NYSE Margin Debt Approaches All-Time High

Disaggregation of credit is the understanding that there are good forms of credit and bad forms of credit.  A good form of credit is something like a standard business loan in which a company obtains access to a line of credit in order to make investments in the firm.  It pays employees, invests in equipment, etc.  This form of credit, when issued prudently, is usually productive in that it helps the company expand and it rewards the lender for having taken the risk.

As a credit based money system we rely largely on the health of these sorts of loans to keep the system running smoothly.  But there are also bad forms of credit.  For instance, when a homeowner decides they want to speculate on real estate as an investment because they (incorrectly) believe real estate can outpace inflation over the long-term.  We could make this matter even worse by repackaging the original loan and selling it off to new investors as AAA rated securities.  In other words, disaggregation of credit was a core piece of the 2008 crisis.

I think another sign of disaggregation of credit is the extraordinary growth in borrowing that occurs around stock market booms.  As the market surges we inevitably see a sort of ponzi effect in the market where more confidence breeds more credit and the bidding up of prices.  It works until it doesn’t and when it doesn’t the air sure comes out fast.

So it’s rather alarming to see NYSE margin debt just shy of its all-time high as of the March reading.  My guess is we’ve actually already surpassed the all-time high though we won’t officially know until April data is released.  Fun times knowing we live in a world that is built on such a fragile foundation.

Chart via Orcam Financial Group:




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Cullen Roche

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. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • LVG

    It feels like the entire US economy is built on quicksand. I hate to start sounding so negative, but it’s starting to feel like we’re just repeating the mistakes of the past again and another fake credit boom is leading to an inevitable collapse of everything. Here’s to hoping the Fed can keep it all propped up (chugs vodka).

  • rp1

    Don’t worry about it. The market knows it’s different this time. The Fed is signalling no change, and better yet the economy is deteriorating! That is very good for the stock market.

  • SS

    Why lend to a business which involves enormous underwriting costs when you can lend to a hedge fund who’s buying government guaranteed assets? The banks probably think it’s a no-brainer to make these kinds of loans. Until the markets all start to collapse and then it all looks like a big house of cards.

  • Stephen

    Even so you see that between the 2000/1 high and the 2007 high new heights in leverage were scaled and who is to say new heights will not be seen this time given the monetary policies appear to be actively encouraging it even if same is not articulated.The ultimate cash is trash.
    This really is the concept of greater fool though. That someone is still left who will borrow even more to buy when he perceives others are still buying. The whole issue of momentum price action.
    In terms of timing the wary,or fundamentally orientated, take note and action to nullify the fact that there’s very little warning to be had when the last fool as been found.

  • Blobby


  • barbacoa666

    So the question is, is it really the same this time? Given that investor sentiment and flows aren’t bullish, and given the changes in the world.and markets, is something else going on? I ask from the standpoint of ignorance, as it is not clear to me exactly how margin debt is calculated.

  • But What Do I Know?

    Kind of fits in with the idea that QE isn’t supporting the equity markets, but rather good old fashioned leverage in the form of margin debt.

  • But What Do I Know?

    Also, it appears that more and more margin debt is needed to reach the same S&P levels. . .

  • http://macronomy.blogspot.com/ Martin T

    Liquidity rules…for now…and no ones wants the punch bowl to be taken away. Oh well…

  • Alex Gloy

    Reduction of short positions also creates buying. 2bn shares less sold short times $50 average share price at the NYSE = $100bn buying power.

  • http://www.conventionalwisdumb.com Conventional Wisdumb


    Read this morning from Doug Short’s site Advisor Perspectives:


    The above chart reflects that only one other time in history has negative net worth been this low, which was the tech bubble back in 2000. The prior two times that negative net worth were this low was 2007 (50% S&P 500 decline) and 2011 (17% S&P 500 decline).

    Here’s Doug’s chart:


  • TR

    Are these margin debt numbers nominal or real? If they are not inflation adjusted, then isn’t the current number much less than the 2000 number?
    Just trying to get a better understanding of our current predicament.
    Thanks to anyone who can answer.

  • LRM

    I saw somewhere recently in comments a request for Cullen’s list of things he knows

    Given all the confusing macro metrics flying around it would be nice to get a breakdown to what is important with a nice little “things I think I know” or some such post !!!!

    A little clarity would go a long way

  • http://thebuttonwoodtree.wordpress.com Romeo Fayette

    ZeroHedge was touting the “highs in NYSE margin debt” last month too.^ Unfortunately, I think margin debt can exceed 2007’s alltime high before a bust, because of:
    1. adjusting for inflation
    2. given the low cost of capital
    3. considering the net margin balances,* for which investors’ -$77.22B negative net worth is on par with lows from 2007 & 11 corrections, but far from 2000’s -$130B

    ^ http://www.zerohedge.com/news/2013-03-01/bubble-margin
    * http://www.thereformedbroker.com/2013/03/02/negative-investor-credit-balance/?utm_medium=referral&utm_source=pulsenews

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Then what? Another bailout?

