Be wise this time. Take a look at your portfolios and make some changes while you can.  Protect some of those assets in money market accounts this time.  But mostly, educate yourself more this time.  Don’t allow those bankster crooks and parasitic brokers lead you down the primrose path. YOU drive the bus and you own it.  Tell them where you want your hard earned money positioned.  This is not financial advice, it is simply a heads up. Decide for yourself.

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Author: redhawk500

International business consultant, author, blogger, and student of life. After 35 years in business, trying to wake the world to a new reality. One of prosperity, abundance, and most importantly equal opportunity. it's time to redistribute wealth and power.

3 thoughts on “Economists Are Saying This is Not a Stock Market Bubble, But Margin Debt Says Otherwise”

    1. It just can’t be co-incidence. George and Cliff have been right more than wrong. I just don’t want to see the same people get screwed twice!

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