Biggest dollar-plunge ever and one of the biggest percentage-plunges.
By Wolf Richter for WOLF STREET.
The only measure of stock market leverage that is reported monthly is margin debt at brokers, via FINRA. Much of the stock market leverage isn’t reported, such as Securities Based Lending, and even banks and brokers that fund this leverage don’t know the leverage in the overall market, or even the leverage of their client if that client is levered as well at other banks. Funds can leverage at the institutional level. There is leverage associated with options and other equities-based derivatives, etc.
Leverage is the great accelerator of stock prices on the way up and on the way down. And the one part of leverage that we can see plunged in January by the largest dollar-amount ever, and by one of the largest percentages ever.
Stock market margin debt, after a historic spike during the Fed’s QE money-printing and interest-rate-repression extravaganza that started in March 2020, plunged by $80 billion in January from December, the largest dollar-decline in the data, which goes back to 1990, and the third month in a row of declines, to $830 billion, according to FINRA today:
But margin debt is still gigantic, with just a small portion having been unwound. The blistering historic spike in margin debt during the Fed’s $4.7 trillion QE in 22 months was a historic outlier, peaking last October with a two-year increase of 67%.
In November, the Nasdaq peaked as we now know with hindsight. Since then, it has fallen 16%.
But many high-flying stocks have gotten totally crushed, one by one, many of them started getting crushed in February a year ago, with many dozens of these high-fliers down 60% to over 90% from their highs. And leveraged bets by enthusiastic retail investors on these stocks were brutally unwound, either voluntarily or via margin calls.
Margin debt is the great accelerator on the way up because it creates buying pressure with borrowed money, and on the way down because it creates forced selling pressure.
In percentage terms, margin debt plunged by 8.8% in January from December, the largest decline in the data since some key moments:
Fed shifts from QE to QT:
- January 2022: -8.8%
Covid Crash:
- March 2020: -12.1% (Covid crash)
Euro Debt Crisis:
- August 2011: -10.4%
Financial Crisis:
- May 2010: -9.1%
- November 2008: -18.1%
- October 2008: -19.7%
- August 2007: -13.0% (Financial Crisis starts oozing to the surface)
Dotcom crash:
- March 2001: -12.1%
- December 2000: -11.6%
- April 2000: -10.4% (dotcom crash begins)
Many of the highest-flying stocks have already gotten crushed: A good sample of the most hyped and highest-flying stocks is included in the ARK Innovation ETF [ARKK]. It dropped 5.0% today to $64.80, the lowest close since June 15, 2020, and is down by 59% from the peak in February last year. Some stocks in the ETF have collapsed much more from their peaks, such as Twilio (-64%), Zoom (-72%), or Roku [-77%].
People who took on high levels of margin debt to fund their holdings of stocks represented by the ARK Innovation fund have either voluntarily liquidated at least part of their positions or were forced to by their broker – and this widespread forced selling accelerated the plunge in prices of those stocks:
High leverage in the stock market is one of the preconditions for a massive sell-off.
In October, just before the sell-off took shape in the Nasdaq, the Fed warned in its Financial Stability Report about high leverage among young retail investors: “The median leverage ratios of younger retail investors are more than double those of all investors, leaving these investors potentially more vulnerable to large swings in stock prices, as they have a larger debt service burden.”
“Moreover, this vulnerability is amplified, as investors are now increasingly using options, which can often boost leverage and amplify losses,” the Fed said.
“A potentially destabilizing outcome could emerge if elevated risk appetite among retail investors retreats rapidly to more moderate levels,” the Fed said.
Everybody knew that, and margin debt tracks some of it, but it just took the Fed a while to figure it out.
In the long-term view of margin debt and its relationship to stock market “events,” it’s not the increases in dollar amounts that matter – given the effects of inflation – but the steep increases in margin debt before the selloffs, and the stock market sell-offs that followed. But no increase was more magnificent than that of 2020 and 2021, neither in absolute terms (dollars) nor in relative terms (percentage):
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There was a video out in the 80s called “Faces of Death.” Some of it was faked, some wasn’t. One that wasn’t, or so I assume, showed a young man bungee jumping from a building, the problem, he measured the length of elastic cord to account for the floors, but the building was built without the 13th floor, oops – it looked like a hard landing, oh well
That’s a little grim.
