MARGIN DEBT AS A % OF GDP AT SAME LEVEL AS MARCH 2000

The pure level of margin debt is the highest in history. Margin debt as a percentage of GDP has reached the level achieved in March 2000. The two previous peaks in margin debt over the last fourteen years were March 2000 and October 2007. Do you know what happened next? The S&P 500 declined by over 50%. The NASDAQ declined by 80% from the 2000 peak.

For those who don’t understand how margin debt works, you borrow against the balance of your existing stock portfolio in order to buy more stock. It really juices your ROI in a rising stock market. Not so much in a declining stock market. With valuations at all-time highs, profits peetering out, bullishness off the charts, tapering under way, and margin debt at record highs, everything is in place for an epic fall. 

When the market starts to fall rapidly, the value behind the margin borrowing declines. The brokers then call the margin borrowers and tell them they need more collateral. The only way for these dumbasses to get more collateral is to sell their stock. The margin calls exacerbate the decline with more selling. It’s a beautiful thing to witness the pure and utter panic among the lemmings. Coming to a theater near you shortly. 

Via John Hussman

 

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A. R. Wasem
A. R. Wasem

It’s called “leverage”. The most important thing to remember about it is that “with a big enough lever you could move the world”. BC-LR to all

Welshman
Welshman

On Yellen’s watch. Oh my

card802
card802

BUY!..?

What would Cramer do.

Tim
Tim

I don’t know anymore, Jim. All of the financial markets are rigged, and I think it’s impossible to predict what will happen. Nothing makes sense anymore. It seems there are no consequences to the foolishness and criminality of TPTB. One respected analyst is saying the DOW will go to 30,000 over the next three years. Who’s right? I don’t know. I just don’t know what to believe.

DC Sunsets

matslinger,

James Gruber is stuck in the paradigm that in a rising rate environment Central Banks can create credit and exchange it for NEW debt (of X value) and that doing so is actually additive to the money supply (creating inflation).

What happens when rates on PREEXISTING debt rise and thus that ocean of IOU’s loses X*Y (where Y is number >1) in value.

Central bank adds X, market takes MORE than X out, result is deflation.

Central banks can only create inflation when two conditions are met: 1) There is not an ocean of preexisting debt, and 2) Market sentiment is buoyant so rates are stable or declining.

The central banks of the world are about to hoist on their own petard. They were so successful enabling an ocean of IOUs to be created that now the course of the future is wherever the winds of fickle markets direct, not a handful of self-officious suits meeting in an oak-paneled room in the City of New York.

The world had experienced the greatest credit inflation in history. Its denouement must entail deflationary collapse.

DC Sunsets

Three times in our recent past have stocks gotten wildly high on leverage (margin debt).

Twice in our recent past, stocks fell from lofty heights, shed 50% (Nasdaq 80%) and then nominally recovered, teaching people that stocks in the long run don’t have any risk, that no matter how far they fall, they always come back.

The 3rd time is likely to be the charm. Now that people are conditioned to believe that Only Chumps Sell, they are psychologically chained to their stock positions and will hang on no matter far they fall (or so they think).

This is the necessary precondition to a market falling 90-98%. Bottoms come with capitulation, and if people are conditioned NOT to capitulate, a market can experience one 50% decline after another without an intervening recovery.

Today’s market is like April of 1930. Stocks had recovered most of their losses from the 1929 crash and optimists were jumping back into them….only to have the DJIA fall 80% and many stocks go to ZERO and never recover.

DC Sunsets

At the coming bottom, Central Banks will be so discredited and reviled that (in the USA) Congress will likely nationalize the Fed. Talk about Yellen being the “fall guy.”

Sadly, there’s only one thing worse than a cadre of egg-headed economists running a private central bank, and that’s 535 political clowns doing so.

I look for them to print $100,000 denomination banknotes within 12 months of Congress running the CB.

I vote for Reagan to grace the $100,000 but surely we can agree that Nixon should have his mug on the $1,000,000 bill.

Thinker

Funny how people feel so “wealthy” based on their stock portfolios which, in reality, are like thin air.

Most everyone I’ve spoken to who’s been playing the market and letting their portfolios run up say they’re protected, in that they’ve put in “stops” where they will sell if everything tanks. They figure they can afford to lose 10-20%, so they keep the stops updated.

Wonder how that’s going to work out for them. I foresee a lot of very, very angry people.

KaD
KaD

Could this be another sign of the economy collapsing? http://money.msn.com/top-stocks/post–dealerships-say-they-have-too-many-cars

Dealerships say they have too many cars

There’s enough inventory for 100 days of sales, the CEO of AutoNation says. Ford reports it has been cutting production.

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