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Don’t worry… the MMers say the EMH proves there’s no such thing as a bubble. Only real and nominal shocks (which no one can ever predict). And a nominal shock can always be solved nearly instantaneously with appropriate Fed action. ;)

  • http://www.chem-dry.net/mcgeorge.mo McGeorge Brothers ChemDry of Kansas City

    The system of borrowing cash as credit is a tricky one for business because few business can start without a loan but not all invest that money well and then can’t repay the loan. As a country I believe that we need to focus more on learning to deal with money better.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    See, here you go:


    Everything was going great in 2007/2008… it was all the Fed’s fault (see last lines) for not fixing it when they should have:

    “PS. My only suggestion to Foote, Gerardi, and Willen would be to focus on the Fed’s catastrophic policy failure, which allowed NGDP to plunge 9% below trend in 2008-09, as a key unforeseen factor that contributed to the severity of the housing debacle.”

    Just a simple nominal shock the Fed could have easily fixed. Let’s hope they’ve learned their lesson! ;)

  • Johnny Evers

    Cullen, will you let us know when to sell?


  • http://orcamgroup.com Cullen Roche

    That implies a simple all-in or all-out strategy, which I would never advocate. I have a paper in the works on portfolio construction which will elaborate on my process and hopefully start to change the way people think about this sort of stuff.

  • Johnny Evers

    Cool, thanks.
    Look forward to reading that — curious to read if there is any element of market timing in the way you recommend portfolio construction.
    I find myself extremely leery of putting new money into stocks at this time, even if it’s only 10 or 20 percent of the total portfolio.

  • Boston Larry

    Gina Martin Adams, the top U.S. equity strategist at Wells Fargo Securities, was just on Bloomberg TV. She argues that the stock market will give back most of this year’s gains. Her year-end target for the SPX remains at 1390, which she has not changed since December. She says stick with defensives: staples, health care, utilities.

  • Boston Larry

    I am defensive with 20% in equities and 65% in a variety of fixed income positions. So far it is growing slow and steady, without a huge downside risk.

  • Boston Larry

    Cullen, I also look forward to reading your new paper on portfolio construction.

  • jaymaster

    I love this chart, because it makes margin debt look like one of the greatest market predictors of all time!

    The granularity is a bit rough, but it looks like margin debt started to rise before each recovery in the S&P 500, at least since 1998.

    That’s the “buy” sign!

    And it peaked and headed south BEFORE every major decline in the S&P 500.

    That’s the “sell” sign!

  • Boston Larry

    Cullen, please let us all know as soon as margin debt peaks and starts heading down. Just one of many key indicators, but could be more valuable than most of them. Thanks to jaymaster.

  • http://www.nowandfutures.com bart
  • Sean K

    Hi Cullen, It would be nice to see this chart with Margin Debt relative to GDP.

  • http://economicmaverick.blogspot.com/ Econ Mav

    Calling Steve Keen on this one!

  • shawn

    I couldn’t help but laugh at the sarcasm. But seriously,someone explain how this eventually “corrects”.

  • http://highgreely.com John Daschbach

    Cullen’s analysis in this on a number of points seems to fall into the confirmation bias approach to the world. Astatement like “because they (incorrectly) believe real estate can outpace inflation over the long-term” is just not thought through, so in fact saying this is what is incorrect.

    At least three primary factors drive house prices. One is wage growth, which can grow either faster or slower than inflation. Two is the cost of financing a house. Three is the value of location. Since housing is in part limited by land (a finite resource), and because increases in real productivity lower the share of productivity required to satisfy other needs the share devoted to housing is likely to increase, on average, higher than the rate of wage growth in many locations. With fluctuations, these trends tend to obtain over long periods of time in locations which either produce a higher share of real productivity.

    It’s always good to look at facts as well when making bold statements like this as well. The Shiller data, divided by the PCEPI, shows about a 0.5%/year compound gain considering the 1970 to 1998 (pre bubble). If you take the data out to when the housing price rise was where an extrapolation would but the fluctuation in line with the earlier peaks, the gain is about 1% per/year.

    So history, and the arguments given above, support housing increasing above inflation.

    But the NYSE margin interest point is worth a bit of critical thinking as well.

    First, how much margin interest is there? Cullen’s figure is incorrectly labeled. The level of margin debt shown would be meaningless, but the number is really in millions of dollars. So margin debt is $370B. How big is this? It’s about 2.3% of the NYSE market cap. Within the past 6 years it’s never been less than about 2% of market cap and it’s been almost as high as 3%.