I suspect it is appropriate as an indirect comment on what is going to happen to our stock market: if reports of a war in Europe starting soon are accurate, when the stock market crashes, the margin calls will begin. The sales from the margin calls will cause more sales and more margin calls, forcing more sales. It will be like taking out the key, bottom cards from a house of cards.
The Nasdaq is down 9.03% year-to-date while the S&P is down somewhat less, down 7.73%. If this trend continues — and I see no reason why it would not — the divergence may spread even farther. Recommend buying a bundle of S&P stocks instead of Nasdaq if you’re playing it cautious. If you want to do a Warren Buffett “be greedy when others are fearful,” play it the reverse.
Are you sure your math is right on the Nasdaq (I assume Nasdaq Composite?)
Year to date:
13,548 / 15,645 – 1 = -13.40%
He does it like Warren Buffet. Of course the math is right.
Catxman
Warren Buffett “be greedy when others are fearful,” play it the reverse.
He also recommended, single most mkt reliable indicator:
Mkt (wilshire 5000) cap to GDP is now over 200%. More than 90% is not conducive to Economic growth. With QEs and ZRP this is again more distorted to discern price discovery. With QT and rise rates in the horizon, we are entering uncharted waters! Prudence is warranted for those in retirement and those close to it.
If you recruited a criminal who robbed old ladies….could care less about his victims………was rich…… had no economic education background…… a total lack of economic understanding (except what a few highly educated monetary bozos with no real world experience shoveled at him)…….was a political shill that was appointed to every prior job due to political connections……… and made him the head of the federal reserve…….what would happen…..
no mystery……just look around.
So this is how 29 felt before the big drop. Always wondered how it happened…..In that case a few idiots tightened money to excess…..in this case a few idiots had M2 growth of 15% going while 7 % inflation rages to encourage greater employment at 3.8 % unemployment……at least that is the official story……its really all about taking and who takes….from who.
1) ARK Mont TRMB monthly log in a channel trending up : Sept 1995 to July 2000, to Oct 2007 and Aug 2021. Mont TRMB retraced 38% of Mar
2020 to Aug 2021 high. It’s a normal reaction.
2) ARK SHOP breached BB #1 May 26/27 2020 to close two years gap.
3) That’s it…Kathy.
WSJ has a couple of great articles today, one of which explains why the Fed isn’t coming to the rescue when the recesssion hits. Germany shut down its coal plants AND its nuclear power plants, switching to Russian natural gas. What could possibly go wrong? LNG tankers are being diverted from Asia to EU to take advantage of high prices, but of course, they never constructed LNG terminals to handle the surge. China will be fine, they are still BUILDING new coal power plants. Slow motion train wreck.
China is also building new nuclear plants.
25% of worldwide nuclear capacity under construction.
China believes that price levels are also a reflection of capacity, not just money supply.
Georgia, US. Plant Vogtle units 3 and 4 will be the first new nuclear units built in the United States in the last three decades
There are 21 nuclear reactors being decommissioned. Another 200 may be shut down in the next 20 years as they were built decades ago.
How long does it take to build a Nuclear power plant in America? Will it be online before 2030?
Unit 3 @ Vogle is “supposed” to be up and running by year end. Unit 4 will take another 6-9 months. The cost is billions in overruns.
Going forward, the US will not deploy any new 3rd generation plants. The US will deploy 4th gen Small Modular Reactors (SMR) that are built in a factory and then installed on site. Each reactor is about 200 MW of power or at least 1/5th of the 1,117 MW for each new unit at Vogle.
The goal, of course, is to build SMRs at much more cost effectively in terms of up-front costs and ongoing maintenance. One of the big advantages of SMR is that they’re expected to be a lot safer and won’t require the copious amounts of water that 3rd gen plants require.
