Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Gold among Negative-Yielding Bonds - 20th Sep 19
Panicky Fed Flooding Overnight Markets with Cash - 20th Sep 19
Uber Stock Price Will Crash on November 6 - 20th Sep 19
Semiconductor Stocks Sector Market & Economic Leader - 20th Sep 19
Learning Artificial Intelligence - What is a Neural Network? - 20th Sep 19
Precious Metals Setting Up Another Momentum Base/Bottom - 20th Sep 19
Small Marketing Budget? No Problem! - 20th Sep 19
The Many Forex Trading Opportunities the Fed Day Has Dealt Us - 19th Sep 19
Fed Cuts Interest Rates and Gold Drops. Again - 19th Sep 19
Silver Still Cheap Relative to Gold, Trend Forecast Update Video - 19th Sep 19
Baby Boomers Are the Worst Investors in the World - 19th Sep 19
Your $1,229 FREE Tticket to Elliott Market Analysis & Trading Set-ups - 19th Sep 19
Is The Stock Market Other Shoe About To Drop With Fed News? - 19th Sep 19
Bitcoin Price 2019 Trend Current State - 18th Sep 19
No More Realtors… These Start-ups Will Buy Your House in Less than 20 Days - 18th Sep 19
Gold Bugs And Manipulation Theorists Unite – Another “Manipulation” Indictment - 18th Sep 19
Central Bankers' Desperate Grab for Power - 18th Sep 19
Oil Shock! Will War Drums, Inflation Fears Ignite Gold and Silver Markets? - 18th Sep 19
Importance Of Internal Rate Of Return For A Business - 18th Sep 19
Gold Bull Market Ultimate Upside Target - 17th Sep 19
Gold Spikes on the Saudi Oil Attacks: Can It Last? - 17th Sep 19
Stock Market VIX To Begin A New Uptrend and What it Means - 17th Sep 19
Philippines, China and US: Joint Exploration Vs Rearmament and Nuclear Weapons - 17th Sep 19
What Are The Real Upside Targets For Crude Oil Price Post Drone Attack? - 17th Sep 19
Curse of Technology Weapons - 17th Sep 19
Media Hypes Recession Whilst Trump Proposes a Tax on Savings - 17th Sep 19
Understanding Ways To Stretch Your Investments Further - 17th Sep 19
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19
Boris Johnson's "Do or Die, Dead in a Ditch" Brexit Strategy - 11th Sep 19
Precious Metals, US Dollar: How It All Relates – Part I - 11th Sep 19
Bank of England’s Carney Delivers Dollar Shocker at Jackson Hole meeting - 11th Sep 19
Gold and Silver Wounded Animals, Indeed - 11th Sep 19
Boris Johnson a Crippled Prime Minister - 11th Sep 19
Gold Significant Correction Has Started - 11th Sep 19
Reasons To Follow Experienced Traders In Automated Trading - 11th Sep 19
Silver's Sharp Reaction Back - 11th Sep 19
2020 Will Be the Most Volatile Market Year in History - 11th Sep 19
Westminister BrExit Extreme Chaos Puts Britain into a Pre-Civil War State - 10th Sep 19
Gold to Correct as Stocks Rally - 10th Sep 19
Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - 10th Sep 19
Stock Market Sector Rotation Giving Mixed Signals About The Future - 10th Sep 19
The Online Gaming Industry is Going Up - 10th Sep 19

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

The Truth About This Stock Market "Meltdown" Indicator

Stock-Markets / Stock Markets 2015 Jan 20, 2015 - 12:56 PM GMT

By: Money_Morning

Stock-Markets

We talk about why you should always be in the stock market (and NOT for the same reasons Wall Street wants you in, either). That's because being in the markets allows you tap into the inevitable growth that comes from capitalism and, by implication, humanity's upside.

Lately, though, people are beginning to doubt the premise behind that Total Wealth tactic.

That's due partly to recent trading action (which is unsettling), and partly due to the hype surrounding various indicators that are almost "guaranteed" to show a looming meltdown (which is unnerving).


Right now the scary indicator making the rounds is record "total margin debt." Chances are you've probably seen the emails, too.

According to the New York Stock Exchange, investors have borrowed more than $457 billion against their brokerage accounts as of November 2014 – a new record. The social meme – the mantra, if you will – is that so much debt is unsustainable, and that it potentially undermines the entire market.

