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zugzwang

Us Margin Debt Nears Record High

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Asset price speculation soaring on the back of QE infinity. Economy proper in the sh!tter.

The Little Professor blows up the world (again). :angry:

http://www.telegraph.co.uk/finance/economics/10240740/Investors-euphoric-as-US-margin-debt-reaches-danger-levels.html

[The] exuberant mood comes as margin debt on Wall Street hovers near $377bn, just below its all-time high and well above peaks before the dotcom crash and the Lehman crisis.

“Investors have rarely been more levered than today,” said Deutsche Bank, warning that the spike in margin debt is a “red flag” and should be watched closely. The bank described this form of debt as “a tool used by stock speculators to borrow money from brokerages to buy more stock than they could otherwise afford on their own. If the stock rises, they end up making far more money. If the stock crashes, the opposite materialises. This kind of speculation is highly alarming.”

The bank warned that forced sales of stocks can set off panic and a rush for exits, snowballing into a crash, as happened in 1929. It said the equity rally may have further legs but it cited “astonishing similarities” between the latest patterns and events preceding prior market crises.

Chart2_2642941c.jpg

Andrew Lapthorne from Societe Generale said the rush for leverage is a classic sign of a credit cycle near exhaustion. “Profits have been ticking along at stall speed just as in 2006 and 2007, and just like then people are resorting to leverage to squeeze out the last dime,” he said.

Mr Lapthorne said the new twist is that US profits have begun to stall as well, with cash flow growth falling from double-digit rates to zero.

He said the rise in margin debt is matched by leveraged excess across the system, with debt-driven buy-backs of corporate shares running at a $400bn annual rate. Leveraged buy-outs are back in vogue. Junk bond yields are near record lows.

“When everybody is jumping up and down and partying, that is the time to worry. Once the market turns nasty we could see a negative feedback loop. Debt is always a killer in the end,” he said.

Investors are betting the US Federal Reserve is about to taper bond purchases for healthy reasons, because the US economy is strong enough to stand on its own feet.

The counter-view is that the Fed is tightening for “unhealthy” reasons, because it has taken to heart warnings from the Bank of International Settlements about the dangers of excess leverage and a fresh asset bubble.

“The Fed is really acting out of anxiety. They are trying to package this in cotton wool, telling us everything is alright, but we don’t think the US economy has reached escape velocity,” said Mr Lapthorne.

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If the stock rises, they end up making far more money. If the stock crashes, the opposite materialises. This kind of speculation is highly alarming.

Sounds like good old 'irrational exuberance'

Except its not irrational at all if you know the .gov will bail you out.

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If the stock rises, they end up making far more money. If the stock crashes, the opposite materialises. This kind of speculation is highly alarming.

Sounds like good old 'irrational exuberance'

Except its not irrational at all if you know the .gov will bail you out.

That depends on who's buying the stock on margin, if it's the average prole then no govt bailout, if it's the giant squid they'll get bailed out 100%.

Buying on margin is a great way to boost profits if everyone else is doing it boost profits. The trouble is when everyone stops boosting stock prices in this way they decline in value.

Add in HFT and you've got the making of a huge crash. Still everything can only go up in value so we don't have to be worried.

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The alarming part for anyone with a view that extends beyond a few days or a week,is that US corporate profitability is up on the back of pay roll reductions.Reducing the hours of your consumers doesn't seem a sensible long term strategy.

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The alarming part for anyone with a view that extends beyond a few days or a week,is that US corporate profitability is up on the back of pay roll reductions.Reducing the hours of your consumers doesn't seem a sensible long term strategy.

We'll get a 'proper recovery' when, and only when the workforce in general gets a real terms pay rise.

You can't have a growing economy if every last scrap of improved productivity (and then some) is captured by very rich individuals/corporations that are already overflowing with cash.

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Asset price speculation soaring on the back of QE infinity. Economy proper in the sh!tter.

The Little Professor blows up the world (again). :angry:

Glad you found that graph zugzwang as I saw it a few days ago, but couldn't find it to repost on here.

I'm sure there is no correlation at all between booming stock markets and booming London prime housing market either, and IRRO points out, constantly inflating asset prices are the "new normal"

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That depends on who's buying the stock on margin, if it's the average prole then no govt bailout, if it's the giant squid they'll get bailed out 100%.

Buying on margin is a great way to boost profits if everyone else is doing it boost profits. The trouble is when everyone stops boosting stock prices in this way they decline in value.

Add in HFT and you've got the making of a huge crash. Still everything can only go up in value so we don't have to be worried.

Will the PPT really allow the DOW to ever go below 15k again regardless of who is buying?

