Best of the Week
Most Popular
1. Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - Nadeem_Walayat
2.Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - James Burgess
3.Gold Price Trend Analysis - - Nadeem_Walayatt
4.The Beginning of the End of the Dollar - Richard_Mills
5.Stock Market Trend Forecast Update - - Nadeem_Walayat
6.Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - Troy_Bombardia
7.Precious Metals Sector: It’s 2013 All Over Again - P_Radomski_CFA
8.Central Banks Have Gone Rogue, Putting Us All at Risk - Ellen_Brown
9.Gold Stocks Forced Capitulation - Zeal_LLC
10.The Post Bubble Market Contraction Thesis Receives Validation - Plunger
Last 7 days
Is A Sharp Stock Market Crash Ahead? - 21st Nov 18
Have We Seen The Worst of the Gold Bubble Burst? - 21st Nov 18
The Real Price of LNG, Climate Change, Coming Fracking Environmental Disaster - 21st Nov 18
Powell and Gold between Inflation and Global Slowdown - 21st Nov 18
Why is the North American Wilderness Known for Spiritualism? - 21st Nov 18
Stock Market Buy the Dip is Dead - 20th Nov 18
Deep State Mad World - 20th Nov 18
Commodities - What Do You Need To Know? - 20th Nov 18
Precious Metals Moving In Unison For A Massive Price Advance - 20th Nov 18
Handicapping the Precious Metals Through Year-End - 20th Nov 18
Betting Markets Confirm Theresa May Safe From Tory Leadership Challenge this Week - 20th Nov 18
Rail Chaos Transpennine Express Cancels Services to Manchester Airport Whilst on the Train! - 20th Nov 18
The Giants Are Coming...Giants of The Internet! - 20th Nov 18
Gold & Silver Corrective Rally is Almost Over - 19th Nov 18
Stock Market Going Sideways - Which Direction is Next? - 19th Nov 18
Technical Analysis Points to DOW 30k Next Target - 19th Nov 18
Stock Market Consolidating in a Downtrend  - 19th Nov 18
Next Tory Leader, Prime Minister Forecast and Betting Market Odds - 18th Nov 18
The Fed's Misleading Money Supply Measures - 17th Nov 18
Stock Market Outlook: Why the Economy is Bullish for Stocks Going into 2019 - 17th Nov 18
NO DEAL HARD BrExit Tory Chaos, Theresa May Leadership Challenge - 17th Nov 18
Gold vs Several Key Investments - 17th Nov 18
GDX Gold Mining Stocks Q3 18 Fundamentals - 17th Nov 18
Is Gold Under or Overpriced? - 17th Nov 18
Active Managers are Bearish on Stocks. A Bullish Contrarian Sign - 16th Nov 18
Will The Fed Sacrifice Retirement Portfolio Values For The "Common Good"? - 16th Nov 18
BrExit War - Tory Party About to Replace Theresa May for NO DEAL BrExit - 16th Nov 18
Aspire Global Makes Significant Financial Strides - 16th Nov 18
Gold Oil and Commodities …Back to the Future ? - 16th Nov 18
Will Oil Price Crash Lead to “Contagion” for the U.S. Stock Market? - 15th Nov 18
How NOT to Be Among the MANY Stock Investors Fooled by This Market Myth - 15th Nov 18
Tory BrExit Chaos Cripples UK Economy, Wrecks Housing Market Confidence - 15th Nov 18
Stocks Could End 2018 With A Dramatic Rally - 15th Nov 18
What Could Be the Last Nail in This Stock Bull Markets Coffin - 15th Nov 18
Defensive Stock Sectors Outperforming, Just Like During the Dot-com Bubble - 15th Nov 18
Buying Your First Home? Here’s How to Save Money - 15th Nov 18
US Economy Ten Points or Ten Miles to ‘Bridge Out’? - 14th Nov 18
US Stocks: Whither from Here? - 14th Nov 18
Know exactly when to Enter&Exit trades using this... - 14th Nov 18
Understanding the Benefits of Keeping a Trading Journal - 14th Nov 18
S&P 500 Below 2,800 Again, New Downtrend or Just Correction? - 13th Nov 18
Warning: Precious Metals’ Gold and Silver Prices are about to Collapse! - 13th Nov 18
Why the End of the Longest Crude Oil Bull Market Since 2008? - 13th Nov 18
Stock Market Counter-trend Rally Reaches .618 Retracement - 13th Nov 18
How to Create the Best Website Content and Generate Organic Traffic - 13th Nov 18
Why the Stock Market Will Pullback, Rally, and Roll Into a Bear Market - 13th Nov 18
Stock Markets Around the World are Crashing. What Not to Worry About? - 12th Nov 18
Cyclical Commodities Continue to Weaken, Gold Moves in Relation - 12th Nov 18
Olympus Tough TG-5 Camera Stuck or Dead Pixels, Rubbish Video Auto Focus - 12th Nov 18
5 Things That Precede Gold Price Major Bottoms - 12th Nov 18
Big US Stocks Q3 Fundamentals - 12th Nov 18
How "Free Money" Helped Create Sizzling Housing Market & REIT Gains - 12th Nov 18
One Direction More Likely for Bitcoin Price - 12th Nov 18
The Place of HSE Software in Today's Business - 12th Nov 18

Market Oracle FREE Newsletter

How You Could Make £2,850 Per Month

Will Debt Leverage Leverage Gold?

