Posted on 05/19/2021 12:04:56 PM PDT by aimhigh
Stock market margin debt jumped by another $25 billion in April, to a historic high of $847 billion, according to FINRA data. It has exploded by $188 billion in six months, and by 61% year-over-year, and by 55% from February 2020:
Excess leverage is the precise and predictable result of the policies the Fed is promoting out of one side of its mouth with its interest rate repression and asset purchases.
Out of the other side of its mouth, the Fed – via its blissfully ignored Financial Stability Report – is warning about leverage, stock market leverage, and particularly the vast and unknown parts of leverage among hedge funds and insurance companies.
(Excerpt) Read more at wolfstreet.com ...
“The S&P price-to-earnings ratio is now at 43. The historical average is around 15. This suggests that a major correction is due.
On the other hand, with CD and bond rates so low, there is nowhere to put investment money these days except in the stock market. This suggests that the bull market will continue.”
You’re exactly right. This has been the case for years now. Money has nowhere else to go.
At some point there is another 2007-2008 crash but who knows when that happens since money continues to pour into stocks.
I respectfully disagree. If you buy the bonds with the intention of selling it later (or I buy into mutual funds like PRULX that track the ETF TLT for long term treasuries), they go up in value when the stock market crashes and everybody is looking for something else to put their money into. Go to https://www.marketwatch.com/investing/fund/prulx and expand the date range to All. See how it jumps during broad market crashes (i.e. from Feb 2020 to April 2020, from Oct. 2007 to Mar 2009, from Mar 2000 to Oct 2002). All of those were yuge inflation problems with the Fed having low/zero interest rates while doing QE (or "not QE" as they said last year).
I often use these as a hedge when I expect a broad market downturn. I haven't pulled out of all of my equity funds, but I'm out of the ones with high PE ratios. Over half of that money is in long term treasury funds to make money when the stocks crash.
> At some point there is another 2007-2008 crash but who knows when that happen... <
I’m thinking that will happen if and when the Fed starts to raise interest rates. CDs at 1% won’t tempt folks to leave the stock market. But CDs at 6% just might.
Leverage = bad. Debt = Bad. Mergers and acquisitions = Bad.
When will these A-holes learn anything? But then I’d kind of like to shoot short sellers, too, to say nothing of hedge funds and people why buy on margin
Hate these jerks that run bubbles up. Anything other than buy and hold common stocks for the longest of terms is no better than running around setting buildings on fire. If they want to bet and speculate instead of own a share of a business they would buy whole, I hope they lose everything.
Volatility, unpredictability, risk is always bad in my book.
Thank you for the sage advice. We can now invest with confidence... (it can only go up, like, to the moon...)
You are talking about the flight to safety trade, one of my favorites to trade in bond futures. Been trading that for over 30 years. Sometimes that is hours (single day big down drafts), other times a couple of days to a week, other times a month or more.
March of 2019 I watched in stunned awe as the 30 and 10 year set all time records for the biggest single day moves ever.
I was talking about longer term holding for a non-trader type. It may be different this time since not since Jimmy Carter did those making the flight to safety trade have to consider very high inflation or the FED triggering that by do 5 trillion of QE with the debt at 30+ trillion.
“Over half of that money is in long term treasury funds to make money when the stocks crash.”
With normal to low inflation that works. This time it may not work out so well, other than the short term.
It’s good to be right. Thx.
something you might want to see if you haven’t already.
Of course, when I saw the S&P 500 crash 30% in a month (Feb to March 2020) it reminded me of the 1987 flash crash, which lasted only a few months (I'm not talking about the one day crash, but the broader 30+% over the fall months of 1987 that Black Monday was part of). So I made nice return on the way down and nice return on the way back up (from March on).
I made 55% last year in mutual funds, most of it in Roth accounts growing tax free. One of the reasons I'm out of the market again now is I'd like to hold onto those awesome gains.
As interest rates rise there will might ultimately be a flight from stocks to bonds at some point when it levels out. But during that interim period of interest rates rising there there will be havoc in the bond market as bond prices fall.
I’m thinking it won’t so much be a flight to bonds that crashes the market next time but rather some external event such as what occurred in 2007-2008. With that idiot Biden as President I can think of many such events happening that would do the trick.
Having said all that I am still holding 40% in the stock market. I did that during the Obama years as well. But then I am a long term investor. Those that will need their invested funds within 10 years are in a different situation. and should be cautious.
Think I’ll remain conservative and wait for a nice entry point like March 2020.
> Having said all that I am still holding 40% in the stock market. I did that during the Obama years as well. But then I am a long term investor. Those that will need their invested funds within 10 years are in a different situation. and should be cautious. <
I agree with everything you said there. There is an old rule-of-thumb. Your percentage investment in the stock market should be 100 minus your age.
That rule has been criticized many times. And rightly so! Nevertheless, I’m sticking with it.
A nice report. Bravo. Too many just freeze, doing the dear in the headlights thing while getting killed, not realizing there are so many options available. And sometimes you have to know when to get up from the gaming tables and do absolutely nothing.
Thanks. I try to keep my emotions out of it and do it algorithmically. Sometimes the difference in gains/losses is not in who has the best strategy, but who’s best at sticking to their strategy even when Cramer or the internet tells you to get hyped up.
“Plus in the 2008 crash, the Central Banks didn’t start the big save till March 2009, after markets had dropped about 40%.”
The Fed and US Treasury really weren’t trying to bail out the stock market. They feared a deflationary collapse of the banking system due to the massive amounts of defaulting mortgage paper and derivatives on their books.
The Great Depression was the result of a cascading collapse in the American banking system over the years 1930-1933. Milton Friedman and Anna Schwartz believed that if the 1930s Fed had stepped in to provide liquidity in the early stages then bank collapse and the Depression could have been avoided. Bernanke was a student of Friedman & Schwartz and he implemented their prescription in 2009.
True, I didn’t mean “the big save” was of the the markets but of everything.
My guess is we will see a 30% drop in markets this fall.
It will not be a flash crash, because FED will not allow it.
But over 3 month period, market drops 25-35%, it will be treated as just a normal correction in a bloated market.
The I bonds are tied to the consumer price index. I think they recalculate every 6 months.
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