Most prognosticators are forecasting ever-increasing stock prices. Sky’s the limit. Back up the truck. Risk on. But the Black Swan may be gracefully floating onto center stage and flap its wings. Investors have too much margin debt. Margin is a gift from the devil. When stocks crash or correct it’s like watching a man try to remove a burning jacket. You cannot get it off fast enough.
Here are a few stats on margin debt which should scare you. Firstly margin debt is at all time highs.
Jason Goepfert at SentimenTrader points out these facts
- Available cash (that is the difference between margin debt and credit balances in investment accounts) is now at a negative $177 billion exceeding the earlier low of negative $129 billion in February 2000.
- As a percent of GDP, margin debt is 2.7% (just below the record 2.8% in March 2000).
- Finally, the ratio of margin debt to cash in brokerage accounts has now exceeded 100% for only the fourth time in history (the previous times were August 1955, October 1972 and August 1973)
The sky will fall. margin accounts will lead the way.
George Gutowski writes from a caveat emptor perspective.