Margin debt is at all time highs, signaling a market collapse.

Margin debt is money investors borrow using there stocks as collateral. Margin debt is at an all time high.

The rise and fall of margin debt parallels the rise and fall of the stock market. Most of the time margin debt peaks right before a stock market falls or collapse. Then when Margin debt is at an all time low the stock market starts recovering and begins a long rebound.

Here is a chart from Wolf Richter.


Go here for his full article

Richter says we are in a stock market mania.

Margin debt – the amount that individuals and institutions borrow against their stock holdings as tracked by FINRA at its member brokerage firms – is just one indication of stock market leverage. But FINRA reports it monthly. Other types of stock market leverage are not reported at all, or are disclosed only piecemeal in SEC filings by brokers and banks that lend to their clients against their portfolios, such as Securities-Based Loans (SBLs). No one knows how much total stock market leverage there is. But margin debt shows the trend.

In February, margin debt jumped by another $15 billion to $813 billion, according to FINRA. Over the past four months, margin debt has soared by $154 billion, a historic surge to historic highs. Compared to February last year, margin debt has skyrocketed by $269 billion, or by nearly 50%

He says margin debt is high, for example Fidelity charges 8.325% on balances of less than 25,000USD. Morgan Stanley charges 7.75% for balances below 100,000. If you have 50 million or more Morgan Stanley charges 3.375.

Leverage usually blows ups accounts and the dream of riches that went with it. The reason account blow up is because most of the time stock markets eventually go down and at the first sign of trouble brokers raise rates and margin requirements to hold those kinds of accounts and most investors cant meet the new requirements.

Here Mr. Richter says.

Leverage is the great accelerator of stock prices, on the way up, and on the way down. Purchasing stocks with borrowed money creates buying pressure, and prices rise, and rising prices increase the margin balances a portfolio can support, and this encourages more stock-buying on margin.

On the other hand, selling stocks to deal with margin calls adds more selling pressure to an already declining market. The more prices fall, the more selling pressure there is from frazzled forced sellers trying to deal with margin requirements.

And then he says.

The historic surge in margin balances in recent months is another indicator of how hyper-speculative and blindly courageous the mega-bubble has become. All kinds of new theories are being proffered why fundamentals and valuations are meaningless, and why prices of all assets will shoot to the moon, no matter what.

I think its not different this time and we will see a big selloff soon, maybe this Fall or sooner buckle up its going to be a wild ride.


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