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Will the PPT really allow the DOW to ever go below 15k again regardless of who is buying?

Depends just how automated the whole system is.

If everyone has automatic stop-loss systems in place you could end up with a cascading run on the entire banking system in less than a second. Unless you had an automatic system in place to flood the system with unlimited credit at the same time you would have no way of stopping it.

An interesting side effect would be that the fed ended up accidentally owning the entire economy..

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Depends just how automated the whole system is.

If everyone has automatic stop-loss systems in place you could end up with a cascading run on the entire banking system in less than a second. Unless you had an automatic system in place to flood the system with unlimited credit at the same time you would have no way of stopping it.

An interesting side effect would be that the fed ended up accidentally owning the entire economy..

I'm sure if that happened everyone would agree to reset and cancel out all the trades ensuring no losses. Risk free profits only allowed in the current system.

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http://www.zerohedge.com/news/2013-08-13/deutsche-bank-hopes-not-all-margin-calls-come-once-case-sell

A recent survey of asset managers globally, managing USD 27.4 trillion between them, found that 78% of defined-benefit plans would need annual returns of at least 5% per year to meet their commitments, while 19% required more than 8%, "a target of 5% per year can be reached but only by using leverage, shorting, and derivavtives." And sure enough, as Deutsche Bank (DB) reports, in short, investors have rarely been more levered than today! According to DB, a MoM change in NYSE margin debt >10% has to be taken as a critical warning signal as there are astonishing similarities in the sequence of events among all crises. As the S&P 500 just hit a new all-time high, investors might want to ask themselves when it is a good time to become more cautious – yesterday, in our view. Simply put, the higher margin debt levels rise, the more fragile the underlying basis on which prices trade; with even a less severe sell-off in equities capable of triggering a collapse.

Deutsche Bank Special Topic: Red flag! – The curious case of (NYSE) Margin Debt

A recent survey by the Create consultancy of >700 asset managers globally, managing USD 27.4 trillion between them, found that 78% of defined-benefit plans would need annual returns of at least 5% per year to meet their commitments, while 19% required more than 8% - far higher than reasonable projections. Institutions are also taking on more risk. According to a fund manager, “a target of 5% per year can be reached but only by using […] LEVERAGE, SHORTING AND DERIVATIVES.”

So the worlds central banks are busy propping up the worlds pension funds that need impossible exponential growth to meet commitments?

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Depends just how automated the whole system is.

If everyone has automatic stop-loss systems in place you could end up with a cascading run on the entire banking system in less than a second. Unless you had an automatic system in place to flood the system with unlimited credit at the same time you would have no way of stopping it.

An interesting side effect would be that the fed ended up accidentally owning the entire economy..

Circuit breakers are now installed at major exchanges to suspend trading in individual stocks in the event of a 10% price movement in less than five minutes, or to take the entire exchange offline as a system-wide safeguard. There are also automatic stabilisers built in to flood the system with liquidity in the event of an emergency. That should prevent a repeat of the 2010 flash crash, at least in theory. If everything else fails, brute force and ignorance: yank the plug out the wall and declare the trades invalid.

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[The] exuberant mood comes as margin debt on Wall Street hovers near $377bn, just below its all-time high and well above peaks before the dotcom crash and the Lehman crisis.

It's difficult to know how to interpret margin debt. I think it topped out at $451bn in January 2014, and been sliding a bit since.

March 10, 2014
...However, the analysts also offer another way to look at margin debt – one that happens to flashing a warning sign.
The concerning metric is called net debit. NYSE member brokerages report cash and other credits in customers’ margin accounts along with their debt—so the JPM team subtracted the total monthly cash and credit from monthly total debt to get the net amount of money owed.
“In theory a very positive net debit is associated with high borrowing and thus overbought equity market conditions,” the analysts say. It is a more useful overall indicator, they say, since it has historically moved back to average levels after market peaks and troughs—margin debt has seen a decades-long trend of gains.
“It is thus a concern that the net debit reading for January 2014… is approaching the record high seen previously in February 2000, at the peak of the dotcom bubble,” says the bank.
Let's Take A Look At The Latest NYSE Margin Debt Data In Historical Context
DOUG SHORT, ADVISOR PERSPECTIVES
JUN. 29, 2014, 8:34 AM

March 2014 http://www.wallstreetdaily.com/2014/03/17/margin-debt-2/

June 2014: http://thesouthern.com/business/local/eye-on-the-market-deadly-debt/article_c870441e-a152-5d5a-a35b-31f383ea9601.html

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Interesting charts tracking margin debt into other crashes.

