There Is No Way This Bull Market Doesn’t End Very Badly

 

A Very Leveraged Market

“Margin debt isn’t an issue. It provides the fuel for asset prices higher.” 

That is a correct statement.

Rising levels of margin debt are a measure of investor confidence. Investors are more willing to take out debt against investments when shares are rising. The more prices increase, the more they can borrow. However, the opposite is also true. Falling asset prices reduce the amount of credit available, and the liquidation of assets must occur to bring the account back into balance.

As discussed previously, “negative cash balances” are at a record.

(Click on image to enlarge)

Bull Market End Badly, There Is No Way This Bull Market Doesn’t End Very Badly

I want to make a critical point here. Margin debt, like valuations, are “terrible market timing” indicators and should not be used as such. I agree and disagree that margin debt levels are simply a function of market activity and have no bearing on the outcome of the market.

As we saw in March of 2020, the double-whammy of collapsing oil prices and economic shutdown in response to the coronavirus triggered a sharp sell-off fueled by margin liquidation.

However, since then, the surge in margin debt has reached extreme levels. More importantly, as shown in the chart below, it isn’t the “level” of margin debt that reflects investor exuberance but rather the rate of change. In this case, we can see a very sharp spike in debt from the previous 12-month low. Such has only occurred near previous market peaks and bear markets.

(Click on image to enlarge)

Bull Market End Badly, There Is No Way This Bull Market Doesn’t End Very Badly

As Jason Zweig recently penned:

Where ignorance is bliss, ‘tis folly to be wise,” wrote the British poet Thomas Gray. One of these days, perhaps sooner rather than later, stocks will stop going up and the importance of understanding what you own will reassert itself. For the time being, though, investors who used to think of themselves as wise may continue to look foolish.”

Fundamentals Will Matter, Eventually

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