China has built a demonstration thorium reactor in the Gobi Desert and is now building a full-scale reactor. It’s very unfortunate that China is starting to lead the US in all sorts of technologies, including thorium-based reactors.
Time will tell if the TerraPower natrium-based reactor is more or less advanced / capable / cost effective as thorium-based reactors.
The holy grail, of course, is fusion. Again, China is doing a pretty good job of leading the pack. Their East Tokamak reactor recently ran for 17 minutes which is unheard of here in the US or UK. England’s torus-based JET sustained the largest ever output, 59 megajoules, for 5 seconds recently, while the US NIF sustained 10 quadrillion watts (700 x US grid generation capacity) for a fraction of a second.
Finally, the highest fusion energy factor, Q, achieved was .7 by JET for a billionth of a second. By comparison, the goal of ITER is to reach a goal of Q factor of 10 or greater, while creating 500 MW of power for long 400 to 600 second pulses. ITER will not produce net energy in the form of electricity but will pave the way for future machines that can. ITER isn’t supposed to fully come online until 2035, so unless the Chinese or JET make some sort of BIG breakthrough in the next 10 years, commercial fusion is still 30 years away.
The punchline of course is that commercial fusion is ALWAYS 30 years away.
Good thing for the US is we have an abundance of nat gas.
So do we over here, in the UK. The madness is though, the Greenies don’t permit.
Great article Wolf and very insightful.
All data suggests that inflation will accelerate and despite all talk by Fed about QT and faster but miniscule interest rate hike, the 10 yr yield is dropping for past 2 days. Its funny and it seems like the big boys and insiders do not believe Fed will ever walk the walk.
Fed and US Govt. seems to be aggressively looking for the next excuse now to keep rates at zero and continue QE. This is perhaps the main reason why US is trying every possible way to get the war started.
One way or the other the party for rich and theft for poor will go on.
That’s right.
Whatever treasury futures might say, the FOMC still has not publicly committed to any further rate increases beyond the measly 0.25% in March.
There is a clear division in the committee between those who want faster & more aggressive tightening (Bullard) vs. those who prefer slower, more measured rate increases (Daly.) If/when Biden’s nominees are confirmed & seated, I expect the second group will have a majority.
Don’t fall for the Fed good-guy/bad-guy garbage. The quoted Fed members are all going according to script and what they say versus what they actually intend to do have no correlation to each other. Nothing more than the jawbones of asses trying to achieve their desires without having to do anything meaningful that would upset the status quo. Should the jawboning fail to have the wanted effect the Fed then continues stall mode, moving with glacial speed when real change has to be implemented so as to allow the ‘preferred people’ to maximize their profits and power before the fit hits the shan.
The one and only mandate (unwritten) that the Fed governors strictly adhere to is to make themselves, the Fed member banks (and their respective c-suites) as wealthy and powerful as possible. The negative impact of their decisions on everyone else they consider to be the cost of doing business.
The real question is when they want to drop the rates by “emergency” it happens just like you would expect in an emergency. Very rapidly. So they can jawbone but notice it hasn’t moved in years now on the upward slope. There is no emergency in the view of the FED regarding needing to raise the rate. End of discussion. When they want it to move they will move it
I think its the surprise game that FED wants to play. In Great Recession they did not act as quick and as strong as last time during covid pandemic. This time, it is going to be unpredictable, too. They will leave us without any clue, whether they will act fast again or they will let the ship sink a little deeper.
Yields go up and down by the minute and the hour and the day. Don’t let these daily up-and-downs distract you. Look at at a longer-term chart.
Right! And the long-term chart shows them going down. Now that they’re at 0-0.25, the next step is for us to follow Japan with negative rates. I know Japan is different, since it’s a creditor nation, etc, but time will tell whether or not JPowell has a spine.
My money is on the US solidifying itself as MMT-based country by rolling out the next wave of QE and rent / mortgage forbearance. For all we know, student loan forbearance may now be fully entrenched as a way of backdooring student loan cancellation.
