History Rhyming

In any discussion of the 1929 stock market crash, the problem of excessive stock margin debt is brought up.

By increasing leverage, market instability and fragility were magnified, with disastrous results. 

Well, it's back!

In the long-term view of margin debt, such as in the chart above, it’s not the absolute dollar amounts that matter, but the steep spikes in margin debt from new high to new high overinlouinvoitemt1590 multi-month pereverage in the stock market has been spiking since April. In September, margin debt – the amount investors borrowed from their brokers – spiked by another 6.3%, or by $67 billion, from August to a record $1.13 trillion.

Since April, margin debt has spiked by 39%, the biggest five-month increase since October 2021; it was in early November 2021 that stocks began to tank, with the S&P 500 ultimately dropping by 25%.

The additional leverage – borrowed money flowing into the stock market – creates buying pressure and drives stock prices higher. Leverage is the great accelerator on the way up, but it’s also the great accelerator on the way down. Multi-month surges in margin debt, jumping from new high to new high, indicate excessive speculation and risk-taking and have invariably led to sharp selloffs:

………

In the long-term view of margin debt, such as in the chart above, it’s not the absolute dollar amounts that matter, but the steep spikes in margin debt from new high to new high over a multi-month period.

I know that I have [predicted roughly 32 of the past 4 market crashes, but this ain't good.

 

H/T Naked Capitalism.