Commodities / Gold and Silver 2018 Apr 13, 2018 - 03:06 PM GMT

By: Arkadiusz_Sieron

Commodities

Attention, please! The leverage in the stock market has been recently rising. As one can see in the chart below, the stock market margin debt surged more than $113 billion in 2017, one of the largest annual surges. Moreover, it was the ninth annual increase in a row.


Chart 1: Stock Market Margin Debt (in $ billions) from February 2010 to January 2018.

As a reminder, margin debt is a borrowing against investors’ portfolios – it means that individuals borrow money against their existing stocks to buy even more stocks. Smart way to boost gains, right? Of course, at least until the bears are unleashed and investors receive “margin calls” – the key problem with margin debt is that is works like leverage. It accelerates bull markets, but also the declines.

Should we worry about the increase in margin debt, then? Well, yes – and no. The marginal debt spiked both before the dot-com crash and the Great Recession. Moreover, the margin debt increased also relative to the nominal GDP or the S&P 500 Index since the previous peak.

But the fact that previous records preceded crises doesn’t imply that we are headed for a collapse now. There were also multiple periods where a bear market didn’t follow after the margin debt peaked.

As John Templeton famously said, “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.” The rise in marginal debt certainly indicates the rise in investors’ confidence, but the current bull market is probably the most hated ever. The margin debt has been rising because interest rates are so low, not because investors expect that the market will explode. Actually, margin debt as a percent of the total market cap has generally been flat since the Great Recession. This is why – unfortunately for gold bulls – we believe that although the margin debt may be a red flag, it doesn’t signal the end of world.

The ultra-low interest rates also bred enormous student loan debt. Americans owe about $1.5 trillion in student loan debt, about $620 billion more than the total U.S. credit card debt! According to the Brookings Institute, almost 40 percent of borrowers will default on their student loans by 2023. The student debt crisis is worse than we thought, but does it have the potential to hinder the whole economy?

We believe that the student indebtedness is a hard hit for people who cannot service the debt, but it’s not a threat for overall financial stability. What we mean here is that the students’ problems may cut their disposable income, spending and delays their homeownership, but even if the student loan bubble bursts (which is not set in stone due to the odd bankruptcy law), the federal government backs most of these debts. Hence, gold bulls shouldn’t count on the next bank crisis caused by student loans and the resulting surge in the safe-haven demand for the yellow metal. Such a scenario is unlikely.

Subprime auto debt is also booming, even as defaults soar. Something worrisome is happening, that’s for sure (loan-underwriting standards are very lax, to put it euphemistically). However, the risks are limited, at least compared to the previous housing bubble. Before it burst, about $1.2 trillion of bonds backed by home loans were issued (about $400 billion were subprime). That compares to the $25 billion of bonds pooling subprime auto loans issued in 2017. So the auto debt bubble shouldn’t cause another global financial crisis, supporting gold prices.

Summing up, the pile of global debts is one of the major risks at the moment. In particular, the high level of household debt in Canada (above the level of Canadian GDP!) and the China’s build-up of debt (the total debt to GDP has risen above 250 percent in 2017, with rapidly growing household debt) are the most worrying debt-related concerns.

Luckily for Americans, but unfortunately for gold bulls, the situation in the U.S. is much better, at least when it comes to the private debt (the threats related to the rising federal debt that we have already discussed). The key is that the both the households and the private non-financial companies deleveraged after the crisis (see the chart below), so there is potential for further economic expansion.

Chart 2: Total credit to private non-financial sector (in % to GDP) from 1952 to 2017.

The margin debt has been rising, but we are far from euphoria. During irrational exuberance, the marginal debt usually increases multiple times above the average change in equity prices – and we are not quite there yet. The student and auto loans are booming, but these bubbles shouldn’t cause a systematic financial crisis.

What does it mean for the gold market? Well, the high levels of debt are certainly worrying, especially during the Fed’s tightening cycle. If something bad happens, debt will become a burden and the yellow metal should gain as a safe-haven. However, with gradual interest rate hikes and subdued inflation, the expansion may last for a while, despite the high indebtedness. The situation of households is better than before the Great Recession. The public debt is more troublesome, but investors should remember that the U.S. dollar is a world reserve currency, so the bankruptcy of Uncle Sam is rather unlikely. So, it is definitely worth monitoring the debt cycles. In the long-run, rising interest rates and increasing debt with an over-leveraged economy is the best recipe for disaster, we totally agree. However, the recent fears seem to be a bit overblown, at least in the short-run.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2018 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