Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
When the Crude Oil Price Collapses Below $40 What Happens? PART III - 17th Nov 19
If History Repeats, Gold is Headed to $8,000 - 17th Nov 19
All You Need To Know About Cryptocurrency - 17th Nov 19
What happens To The Global Economy If Oil Collapses Below $40 – Part II - 15th Nov 19
America’s Exceptionalism’s Non-intervention Slide to Conquest, Empire - and Socialism - 15th Nov 19
Five Gold Charts to Contemplate as We Prepare for the New Year - 15th Nov 19
Best Gaming CPU Nov 2019 - Budget, Mid and High End PC System Processors - 15th Nov 19
Lend Money Without A Credit Check — Is That Possible? - 15th Nov 19
Gold and Silver Capitulation Time - 14th Nov 19
The Case for a Silver Price Rally - 14th Nov 19
What Happens To The Global Economy If the Oil Price Collapses Below $40 - 14th Nov 19
7 days of Free FX + Crypto Forecasts -- Join in - 14th Nov 19
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19
Gold and Silver - The Two Horsemen - 11th Nov 19
Towards a Diverging BRIC Future - 11th Nov 19
Welcome to the Zombie-land Of Stock Market Investing - 11th Nov 19
Illiquidity & Gold And Silver In The End Game - 11th Nov 19
Key Things You Need to Know When Starting a Business - 11th Nov 19
Stock Market Cycles Peaking - 11th Nov 19
Avoid Emotional Investing in Cryptocurrency - 11th Nov 19
Australian Lithium Mines NOT Viable at Current Prices - 10th Nov 19
The 10 Highest Paying Jobs In Oil & Gas - 10th Nov 19
World's Major Gold Miners Target Copper Porphyries - 10th Nov 19
AMAZON NOVEMBER 2019 BARGAIN PRICES - WD My Book 8TB External Drive for £126 - 10th Nov 19
Gold & Silver to Head Dramatically Higher, Mirroring Palladium - 9th Nov 19
How Do YOU Know the Direction of a Market's Larger Trend? - 9th Nov 19
BEST Amazon SMART Scale To Aid Weight Loss for Christmas 2019 - 9th Nov 19
Why Every Investor Should Invest in Water - 8th Nov 19
Wait… Was That a Bullish Silver Reversal? - 8th Nov 19
Gold, Silver and Copper The 3 Metallic Amigos and the Macro Message - 8th Nov 19
Is China locking up Indonesian Nickel? - 8th Nov 19

Market Oracle FREE Newsletter

How To Buy Gold For $3 An Ounce

Stock Market Margin Debt

Stock-Markets / Stock Markets 2014 Feb 14, 2014 - 08:58 AM GMT

By: Fred_Sheehan

Stock-Markets

John Hussman (Hussman Funds) wrote in his February 3, 2014, Weekly Market Comment: "The latest data from the NYSE shows equity margin debt at a new all-time high. Relative to GDP, the current 2.6% level was eclipsed only once - at the March 2000 market peak."

The ratio of margin debt is usually - at least, often - calculated in comparison to the market value of stocks. Later in his Comment, Hussman explains his choice: "We use GDP here because margin debt to GDP has a much higher correlation with actual subsequent market returns than say, margin debt/market capitalization (which destroys information by muting the indicator exactly at points when prices are extremely elevated or depressed)."


The March 2000 peak was an example of our so-called policymakers clamming up. Their duty is exactly the opposite. Quoting from Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve, by William A. Fleckenstein and Frederick Sheehan: "On February 17, 2000, the subject of margin debt came up when the chairman testified before the House Banking Committee, just as it had three weeks earlier, when Greenspan had appeared before the same committee of the Senate. Despite having been thoroughly interrogated on the subject by an obviously concerned Senator Schumer on January 26, Greenspan reiterated the view that he shared in his previous testimony, that raising margin requirements would have no effect on stock prices.

