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Margin Debt: Down for the first time in 15 months...


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The most recent FINRA data through July shows a 4.3% month-over-month decrease of margin debt.  After non-stop huge, rapid increases since March 2020, this is the first decline in 15 months.  I'm surprised this topic hasn't received more attention, and while I'm not interested in making general market predictions, calling the market top, or alarming for an imminent crash - I do think this data is worth keeping an eye on....  Even if it's not terribly useful, it's at least interesting.  

 

The chart below tells a pretty clear story --- It's hard to ignore the link between stock market prices and margin debt--- 2000, 2008, and past episodes have this in common.  I have recently been re-reading John Kenneth Galbraith's "The Great Crash 1929," and it is a topic he brings up constantly.  Why does it matter?  As Galbraith puts it, "when prices stopped rising - when the supply of people who were buying for an increase was exhausted - then ownership on margin would become meaningless and everyone would want to sell.  The market wouldn't level out; it would fall precipitately."  Per Galbraith, during the bull market of 1926 - 1929, margin debt would often be held at interest of 8%, 10%, or 12%.  Margin rates today are a bit lower, but not by much.  (The last I checked, Vanguard was offering margin at about 6-8%, depending on loan size.)  History has shown that if/when market euphoria begins to subside, future expectations no longer justify these interest payments, and a drop in margin debt can correlate with a very sharp drop in market prices.  Volatility should be expected, as people on margin are (for good reason) more likely to rush for the exits as markets level off and/or drop. 

 

Curious to hear opinions/thoughts from folks on this board.  Is this a huge flashing red warning sign, or nothing to worry about?  

 

Source:

https://www.advisorperspectives.com/dshort/updates/2021/08/12/margin-debt-and-the-market-down-4-3-in-july-first-decline-in-15-months

 

image.png.cfdc9a06bc886f755d2cd858e9beaf37.png

 

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Maybe, but there's more to it IMO. For every person on margin, there's tons of people with cash. I regularly run into folks who have like 20%+ cash or cash like equivalents. Additionally, whats the average Joe really able to margin? 2:1? Generally smaller sums. For every one of those theres an institution who can access significantly more in terms of % leverage and actual dollar volume. Its not irrelevant, just one data point that may or may not be helpful in a grand equation. I'd say you need to do way more than just look at this on a chart to get anything valuable out of it. 

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Perhaps an even more telling data point is the decrease of available credit in customers' margin accounts, which apparently dropped (plummeted) to $195 billion in July.  Are margin brokers becoming more stingy with margin limits/requirements?....  With the S&P slightly higher over this period, it isn't obvious to me why they would be doing this.  

 

 

image.png.6953f3321dd525da7aab5ce6207dc922.png

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What is funny about all these margin requirements is that Archegos had virtually no such limit on their "margin" and were levered 5 to 1 ($5 of assets for $1 of equity). Archegos & their IB frinds made a mockery of margin limits by using total return swaps.  

Edited by Munger_Disciple
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"This would be above 2018's peak $800 billion levels and nearly double 2020's depressed $500 billion levels, suggesting upside risk to our forecast for no net EPS impact from buybacks to the S&P," BofA said.

 

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20 hours ago, Gregmal said:

Maybe, but there's more to it IMO. For every person on margin, there's tons of people with cash. I regularly run into folks who have like 20%+ cash or cash like equivalents. Additionally, whats the average Joe really able to margin? 2:1? Generally smaller sums. For every one of those theres an institution who can access significantly more in terms of % leverage and actual dollar volume. Its not irrelevant, just one data point that may or may not be helpful in a grand equation. I'd say you need to do way more than just look at this on a chart to get anything valuable out of it. 

 

I don't disagree, but I think other data points also support caution:

 

1) Small Caps peaked in March 

2) Emerging markets peaked in February 

3) Most commodities peaked in May - June and some are down significantly from those peaks (lumber and iron are prime examples)

4) Bitcoin peaked in May 

5) Interest Rates peaked in March and have come down substantially

 

I think we're seeing several high-beta/high risk portions of the market signaling things are becoming more "risk off". This could spread to more traditional asset classes like U.S. Large Cap. I think a declining margin level, despite record highs in the markets, could be that signal confirming the loss of confidence has spread.  

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Peak optimism/confidence seemed to be sometime between late Feb - May in lots of the high flyers, which are significantly off since then with what might be a dead cat bounce happening in some of those same stocks right now…….if they roll over again in the next couple of months it will be interesting to see where the floor is on some of those. The indices of course have continued to climb higher which is of course the interesting discussion that happening over at the - Are we at a TOP - thread

 

Seems to me liquidity is driving the hot stocks and with kids / college kids back to in-person learning now……..and big kids (office workers) drifting back into the office after Labor Day in greater & greater numbers as the weeks roll on……………your really looking at a cohort of buyers who since Mid-2020 were bored at home/alone & connected to a device that nudged them to buy the dip & preferably with options.

 

Much harder to be messing around on Robinhood with your boss floating around or a co-worker waffling to you about how busy things are with them

Edited by changegonnacome
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