    If you look at the margin interest cost it’s near the 80th percentile of what it’s been since 1990. However, if you look at the margin interest cost normalized by the S&P500 it’s near the low end (around the 20th percential, e.g 80% of the time it’s been higher). If you simply look at the normalized margin debt level (to S&P 500) it’s about at the median of the past 6 years and 25% below the peak.

    Second, correlation, while a basis for understanding, is simply an observation. Causality requires a model and preferably some way to probe the model. Certainly the correlation is very good, 0.92 over the range from 1990 to the present. So it is nearly information content free! (If the correlation was 1.00 is just says that margin debt exactly follows the market).

    So, with a correlation of 0.92, it isn’t at all alarming that it’s reaching all time highs because so is the market, and it tracks the market so well that it’s a low information content piece of data. The overall level has increased relative to the market by about 2x in a relatively steady compound growth way with fluctuations above the growth curve during 2000-2003 and 2006 to mid 2009. Taking out the obvious upward fluctuations it’s very steady in a compound way, and we are about 15% below this curve. The relative margin interest cost is roughly steady, with sizable fluctuations above during the same two periods.

    The ratio of margin debt to margin credit balance (primarily short sales) is interesting as well. From 1990 to about 2001 it was 4.5 +- 0.5. In 2001 it dropped to 1.5 +- 0.5 where it has remained.

    Cullen, based upon the data and analysis, your views are pretty idealogical. Relative margin interest levels are, by range of reasonable measures, at low or moderate levels. Sure, the absolute level is high relative to the pre 1998 data, but the cost (the flow of funds) is almost at it’s all time low since 1990.

  • shawn

    Cullen, do you ever use puts or mutual funds like PSSAX and hopefully sell these positions and go long when forward returns look better?

  • http://orcamgroup.com Cullen Roche

    Relevant points, but are you really being “critical” of my comment because real estate generates a 0.5% return per year according to you? Talk about splitting hairs!!! Besides, the Shiller data going back to 1890 shows that the 100 years prior to the bubble saw zero growth in real estate. I don’t know why you’d spend so many words “refuting” such a small discrepancy in facts. If you want to get down and dirty we could go into real, real returns and I could really wreck your point there….Real estate is usually not a great investment. That’s the point I was making and if I need to go into more detail then I can (though I don’t always do so in short blog posts because I don’t expect people to be so critical).

    Regarding the margin debt – you don’t seem to fully comprehend debt dynamics. I read the same sort of analysis about sub-prime mortgages in 2005. About how they were such a small sliver of overall outstanding debt and how they couldn’t possibly cause any damage to the financial system. Of course, the banking system is now built on derivatives of derivatives so when we start to see major credit collapses in some segments of the system it tends to have a ripple effect. The fact that a segment of debt represents a small portion of overall NYSE market cap does not imply that defaults in this area can’t cause much bigger problems.

    I also never said anything about correlation and causation so I am not sure what you’re even refuting there.

    I appreciate your comments, but it often times looks like you’re just splitting hairs in an effort to disagree with something I’ve written – not because you actually disagree with it, but because you seem to be overanalyzing and nitpicking blog posts. I’m not sure that it’s actually productive in the end….

  • Ted

    I was thinking the same thing. Look for an initial 10-20% drop in margin debt to indicate a peak, then get defensive.

  • http://highgreely.com John Daschbach

    I don’t think it’s entirely splitting hairs. Peoples choices can vary, but if housing is roughly 33% of income and real GDP growth is good (3%/year) it seems reasonable that 1/3 of this will be in housing. I think it will be higher, because the real gains over the past 60 years have been so large that people are getting saturated in many factors of their gains. Health care is the huge uncertainty but in large part that has been driven in the US by how to keep high wage domestic employment up. But averaged over the entire US, as GDP data is, we should have expected real housing costs to have grown between 0.5% and 1% per year above inflation, even with the increasing share going to health care. Roughly, that’s what they have done. Given that people spend and increasing share of income on non-essential needs and the land, transportation, and the emphasis on intellectual capital drive closer spatial concentration of people, it is highly probable that the rate of increase in housing prices will averaged over the whole country increase, but be much higher in places that provide the aforementioned conditions.

    The idea that I don’t understand debt dynamics odd. I have a good understanding of physical and chemical dynamics (I’ve published many papers in the top Chemical Physics and Physical Chemistry journals). The ideas of economic equilibrium and dynamics is weak bastardization of the physics concepts from which it’s derived. I’ve been very clear that the ideas of equilibrium adopted from physics are only applicable in a limited sense to economics because our system is operating very far from any approximation to thermodynamic equilibrium.