Finally, I think we’re all smart enough to realize that the 40-year trend chart isn’t up, up and away.
JayW,
Trends can turn around violently when they hit bottom. You just don’t know at the time. You only know with hindsight.
Negative-interest-rate mongers don’t understand that the 12 regional Federal Reserve Banks are owned by the banks in their districts, and that negative rates are really bad for bank earnings and bank stocks. Just look at European bank stocks over the past 20 years and at Japanese bank stocks over the past 40 years. That’s why the Fed will NOT do negative rates.
The ECB’s number one job is to keep the Eurozone together. It doesn’t care about the banks. The BOJ’s number one job is to fund the government deficits, and it doesn’t care about the banks either. The Fed is a very different animal.
Wolf,
So you mean that next possible down turn may not followed by a negative rate? Since the current rate is already very low, next to zero. I am thinking that the regional Feds may not dictate the Federal Reserve to what to do.
That’s why the Fed has done QE .. because it hit what it calls the “lower bound” and felt like it had to do more stimulus. The “lower bound” = 0%. It calls it the “lower bound” for a reason: because it won’t go lower.
True, now they do QE and worth than than buying MBSs to screw the first time buyers, so frustrating.
Kunal: “…the 10 yr yield is dropping for past 2 days.”
Not sure what Wolf can dig up on international Capital Flows but my bet is some of this drop is due to European (and maybe Canadian) money getting out of Dodge before SHTF events.
Kunal – Not really . The war is just a news headline to displace the attention away from the fed. Money is shuffling around because of the fed, not Russia. And so people like you buy into the narrative that Russia news event is moving markets.
Exactly Doug. Shifting blame away from the Fed (and indirectly, the President) is the current liberal media MO and it will continue. Each market decrease this past week has immediately been accompanied by headlines like “Market decrease from tension in Ukraine.”
The media protection racket at work. They’ll continue to look for other outside reasons as the decline continues. Never the Fed, never the current administration (provided the administration is Democratic.) Always an exogenous factor.
To understand what’s actually going on with Ukraine beyond just the natural gas pipeline income and NATO membership play, you need some Putin and regional history. For that watch:
PBS Frontline: Putin’s Way (2015)
PBS Frontline: Putin’s Revenge Part One (2017)
Both are on-line and are very interesting to watch even if there wasn’t this Ukraine issue going on.
Maybe “so many people like me” consider that events do not need to have just one cause. The possibilities and vectors are many. Multiple ones combine. I hope this isn’t the sort of mass storm that whipped up in the 1930s. A whole bunch of actors and conflicts merged into a global war.
But there is secondary psychological gain in feeling smart and decisive, and talking that way. We are energy conserving beings (lazy), meaning there is always a temptation (payoff) to lurch for a single, simple answer.
phleep-very well-said. the inclination towards binary rather than analogous thinking seems to be amplified, rather than diffused by the massive expansion of modern mass communications…
may we all find a better day.
“One way or the other the party for rich and theft for poor will go on.”
That’s what happens when there is only one party of multi-millionaires in the USA. The War Party Of The Rich. Demopublican and Republicrat thieves on both sides of the “aisle”.
Ain’t “democracy” grand ?
Somebody posted the other day that Ben Bernanke said in 2010: “We could raise rates in 15 minutes if we had to.” If the FED was really concerned about inflation and overheated markets, etc., would they not have had an emergency meeting and raised rates long ago? Of course they would have. These clowns are intentionally causing all of this. When you put an arsonist in charge of of the fire department, this is what you get.
It’s 100% intentional.
The Fraud Reserve’s “tough new ethics rules” against insider trading won’t take effect until May 1.
They’re probably dumping their stonks & creepto right now.
Imagine if the FED was actually owning and trading cryptocurrencies. That would be the most heinous act of a central bank in history – dealing in competing currencies for their own personal financial gain.
