Stock Market Leverage

Weather Man

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Is the Fed even ****ing paying attention?

Stock Market Leverage Spikes, Margin Debt Up 42% YoY​

Nov. 19, 2021 11:25 AM

Summary​

  • The only leverage data we do get on a monthly basis is margin debt at brokers, reported by FINRA.
  • The increase in margin debt has become a huge outlier, compared to prior years, with margin debt ballooning by 42% year-over-year and by 66% in two years.
  • High levels of stock market leverage are one of the preconditions for a massive sell-off. It’s hard to have a massive sell-off without a lot of leverage.
Only part of the leverage in the stock market is tracked and disclosed on a monthly basis. Much of the leverage happens in the shadows, including Securities Based Lending (SBA) that banks may or may not disclose on a quarterly or annual basis; leverage at the institutional level such as with hedge funds, an $8.5 trillion industry; and leverage associated with options and other equities-based derivatives.

It’s only when something blows up that we can see tidbits of this leverage emerge in all its splendor, such as when Archegos imploded earlier this year.
The only leverage data we do get on a monthly basis is margin debt at brokers, reported by FINRA. And we got another doozie: Stock market margin debt spiked by $33 billion in October from September to another all-time high of $936 billion, up by $277 billion, or by 42%, from a year ago, and up by 67% from October 2019.
saupload_US-margin-debt-2021-11-18-short.png
The increase in margin debt has become a huge outlier, compared to prior years, with margin debt ballooning by 42% year-over-year and by 66% in two years, summarized by this chart of year-over-year changes, with the period since March 2020 in red:
saupload_US-margin-debt-YOY-2021-11-18.png

This type of stock market leverage doesn’t predict when the market will crater. What it does predict is that when this market is going down hard enough, it will trigger massive bouts of forced selling as margin calls are going out, and leveraged investors have to sell stocks to pay down their margin debt, which then pushes down prices further, which then triggers more forced selling, and more fears of forced selling, as portfolios are being liquidated, thereby accelerating the swoon.
This is why leverage is a risk to financial stability. And why the Fed keeps talking about leverage in its Financial Stability Reports.

But apparently no one at the top of the Fed – least of all Powell and the other members of the FOMC – ever reads these Financial Stability Reports because the FOMC, out of the other side of its mouth keeps encouraging ever more leverage with its interest rate repression and money printing.
Margin debt is the big accelerator on the way up, as borrowed money enters the market and creates new buying pressure.

And margin debt is the big accelerator on the way down, as this borrowed money gets drawn out of the market and vanishes by paying off debts, thereby creating selling pressure.
High levels of stock market leverage are one of the preconditions for a massive sell-off. It’s hard to have a massive sell-off without a lot of leverage.

In its Financial Stability Report, released this month, the Fed is particularly warning about high leverage among young stock market investors.
“The median leverage ratios of younger retail investors are more than double those of all investors, leaving these investors potentially more vulnerable to large swings in stock prices, as they have a larger debt service burden,” the Fed said in the report.
“Moreover, this vulnerability is amplified, as investors are now increasingly using options, which can often boost leverage and amplify losses,” it said.

High leverage is a sign of high and growing “risk appetite,” as the Fed calls it. And concerning the risk appetite of these investors, and their reliance on the social media, the report warns:
“A potentially destabilizing outcome could emerge if elevated risk appetite among retail investors retreats rapidly to more moderate levels,” the Fed said.

But what the heck.
Out of the other side of its mouth the Fed is still repressing short-term interest rates to near zero, and it’s still engaging in large-scale money printing to repress long-term interest rates and heat up further that risk appetite that it warns could retreat, and when it retreats, could produce “a potentially destabilizing outcome.” So…
Here’s the long-term view of margin debt. Given that the purchasing power of the dollar has dropped over the period, it’s not the long-term increases in absolute dollar amounts that matter, but the steep increases in margin debt before the selloffs, and the magnificent increase underway now:
saupload_US-margin-debt-2021-17-18.png

Original Post
 

q6543

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That's a really good article.

Doesn't take into account that we are in a negative real rate environment.
Big players are EARNING 5% plus on every dollar they borrow.
Of course you'd want to leverage out as hard as possible.

Crack up boom incoming.

The 30yr still has rates capped under 2%
Imagine a multi decade NIRP cycle.. that's what we're in for.
 

Weather Man

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That's a really good article.

Doesn't take into account that we are in a negative real rate environment.
Big players are EARNING 5% plus on every dollar they borrow.
Of course you'd want to leverage out as hard as possible.

Crack up boom incoming.

The 30yr still has rates capped under 2%
Imagine a multi decade NIRP cycle.. that's what we're in for.

The only agreement on why the Great Depression kicked off was that there was a change in market psychology. When that happens to this market, with the technology, it will be fast. And remember, crypto trades 24/7 with NO circuit breakers to give people time to think.