August 2014

http://seekingalpha.com/article/2436455-margin-debt-peaks-may-indicate-end-of-cyclical-bull-market

From that, it seems margin debt can, sometimes, give 'vultures circling' market signals, before a drop. Other occasions, it gives no warning.


Aug. 26, 2014

...The latest Margin Data

Unfortunately, the NYSE margin debt data is about a month old when it is published. Following its February peak, real margin declined sharply for two months, -3.9% in March -3.2% in April and was flat in May. It then jumped 5.7% in June, its largest gain in 17 months. The August number shows a fractional decline of 0.8%, which puts it 2.6% below its February peak.

http://www.businessinsider.com/nyse-margin-debt-july-2014-2014-8

Aug. 28, 2014 5:56 AM ET | Includes: DIA, NY, NYC, QQQ, SPY
Summary

New York Stock Exchange margin debt declined to about $460.23 billion in July from about $464.31 billion in June, the exchange reported this week.
NYSE margin debt at its latest level is therefore just -$5.49 billion, or -1.18 percent, lower than its all-time high of around $465.72 billion in February.
The risk of speculation appeared lower in July than it did in June, but higher than in 78.26 percent of all months evaluated by my proprietary methodology.

http://seekingalpha.com/article/2456585-nyse-margin-debt-dips-in-july-risk-rank-at-no-30

Margin debt slightly below a February peak, but with some indicies putting on fair gains since then, including S&P, recently passing through and over 2000.

140228153042-sp-month-620xa.png

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S&P500 near all time high, implied volatility and realised volatility at all time lows. It would only be remarkable if margin debt was NOT near all time high.

Futures market positioning is more important than the margin debt in the cash market. However I haven't looked at positioning recently.

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S&P500 near all time high, implied volatility and realised volatility at all time lows. It would only be remarkable if margin debt was NOT near all time high.

Futures market positioning is more important than the margin debt in the cash market. However I haven't looked at positioning recently.

Agreed. If you choose to believe margin debt tells you anything, the alarms would be when margin debt has slipped considerably, and S&P500 (or others) still flying highs.

However margin debt has paused at just below Feb record high, whilst S&P500 and DJIA have also kicked on a fair bit - but we're working a few weeks behind for margin debt; latest numbers a few weeks old.

Perhaps so with futures market positioning, although I think I saw future market a bit giddy before market opened today, on the DJIA. It closed yesterday at 17,079, but futures had opening priced up around 17130. My guess priced that way, perhaps expecting everyone in market wanting a cheery US bank holiday weekend. Market opened to a nervy hold, before dropped to 17040s in first hour or so, probably on some real world concerns, before it's recovered ground, 17076 as I look. Yet that's just my wild interpretation. Short sellers tend to be the smartest of investors, in my opinion, but they've been punished and tortured by pollution of stimulus, overriding market norms for valuations.

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You mean you might as well just toss a coin?

Maybe. Especially as we don't know where we stand with authorities, Fed, taper yes/no... just how soft will be their ongoing position, and ECB QE? (I really hope not, whilst others gleefully looking forward to it raising stockmarkets..... not where younger FTBs tend to keep their savings towards building a deposit.... but where older owners tend to have much of their wealth, on top of their owned outright, think of the victims "can't allow a hpc" position).

Although if margin debt drops considerably - and if we get advance warning of it - whilst markets riding high, I may take a serious position.

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Alternative view to the margin debt out there - perhaps when measured against market values.

Spectre of 1929 crash looms over FTSE 100 as traders take on record debts
By John Ficenec | Telegraph – 5 hours ago

The spectre of the 1929 stock market crash looms large for UK investors as traders borrow record amounts to invest in rising stock markets

NOTHING has been learnt from the madness of the 1929 stock market crash as once again traders reach for record amounts of debt to pile into rising share prices.

The level of margin debt that traders are using to buy shares in the stock market reached the highest levels on record according the latest data from the New York stock exchange.

US traders borrowed $460bn from banks and financial institutions to back shares, and once cash and credit balances held in margin accounts of $278bn is subtracted this left net margin debt of $182bn in July

Traders are now more exposed to a fall in share prices than at the height of the dot-com bubble at the turn of the century, and just before the financial crisis during the 2007 peak.

Source: Dshort.com

Buying shares on margin is often used by hedge fund traders to increase the returns on their investments. As the stock markets have steadily risen during the past five years and the level of risk has fallen, banks have become more willing to lend money for this activity.

The practice of buying shares on margin can trace its roots back to the heady days of the roaring 20’s stock market boom. Retail investors intoxicated by the offer of limitless gains only had to put down a small portion of their own money to buy shares.

