Former President Donald Trump was no stranger to debt. He thought debt was his ally. Those on Wall Street are of the same mindset. They’ve backed up the truck and loaded up on debt. The numbers are truly stunning. The amount of debt on the books of investors is at another all-time high.
Investors are currently utilizing over $935 billion in margin debt. As this margin debt is continuing to climb, it is putting positive pressure on stock prices. It is also a sign that the money being created by the Fed via commercial banks is making its way into the market.
Some of this rise in margin debt could be attributed to new investors using Robinhood but the vast majority is going to be skilled traders who have been playing this game for a long time. This added debt is fuel for the continued bull run. It is allowing the S&P to continue to climb the wall of worry. However, at some point the margin debt flow stops. Once that happens there is going to be a big problem for stocks.
When a reversal happens, the fuel that caused the rise will become accelerant for the fall. As investors face margin calls, they’ll be forced to sell stock to raise cash. This will lead to more selling as more investors try to get out with the shirt still on their back. Operating on margin is a very quick way to get wiped out. There is a time to use it. Its when stocks have crashed and you can buy cheap, but now is not that time.
On the other side of the equation is the free credit balance. You can think of this as the true measure of ‘cash on the sidelines’. This is cash being held in customer accounts waiting to be deployed in the market.
It rose rapidly in the 4th quarter last year. Since that time, it has plateau’ed. Traders have turned to using margin instead of putting the cash they are holding in the market.
This is becoming an increasingly dangerous game.
The money stock numbers come out tomorrow. This will help frame our picture of the market better. I will try to get something out as soon as I can but it’ll probably be later than normal.
From here https://www.investing.com/analysis/a-look-at-nyse-margin-debt-and-the-market-200197897 looks as though it is the reduction in margin debt that leads the stock market falls, and not stock falls pushing margin debt down. Thats not to disagree with " As investors face margin calls, they’ll be forced to sell stock to raise cash." just that you could also state that a reduction in margin debt begets a reduction in margin debt. The distinction seems meaningless but usually stocks have a concept of fair value that they won't go below, but a margin debt reduction is a self-reinforcing spiral to zero in the way that stock valuation falls are not, being braked ultimately by fair value.
For timing and anticipating I imagine that day to week margin debt is very noisy so I think Grantham has it, that there is no burst, no bang as such, just that the exuberance begins to gradually slowly fall off on the most risky hopium stocks.
As always, a very interesting read thank you.