With that said, a lot of people think there is still one more leg up.
 

q6543

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Forget a leg... I'm looking at decades.
Millennial cycle has literally just begun... we're at the bottom.
I4HTBwjG_mid.png

Now that everyone is used to saying Trillion... we need to start working on Quadrillion.
That'll buy a few more zeros.

Crypto will probably be the 1st Quadrillion asset class...not being bound to the physical.
 

cobracide

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Keep looking???? It is smashing you in the head with a baseball bat.
As I stated earlier, it's one metric. So the fk what? Also its a year over year percentage so the graph is exadurated. It is well established by your posts you are 1) anti-crypto 2) short seller. You obviously have an agenda to try and influence but not sure the reasoning for doing this on a car forum with a very limited trader audience.
 

Weather Man

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Citing one single metric for a market trend is a losing formula and typically a sign of bias to push an agenda.

Thinking there is only one market trend pointing to a bubble bursting is a sign of being a simpleton and losing your ass in the market.

How far this bubble(s) run's is an open question. That there are multiple inflating bubbles isn't.

The number of bank and investment commentators writing CYA columns is ridiculous. There should be a metric made up for it.

The only valid point you would have is that the market can stay crazy longer than you can stay solvent, which is kinda a frustrating reality.
 

Weather Man

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As I stated earlier, it's one metric. So the fk what? Also its a year over year percentage so the graph is exadurated. It is well established by your posts you are 1) anti-crypto 2) short seller. You obviously have an agenda to try and influence but not sure the reasoning for doing this on a car forum with a very limited trader audience.

The only agenda I have is to say Hey! pay attention. People can do as they will as you obviously do.
 

cobracide

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Thinking there is only one market trend pointing to a bubble bursting is a sign of being a simpleton and losing your ass in the market.

How far this bubble(s) run's is an open question. That there are multiple inflating bubbles isn't.

The number of bank and investment commentators writing CYA columns is ridiculous. There should be a metric made up for it.

The only valid point you would have is that the market can stay crazy longer than you can stay solvent, which is kinda a frustrating reality.
This is like the little boy who cried wolf - eventually a wolf will show up years later so he can say - SEE - WOLF, I TOLD YA! Too bad little wolf boy could have been making money all those previous years and protected his investments with a simple stop-loss trade - that never occurs - until the wolf actually does show up.

The point being - a smart trader doesn't care if and when the wolf actually shows up because he protects his investments with a stop-loss. Wolf boys can point to a million different metrics all the time to prove "wolf" but it's actually a rare occurrence over the course of multiple years that there IS an actual wolf.

You're "analysis" of a single metric of "margin debt" is not a convicing wolf argument to me.
 
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Weather Man

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This is like the little boy who cried wolf - eventually a wolf will show up years later so he can say - SEE - WOLF, I TOLD YA! Too bad little wolf boy could have been making money all those previous years and protected his investments with a simple stop-loss trade - that never occurs - until the wolf actually does show up.

The point being - a smart trader doesn't care if and when the wolf actually shows up because he protects his investments with a stop-loss. Wolf boys can point to a million different metrics all the time to prove "wolf" but it's actually a rare occurrence over the course of multiple years that there IS an actual wolf.

You're "analysis" of a single metric of "margin debt" is not a convicing wolf argument to me.

The evidence is that most investors, for whatever reason, do not employ stop loss. I have not been saying the sky is falling for years. I have said that crypto is a ponzi for years that people could make money off of. A smart trader does care when the wolf is around because his trading pattern would change based on that scenario.

Thank goodness it is a "rare" occurence.
 

cobracide

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The evidence is that most investors, for whatever reason, do not employ stop loss. I have not been saying the sky is falling for years. I have said that crypto is a ponzi for years that people could make money off of. A smart trader does care when the wolf is around because his trading pattern would change based on that scenario.

Thank goodness it is a "rare" occurence.
Most investors are amateurs and don't have a clue on how the stock market "works". Their loss. I was there once and learned expensive lessons.

No one has a real clue where the stock market will go next. You can't change you're trading pattern AFTER a flash crash has occurred. It's too late. Some of you're posts are informative but this thread start is counter productive to any investor (especially the ones who don't know any better) and without real merit.
 

q6543

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Any sky is falling/2nd great depression scenario played out in March 2020.

That was the worst case scenario. We had it happen. Earth shut down.
That was the bottom ... that was 1929 all over again.. that was our once in 100 year crash.

It's over... it already happened... a 5% pullback just got bought up in 2 days.

Again... clear skies for decades.
 

cobracide

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Any sky is falling/2nd great depression scenario played out in March 2020.

That was the worst case scenario. We had it happen. Earth shut down.
That was the bottom ... that was 1929 all over again.. that was our once in 100 year crash.

It's over... it already happened... a 5% pullback just got bought up in 2 days.

Again... clear skies for decades.
Well that's the optimist view I guess, but business cycles DO occur - irregardless of Covid. That's the real interesting concept with the Financial Markets - it's truly a mix of actual economics and human psychology.
 

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