I get that… debt is a four-letter word after all, especially when it comes to the central bankers and Wall Street fat cats. But this is different.

In fact, I'd even go so far as to chalk this up to another case of "it isn't what it seems."

Here's the truth about this "meltdown" indicator.

Putting $457 Billion of Debt into Context

Total margin debt isn't a statistic that's calculated out of thin air. In that sense, it's really nothing new.

Every New York Stock Exchange Member Firm is required to report total outstanding borrowing held against client accounts on a monthly basis and has been since passage of the SEC's rule 606 in 2005. That way, the exchanges and regulatory agencies can track potential exposure and liquidity problems by determining who is leveraged up to their eyeballs and who is not.

This is important because it is the brokers and ultimately the financial intermediaries who will have to make good on any default. You could argue that lately this risk has been shifted onto the American public and I wouldn't disagree – but let's save that for another time.

The thinking is that margin debt goes up because investors are becoming more aggressive and using that money to buy additional securities. That somehow it's an irrational acceptance of risk or complacency.

In reality, though, there's nothing unusual about margin levels that have risen to where they are today. I'd even go so far as to say that while it's imprudent, it's not illogical. When money costs nothing, people are going to borrow as much as they can. And you can thank the Fed for that little gem, via its zero-interest-rate policies.

I know the chart below looks scary but, again, everything is not what it seems…

margin debt

Source: Advisor Perspectives & Doug Short.com

I say that because what these terrifying Internet email chains never bother to disclose is that all that money isn't necessarily used to buy stocks.

In fact, the money can be used any way the account holder wants – to buy a home, pay for college, an upcoming trip, or to buy more stock. As long as there is acceptable collateral posted, there are really very few restrictions.

The other thing to think about is that margin is cheaper than it's ever been thanks to the Fed's emphasis on cheap money. Not only that, but brokerage competition is more intense than ever before, so the terms are more attractive to clients who want to borrow than they've been at any other time in history.

And, finally, the S&P 500 is up 187% from March 2009 lows. Seeing a corresponding rise in margin at the same time is absolutely consistent with the Fed's policies. That's because the Fed has done the impossible and inflated everything – collateral and debt alike.

So the next time you see one of those panic-inducing emails and your breathing starts to quicken, take a look at the following chart of total NYSE margin as a percent of total market capitalization.

total margin debt

Source: GaveKal Capital

What it's telling you is that total margin debt is less than 3% of total market capitalization. That's practically a rounding error. What's more, it shows you that the debt-adjusted returns we've seen over the past few years are par for the course.

To be fair, I'll leave it to you to decide if this is sustaining or sustainable. Charts or not, I could make the argument either way.

And that brings me to my favorite part of each column – what to do with your money.

The Key Takeaway from the Margin Debt Debate

Rising margin debt is clearly not a data point you want to watch in isolation, nor is it something you want to ignore. But keep things in perspective.

Growing up in a household where you don't buy something unless you can pay for it, debt is not my preferred way of doing things. I don't like it and never have. But that's just me.

If anything gives me pause about the level of margin debt, it's the fact that millions of Americans don't share that attitude. Not surprisingly, I view the rising margin debt as implicit social acceptance that "somebody else" will bail the system out again if it collapses.

That means risk management is vitally important, beginning with your trailing stops. Just because everybody else is apparently throwing risk to the wind and willing to go into hock for the privilege of doing so doesn't mean you need to.

It's also proof positive of something else that we talk about a lot – namely that the big money is going to be made ahead by those companies answering needs humanity can't do without and that debt cannot disrupt at any level. (That's a big part of what makes a trend "unstoppable.")

Not only are they more stable, but such companies tend to recover faster if there is a major correction, no matter what the cause.

For example, both American Water Works Company Inc. (NYSE: AWK) and Becton, Dickinson and Co. (NYSE: BDX) saw losses in 2008-2009 that were minor compared to those suffered by the major indexes.

AWK taps into the Demographics and Scarcity/Allocation trends, while BDX also hits two of our trillion-dollar trends at once: Medicine and Demographics.

Source : http://moneymorning.com/2015/01/19/the-truth-about-this-meltdown-indicator/

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules