Margin debt amounts to $814 billion. Does this predict a market crash?
Investors are borrowing huge sums of money to buy stocks. Is that a problem?
The “everything rally” that started in stocks last year has been boosted by investors betting money they have borrowed. That includes both small players and heavyweights like Archegos Capital Management, the investment firm that triggered a mini-meltdown for several companies’ stocks.
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.
Further reading:
What is margin debt:
Should I borrow to trade? What is margin trading?
Margin call explained:
Margin call explained: What caused the $20 billion stock fire sale last Friday?
Bloomberg: Margin debt levels don't necessarily predict a stock market crash
While it’s clear that rising margin debt mirrors the rising stock market, it’s hard to know when levels signal danger.
One way to measure this is to weigh margin debt relative to GDP or to the total capitalization of the stock market. Some market watchers have done that in recent weeks, claiming that not only is margin debt at record highs in nominal terms, it’s at all-time highs relative to GDP: approximately 3.6%.
One way to measure this is to weigh margin debt relative to GDP or to the total capitalization of the stock market. Some market watchers have done that in recent weeks, claiming that not only is margin debt at record highs in nominal terms, it’s at all-time highs relative to GDP: approximately 3.6%.
Once again, the historical record disagrees. Back in 1929, margin debt was as high as 6% or even 8% of GDP. In other words, margin debt levels can't necessarily predict a market crash.
Wall Street analysts' opinions
- “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.
Source: WSJ, Bloomberg, MacroMicro
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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Sinthetic : I heard that the shorts have to cover.
MisterJ420 Sinthetic: that's what I heard too, and with 801 every player is responsible for the total bill
102436083 : hmm... gotta be careful.
31dragon :
That why it is strange, when bill hwang case like it was nothing.. Not much impact?? .. Likely to be ripple effects but somehow, it just doesn't seem to be the case.. Underlying problem.. Too many borrows again, cover up holes. Maybe like Lehman Brothers that trigger 2007 crisis.. Drag and sweeping under carpets.. Only portray Positive side. But not negatives.. Just my 2 cents thoughts..
eliasengstrom : okay
MiMoo : Thanks for sharing
Diamond1228 : good to know
102751329 : Informative
win 11118 : Nice