    I think I’ve made that point before. Our system is (and will always be) far from any real equilibrium. Stability in the system has a necessary condition that relative perturbations in the flows between economic factors are small, but it’s not, and will never be a sufficient condition. The housing bubble is probably a classic example. The first derivative of real house prices was the largest we had ever experienced which was a large perturbation, although the first derivative of share of income going to mortgage debt was larger in the late 1970’s, and the total share greater for almost 20 years from the late 1970’s to the 1990’s. So analyzing any of this data in terms of an equilibrium derived model based upon measures like debt/gdp, or reaching a new peak is meaningless. My point in providing detailed analysis from different viewpoints is primarily to make the point that these static approaches to analysis are not statistically robust or that useful. They are useful if people, in aggregate, find it agrees with their views and that moves the real economy or markets.

    As far as margin debt goes I think there are perhaps a few factors to consider. First, there are hedge funds that operate with high leverage as their business model, and as expected they track the market reasonably closely in terms of debt to stock index levels. Second, defaults on margin debt are pretty rare in this day in age with the legal margin requirements and general liquidity of most equities (sure liquidity can evaporate and m.r. Can be violated in these cases). Third, the fact that margin debt correlates well on a slightly lagged basis with short interest in a rising market suggests that at times these increases in margin debt are partially the result of hedge funds and others putting a collar on losing short positions that they don’t want to exit and hope to ride out. Sure, that’s speculation, and it’s gambling in the market, but whether it makes markets less stable and efficient or more efficient is an open question.

    I’m not trying to nitpick, I’m trying to be objectively critical. For instance, if you want to look at perturbations that may have had an impact on the incredible bull market starting in mid 2009 look at the increase in margin credit balance (short interest) levels just before this. It’s completely uncorrelated with any real measures I can find, except perhaps private domestic investment. But it’s collapse (an 80% decrease in a few months, after rising 500% in the ca. 3 preceeding years) is unprecedented in the economic data I have.

  • http://orcamgroup.com Cullen Roche

    1) The real, real returns of real estate are zero and probably negative for most people. Real estate is similar to commodities in that there are enormous holding costs over time (a house is basically something you inventory). Of course, no one subtracts all those costs when they calculate their actual real estate gains, but they’re a very real cost that almost certainly renders real estate a losing investment the vast majority of the time (perhaps with the exception of some income producing properties and commercial re). The point I was making in the post was that RE is a far worse “investment” than most people presume, but I didn’t think I needed to go into this kind of detail in a short blog post on something totally unrelated to the actual post.

    2) I don’t use an equilibrium based model so I don’t even know why you keep discussing equilibrium based economic models. I don’t ever use the world “equilibrium” in my work. That’s neoclassical econ you’re referring to and it has little to do with what MR is or the models I work with.

    3) I never said anything about correlation and causation here. I simply showed a chart that appears to show a correlation. That doesn’t imply causation either way. Like much of what I provide here, this is simply a data point of thousands that may or may not be useful within a complex dynamical system with millions of different variables. If you want to nitpick at every one then fine, but you’re jumping to lots of conclusions in your criticisms that don’t really apply to anything I’ve written here.

  • Joshua Roche

    Hi Cullen,

    Can you clarify the catalyst for the sudden drop in margin debt prior to the ’00 and ’07 peaks. Is it indicative of “smart money’ raising cash or margin calls to over-leveraged portfolios? I find the chart rather interesting, especially since I feel that this market has become substantially disconnected to macro-economic fundamentals.

  • pwrighter

    Rapidly and with little warning!

  • pwrighter

    Great post. So here we go again. The stock market is booming but there has been no real recovery. The problem goes to the core of capitalism – the profit motive. As we all know, if profits can’t be made through investment, businesses won’t invest and the economy stagnates. China’s investment boom has been the other side of that coin until now when it too is experiencing declining returns on its investment. The recurring pattern is to resort to speculation as a way to generate profit and this has been facilitated by agencies such as the Fed which now sees propping up asset values as its main job, and perhaps for good, but short-term, reasons. But only when a real crash occurs, during which asset values fall disastrously and vast swathes of the economy are liquidated, can the profit engine be restored. And that has been the history of capitalism until the last half of the 20th Century. As the survivors pick up the pieces at cut rate prices the rate of profit is restored and a boom reignites. But, as politicians well know, the populace will no longer tolerate this nasty and brutish capitalism of breadlines and living in hovels(at least in well educated “advanced” economies). Is there a heterodox solution to this intractable problem of the real economy, or rather, of society in general? Look at the solutions of the distant past and shudder.

  • larry Levin

    how often is margin debt data available

  • Nils


    I think that’s the one, once per month with a month lag. Not very useful as an indicator, maybe there’s a commercial source?