By the way, it’s time to start putting this whole crytpo “currency” thing under a magnifying glass, and understanding how competing currencies are even allowed. In the past, if you created your own currency you were arrested and hauled off to jail.
=competing currencies are even allowed=
What currencies ? Craptos ?
From the legal point of view cryptos are ‘scrip’ = ‘substitute for legal tender’ of which one well-known example are casino chips and another are MPC used during VW.
I have beautiful $20 Military Payment Certificate featuring Ute Chief Ouray and hydroelectric dam on the back.
What is wrong with buying platinum casino chips costing $10K each when bitter divorce is on the horizon ?
Bitcoin is not a currency. It has been defined as digital property by the FTC in terms of US regulation so far.
“Bitcoin is not a currency.”
My point is that’s what it was being touted as, and used as – an alternative currency to the US dollar. In the past, you would have been shut down immediately for such thing. Now, we’re back to the wild, wild west of “anything goes.” And to think the FED themselves could have been trading in the competition to the dollar?
The Fed is going to transfer the last dime it can steal from savers to Wall Street before it pivots to saving the dollar, so it thinks. The Fed’s only hope is it causes a recession before it ruins the dollar by inflation. Recession at some point will be a mercy killing. Don’t forget Mrs Magoo, now in treasury, said recessions are a thing of the past. They all need to be hog tied under a locust rail tarred and feathered and slowly walked out of town, in a dust storm.
If Yellen actually said that, she is an even bigger idiot than I thought and that’s saying a lot.
I don’t consider any of these people idiots, I consider them dangerous psychopaths who have no problem whatsoever with lying and stealing while smiling in our faces.
she’s a disgusting pig. i have nothing but contempt for that woman.
In 2017 she actually implied a recession would not happen in our life time DUE to a financial crisis such as we experienced in 2009 because of the corrective actions of the Fed.
Low interest rates were haircuts to creditors. Now, in our new turn of the screw, inflation is a haircut to cash-holders. Debtors are next on the menu. The Fed is switching modes, trying to distribute the pain of the past excesses onto various shoulders one after another without the whole social order melting down. The excesses were already there and the pain is unavoidable. I was puzzling about it, but smart money like Bill Gates was buying real assets in remote places. But he has the infrastructure and finance to pull this off.
But we did on the whole glide reasonably well through this pandemic, all things considered, I agree with Yellen. Compared to what? The avoided worse things, nowadays world war and social meltdown. We survived another weird challenge, but are the worse for it, mostly due to preceding over-amping by the Fed. Further back, I think the 2000-2008 missteps were the biggest ones that put us on a (wealth destroying) historically lower track, the “war on terror” foremost. Poorly engineered financial gimmickry second, always helped by puts and poor regulation from the Fed.
We’re due for a big down day in the markets that will test those who claim to be “buy and hold” investors. If this sell off continues for much longer people will start cutting their losses out of pure fear.
I’m glad to be observing this collapse from the sidelines, ready to jump back in after most have been thoroughly demoralized and spent. As an old fart, I can’t afford to lose 50%+ as prices revert to the mean.
A pal is talking about the tens of thousands vaporizing daily from her account. I’m too shy to ask whether her Maserati might be repo’d. But it was all bubble gains anyway, as of now going back a year or so. It was too much leavened with hype anyway, and that despicable cheap credit.
Is your pal’s first name Cathie by any chance?
No, but this one worships tech, whether flashy cars, tech stocks, or PT Barnum type pied piper “visionary geniuses.”
She got any equity in that Maserati?
A Maserati repo would save her a ton of money. They are garbage on wheels. Check out how fast they depreciate
et al: “Miserati”…
may we all find a better day.
“If this sell off continues for much longer people will start cutting their losses out of pure fear.”
The DOW is still at 34,000 – an impossibly bloated level. The idea that this current “sell off” is anything more than the tiniest of paper cuts is laughable. The DOW needs to sell off to 7,500 – AND THEN STAY THERE FOR 20 YEARS.
No kidding
Japan’s stock market is still almost 30% below the December 29, 1989 peak.
