EQUITY BORROWING SURGES
With an overly financialized economy addicted to debt it’s only appropriate that the equity markets would be fueled by rising debt levels. According to Bloomberg margin debt is rising at a pace that is consistent with near-term market peaks:
“Borrowing to buy U.S. stocks is rising at a pace that suggests investors are too exuberant and share prices are poised to fall, according to Charles Biderman, chief executive officer of TrimTabs Investment Research.
The CHART OF THE DAY shows how the total amount of margin debt, or loans for stock purchases, provided by New York Stock Exchange member firms compares with the Standard & Poor’s 500 Index since a five-year bull market ended in October 2007.
Margin debt climbed by $38.2 billion in September through November, according to data from the NYSE. The increase was the biggest in a three-month period since May-July 2007. November’s $274 billion total, released last week, was the highest since Lehman Brothers Holdings Inc. collapsed more than two years ago.”
While this data may be pointing to excessive near-term exuberance it also has long-term implications as debt levels remain well below market peak levels. This reduced risk tolerance is consistent with the general economic malaise we have experienced over the last 36 months. A continued rise in economic activity, sentiment and margin debt could ultimately prove to be a net positive for the equity markets.  The takeaway here is a rise in near-term risks, but a potential fuel for long-term market gains.
Source: Bloomberg
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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7 Comments
Is there a chart available that goes back further than 2007?
I too would like to know how far back this chart goes back. Because it looks like rising margin debt indicates rising equity markets/prices (until the peak) and not a decline in prices…
I think this is what you’re looking for:
I do not know what you call long term: current level is close to where it was six months to a year before each major crash (2000 and 2007).
I really like the year-to-year graph in the comments. Is there anywhere the NYSE regularly updates these figures? My google-fu is weak, and I could only dredge up the following:
https://www.nyse.com/pdfs/margin.pdf
Couldn’t it also just as easily be that as stock prices rise or decline that total margin debt necessarily follows suit, assuming that investors have a preferred level of gearing in their portfolios?
The argument in the article seems to be picking the chicken instead of the egg.
That’s a good point. Plus visually this looks like a trailing indicator. As the S&P rises debt levels rise naturally for portfolios where investors maintain a fixed percentage, and then rise more trailing the index as investors choose to raise debt based on momentum. The opposite happens when the index falls.
It would be more interesting to see an indicator for the % of debt to equity, but again just looking visually it sure seems like another interesting but trailing bit of data.