In the 1920’s investors put down between 10pc to 20pc of their own money and therefore borrowed up to 80pc to 90pc of the cost of the investment.

The impact on returns in a rising market is startling. If for example an investor only has to...

continues: https://uk.finance.yahoo.com/news/spectre-1929-crash-looms-over-200011982.html

Yet... and I've got shorts all over the place, but with guaranteed stop-losses. Downside outweighs upside going into September-December, in my opinion - even if there's been no retreat from margin debt for the moment, and leveraged loan issuance still flying.

Personally can not let the taper-end pass (if it does end) without some exposure, although I wouldn't be surprised if there is a move upward to knock out the shorts before that; why my shorts are low-exposure for now - although I've ruled out ECB QE for some time.

It's time to shed short positions: Art Cashin
Drew Sandholm
Friday, 29 Aug 2014 | 10:37 AM ET

Investors should consider closing any short positions ahead of the Labor Day holiday weekend, veteran trader Art Cashin told CNBC on Friday.

"If you're short, your potential loss can be infinite and so if prosperity or good news broke out over the weekend you might have something move far beyond what you were prepared for," Cashin said on "Squawk on the Street." "That is why the 70 percent bias to the upside before a three-day weekend."

continues http://www.cnbc.com/id/101957818
Edited by Venger

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Clearly we're not near a top as the papers are seeing i coming.

http://www.telegraph.co.uk/finance/markets/11066137/Spectre-of-1929-crash-looms-over-FTSE-100-as-traders-take-on-record-debts.html

'Spectre of 1929 crash looms over FTSE 100 as traders take on record debts

Nothing has been learnt from the madness of the 1929 stock market crash as once again traders reach for record amounts of debt to pile into rising share prices.

The level of margin debt that traders are using to buy shares in the stock market reached the highest levels on record, according the latest data from the New York stock exchange.

US traders borrowed $460bn from banks and financial institutions to back shares, and once cash and credit balances held in margin accounts of $278bn is subtracted this left net margin debt of $182bn in July

Traders are now more exposed to a fall in share prices than at the height of the dot-com bubble at the turn of the century, and just before the financial crisis during the 2007 peak.'

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“a target of 5% per year can be reached but only by using […] LEVERAGE, SHORTING AND DERIVATIVES.”

5%?

Couldn't they just find some good companies to invest in.

Even zopa claims to be able to provide 5%.

They probably mean the target can only be reached under the current system by flooding the world with exponential debt and by banking bailouts but if so they should say so and come clean about it. It's high time for an alternative system and that's for sure if it takes all those risks to try to get just 5% and then fail and need bailouts.

It's little or no wonder that the average person is finding it almost impossible to make what used to be an average reasonable life under the current casino circumstances.

Edited by billybong

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Clearly we're not near a top as the papers are seeing i coming.

That's my view too (and same can be said for hpc... 14 years of concern, warning signs, and just more hpi enthusiasm and excuses for those 'victims paying' x2-x10 others prepared to pay.... eventually some nonlinear event might come into play... the straw that broke... ).

When volatility comes back, who knows, but it may come back suddenly. Can't see any sell-side signals from hedge funds either going into Autumn... but there is always the possibilitiy those calling the risks in the MSM get diabolically lucky mentioning something from the old-world common-sense, vs entitled/complacent/coarsened bulls, and their 5-6 year bull party on QE and everything else, in the Hamptons and all over. More likely though, more of the bull this year, but a small position against that is a bit of fun, if QE ending brings about sudden anxiety.

Fewer invites to the VI for Jackson's Hole just past, although not heard anything from Yellen and others they will stop being so accomodative to the VI.... or wider authorities in charge "who plead fealty to the free market but support a corrupt and crony capitalist slush fund that picks winners and losers."

21 August 2014

My three big calls

..Fixed income markets have grown massively on a wave of quantitative easing money since 2009 but, thanks to investment banks pulling back from fixed income trading, the market has little depth and is extremely opaque. This is fine in a rising market as companies have issued plenty of cheap debt to income hungry investors. However, if there is a rush for the exit, liquidity could dry up very quickly. This is something at the front of the mind of every bond manager we speak to.

continues.. http://www.moneymarketing.co.uk/opinion/rob-burdett-my-three-big-calls/2013429.article

FRED_M1_velocity640.png

Edited by Venger

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FRED_M1_velocity640.png

That picture paints a thousand words.

All that printed money and yet all they've managed is flat GDP.

You've got to surf with the waves,but still,this is setting up for a nasty crash at some point.A whole financial system leveraged up to the gills on hope,(the strategy,not the emotion).

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