Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Chronicle Of A Debt Foretold - When Central Banks Buy Equities

Stock-Markets / Stock Markets 2016 Jan 23, 2016 - 03:17 PM GMT

By: John_Rubino

Stock-Markets

Critics of today’s fiat currency/fractional reserve banking world have (for what seems like forever) made the common sense point that when debt rises faster than cash flow, bad things are bound to happen. In every cycle since 1980 this has been dismissed by the vast majority who benefit from inflating bubbles — until the bubble bursts.


And here we go again. The following chart from Stock Traders Daily shows the relationship between margin debt (money borrowed by investors against existing stock positions in order to buy more stock) and cash on hand in brokerage accounts. The idea is that when investors hold lots of cash they’re pessimistic, and when they borrow a lot they’re optimisitc. Extremes of either tend to signal changes in market direction. At the end of 2015 investors were even more excited than at the peak of the housing bubble, indicating that there’s not much retail money left to be tossed at US stocks.

Margin debt vs free cash Jan 16

China, being a little more bubbly than the US, is a good indicator of where US margin debt might be headed:

China margin debt Jan 16

Another red flag is being waved by corporate debt, much of which is being taken on to fund share repurchase programs. These tend to benefit shareholders in the moment but at the cost of higher leverage and less flexibility in the future. Where in the past net debt has tended to track EBITDA (a broad measure of earnings). starting in 2014 the former has soared beyond the latter. Just as a spike in margin debt implies a lack of retail stock buying in the future, soaring corporate debt implies limited borrowing power and a scale-back of share repurchases going forward.

Corporate debt vs EBITDA

Based on both history and common sense, we should expect not just a slowdown, but a cratering of equity demand from both individuals and corporations in the year ahead. What happens then? Either the market crashes and prices go back to levels that attract wiser capital, or a new source of dumb money emerges.

And that would be government. Already, the Bank of Japan owns more than half of the Japanese stock market. And now China — displaying its customary cluelessness about what markets are and how they work — is countering the recent bear market with public (which is to say borrowed) funds:

China Vice President Vows to ‘Look After’ Stock Market Investors

(Bloomberg) – China is willing to keep intervening in the stock market to make sure a few speculators don’t benefit at the expense of regular investors, China’s vice president said in an interview.

Calling the country’s market “not yet mature,” Vice President Li Yuanchao said the government would boost regulation in an effort to limit volatility.

“An excessively fluctuating market is a market of speculation where only the few will gain the most benefit when most people suffer,” Li told Bloomberg News after arriving at the World Economic Forum’s annual meeting in Davos, Switzerland. “The Chinese government is going to look after the interests of most of the people, most of the investors.”

Li, 65, is the most senior Chinese official yet to underline the government’s readiness to intervene should the market turmoil of last summer and the start of 2016 continue. So far this year, the Shanghai Composite and the Hang Seng China indexes have both lost more than 15 percent, even as the central bank injects cashinto the system to drive down borrowing costs and boost the economy.

Companies exchanging long term bonds for equities and individuals using equities as collateral to buy more tend to distort equity valuations, but only temporarily, as the players’ finite borrowing capacity is eventually maxed out and the buying has to stop.

Governments are a different story, since they can create trillions of dollars with a mouse click. Their ignorance is thus a lot more dangerous because it short-circuits price disclosure on a vast, potentially open-ended scale.

When a central bank buys equities, it doesn’t have teams of analysts running valuation studies and creating model portfolios. Presumably it just makes across-the-board purchases, which tends to float all boats. So the wheat doesn’t get separated from the chaff and capital has no idea where to flow. Malinvestment becomes rampant and the result is, well, what we have today: Chinese ghost cities, Japanese zombie companies and US tech unicorns worth billions before generating their first dollar of earnings. And that’s before the Fed and European Central Bank really get going.

By John Rubino

dollarcollapse.com

Copyright 2016 © John Rubino - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 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