"In response to the question from Senator Schumer during the January Senate appearance, Greenspan had staked out his views on the subject, stating that raising margin requirements would discriminate against the small investor and, furthermore, studies had 'suggested the level of stock prices has nothing to do with margin requirements.'

The Fleckenstein & Sheehan response: "I have no idea what studies he was referring to...." We then wrote of a couple of possibilities, far-fetched, instead of writing that Greenspan had lied. After the crash, Greenspan gave the most noxious speech of his life at Jackson Hole, Wyoming, on August 30, 2002. Blameless as always, the worm tacked on a footnote: "Some have asserted that the Federal Reserve can deflate a stock-price bubble - rather painlessly - by boosting margin requirements. The evidence suggests otherwise. First, the amount of margin debt is small, having never amounted to more than about 1-3/4 percent of the market value of equity..."

First, the amount does not matter, since the problem lies with the level of the ratio and rate of advance. Hussman writes: "[T]he main usefulness of this measure isn't for any fixed correlation with subsequent returns - numerous valuation measures do much better - but for its extremes. This is particularly true when margin debt advances rapidly over a span of several quarters relative to prices, GDP and other measures." Hussman's chart shows advances similar in 2000, 2007, and in 2013 and 2014. (Total margin debt had risen 45% between October 1999 and February 2000.)

Although "numerous valuation measures do much better," Hussman notes: "Prior spikes in margin debt/GDP in June 1968, December 1972, August 1987, March 2000, and October 2007 were followed by a bear market losses of at least one-third of market value shortly thereafter."

As to valuation measures: "In the context of the most extreme bullish sentiment in decades, and reliable valuation metrics about double their historical norms prior to the late-1990's bubble (price/revenue, market cap/GDP, Tobin's Q, properly normalized price/forward operating earnings, price to cyclically-adjusted earnings), we view present market conditions as dangerously speculative."

Most everyone knows we are at the edge, in their gut, if not their mind. Experts are paid to say otherwise. Again, the closer the cliff, those who are paid to keep investors in the game, and at necessarily greater feats of leverage, will make ever more reassuring claims.

It is my sense the Federal Reserve is losing its credibility with the public. Woe betide us the day it loses credit-ability. As with anxiety about stocks, this may be latent. It will pour forth when leverage retreats. Newly inducted Federal Reserve Chairman Janet Yellen offered testimony before the Senate Banking Committee for the first time yesterday, February 11, 2014. She was full of reassurances: "The economic recovery gained greater traction in the second half of last year." Asset prices are not at "worrisome levels." In questions and answers, she said something like "stocks are savings." (If anyone has the actual quote, please let me know.) This is to be expected. To forestall the complete loss of Fed creditability, more direct contradictions to the truth will be asserted.

In September 1996, bespattering his fellow FOMC comrades with an excess of machismo (should such be possible), the "greatest central banker who ever lived" - Alan Greenspan, in the words of Alan Blinder - claimed: "I recognize that there is a stock market bubble problem at this point. . . . We do have the possibility of raising major concerns by increasing margin requirements. I guarantee that if you want to get rid of the bubble, whatever it is, that will do it."

From John Hussman's February 3, 2014, Weekly Comment:

"Just a note - I'll be speaking at the Wine Country Conference in Sonoma, CA on May 1st & 2nd, 2014, along with Mike "Mish" Shedlock, David Stockman, Stephanie Pomboy, Steen Jakobsen, Chris Martenson, Mebane Faber, Jim Bruce and others. This year's conference will benefit high-impact programming for individuals on the autism spectrum and their families, primarily local efforts through the Autism Society of America. As many of you know, my 19-year old son JP has autism, so the cause is very close to my heart. Last year's conference benefited the Les Turner ALS Foundation. It's a great event in a beautiful location. Hope to see you there. For more information, please visit www.winecountryconference.com. Thanks - John"

By Frederick Sheehan

See his blog at www.aucontrarian.com

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Frederick Sheehan Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules