Margin debt – the amount of money that individuals and institutions borrow against their stock holdings – spiked…[by 9.6% last November and another 7.8% in December which were] the two largest month-over-month increases on record…[and is now up 62% since March of 2020 and] high margin balances tend to precede epic stock market sell-offs, as annotated in the chart below.
On a year-over-year basis, margin debt surged by nearly $200 billion in December, by far the most ever:
Stock market leverage is an accelerator.
- When stocks already rise, and investors feel confident, they borrow money to buy more stocks, and they can borrow more against their stocks because their value has risen. This additional borrowed money is then chasing after stocks and thereby creating more buying pressure, and prices surge further.
- Stock market leverage is also an accelerator on the way down, when stock prices are already falling and brokers issue margin calls to their clients that then have to sell stocks to remain compliant, triggering a bout of forced selling…
Everything is getting chased higher by speculators who are totally indifferent to valuations, who focus only on the fact that others are chasing these things higher, and valuations are irrelevant, and some of this chasing is happening with borrowed money, from regular margin debt all the way to borrowing against the home or credit cards. That’s what this surge in margin debt tells us.
It has gotten crazy out there.
Editor’s Note: The original article by Wolf Richter has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read. The authors’ views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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