In a world where valuations are irrelevant.
By Wolf Richter for WOLF STREET.
Margin debt – the amount of money that individuals and institutions borrow against their stock holdings – spiked by 56 billion in December, after having already spiked by 63 billion in November, by far the two largest month-to-month increases on record, to $778 billion, according to FINRA which regulates brokers and exchanges. Since March, this measure of margin debt surged by nearly $300 billion, or by 62%.
Margin debt as tracked by FINRA at its member firms isn’t the only form of stock market leverage, but it’s the only form that is disclosed monthly. There are many other forms of stock market leverage by institutions and individuals that are not disclosed, or are only disclosed voluntarily in SEC filings by the brokers and banks that lend to their clients against their portfolios, such as “securities-based loans” (SBLs). We don’t know how much total stock market leverage there is, but margin loans indicate the trends, and we had another WTF moment:
High margin balances tend to precede epic stock market sell-offs, as annotated in the chart above.
With these two-decade charts, the long-term changes in the dollar amounts are less relevant since the purchasing power of the dollar has dropped over the period. But on a short-term basis, the movements are very indicative about rising or falling leverage in the stock market.
On a year-over-year basis, margin debt surged by nearly $200 billion in December, by far the most ever:
Stock market leverage is an accelerator. When stocks already rise, and investors feel confident, they borrow money to buy more stocks, and they can borrow more against their stocks because their value has risen. And this additional borrowed money is then chasing after stocks and thereby creating more buying pressure, and prices surge further.
And stock market leverage is an accelerator on the way down, when stock prices are already falling and brokers issue margin calls to their clients that then have to sell stocks to remain compliant, triggering a bout of forced selling, and many leveraged investors sell ahead of margin calls in order to avoid being forced into selling at the worst possible moment.
This spike in margin debt over the past few months is another sign that markets have gone nuts, and everyone is chasing everything, regardless of what it is, whether it’s a penny stock with a similar name to something Elon Musk mentioned in a tweet, or whether it’s Tesla’s stock itself, or any of the EV makers or presumed EV makers that might never mass-produce EVs, or a even legacy automaker that is now touting its EV investments, or whatever it is, including Bitcoin – which exploded higher, before plunging 28% in two weeks.
Everything is getting chased higher by speculators who are totally indifferent to valuations, who focus only on the fact that others are chasing these things higher, and valuations are irrelevant, and some of this chasing is happening with borrowed money, from regular margin debt all the way to borrowing against the home or credit cards. That’s what this surge in margin debt tells us. It has gotten crazy out there.
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