On August 13, 1982, the Dow closed at 776. This was about 24% below the February 9, 1966 high, even with 16 of massive inflation.
1966 wasn’t even close to a mania, not for stocks and not for anything else.
Most world stock markets until recently were below the 2007 peak, 1999 peak, or both. Some still are now, even with decades of actual (as opposed to mostly fake) growth.
Loving the longer analysis of key moments
EWJ is an ETF of Japanese stocks with Toyota the largest holding. It has a P/E Ratio of only 5x — a true value fund.
If you like risk, TUR, an ETF of Turkey stocks, might look like a smart investment one year from now if you are patient.
Watch the look on the face of the middle class if their 401Ks vaporize and they realize they spent their lives sitting in traffic and at a desk working hamster wheels for nothing.
Depth Charge:
+1000
Outwest
The number thrown around in the rumor is mil before Fed steps in to prevent a significant slide is around 3700 (S&P). There will be a lot of jaw boning, to prevent recurrent slides.
it will never go, straight downwards but with a lot bounces (Bear traps) along the way, to pull the retail investors, back into the sliding mkt.
Are crack-up boom charts full of WTFs? Asking for a friend.
According to my spiritual medium Ms. Magic 8 Ball, Mises still says “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
When questioned about whether the second situation was more likely she reported “Signs point to yes”
I do not have Ms Magic, et al to cipher the signs of collapse. I do have the, or a albino squirrel that appears during times of , or before a shit storm. I have mentioned this Delphi Squirell before and it or another one is back. The squirell was cutting a black walnut on a landscaping r.r. crosstie in the backyard on Friday. It seems there is a correlation between them and they are tapped into a common medium . I observed the Delphi Squirrel using my binocular’s to see if there was a secret message hidden in the cutting of the walnut. I event took a hike to the tie later and looked at the cuttings. I believe the pattern was a crude $ sign which I interpret as the message . CASH.
Interpret carefully, squirrels can’t tell one nut from another!
They don’t go near buses, they travel in bulletproof limos. Nice try.
Stock market as an asset is coming down which impacts mainly rich people.
Would the same happen to housing market as well so that homes are affordable to common people ?
Homes going down in price should not impact current home owner but should benefit people who want to buy to live in.
> Stock … asset is coming down which impacts mainly rich people.
I’m told some new online app brokers (who shall remain unnamed) were marketing options and margin accounts to small retail investors. I think it was linked to bank accounts. They are mostly young and hopefully extract a valuable (if costly) lesson. It was “gamified,” with little animations and noise like that. Oh, and the customers got froze out at the very moment they “needed” to make very important trades. Maybe that”s why that broker’s stock is in the tank.
That is funny Phleep and it makes sense to “gamify” investing to the mindset of the younger generation.
However, I wonder which icon is flashed on the screen that communicates “your investment has decreased over 50% in the past two weeks?”
It would be a fun game when markets are going up. Not so much in the other direction.
CITM:
The icon? It’s Linus with his blanket……
Rich are first to sell look at buffets #1 rule
“It was “gamified,” with little animations and noise like that. Oh, and the customers got froze out at the very moment they “needed” to make very important trades. Maybe that”s why that broker’s stock is in the tank.”
Names matter. It was Robinhood you’re talking about, and what’s even more important to note is that Citadel Securities is their market maker. Some big name hedge fund insider got on the wrong side of a trade with the Wallstreetbets crowd from Reddit, and he was facing a margin call he couldn’t cover because of the mother of all short squeezes they had him in. And the Wallstreetbets crowd was screaming “keep buying, slaughter these pigs!” with the stock prices going parabolic.
And so finally when it became clear that this guy’s whole fund was going to fail like Lehman Brothers, Citadel Securities stepped in, under the urging of Ben Bernanke (with Granny Yellen even opining) and the billionaire fraudster Steven Cohen, told Robinhood to shut down all trading in certain meme stocks. Then, the billionaire fraudster Steven Cohen bailed the hedge fund out before it was crushed into oblivion.
This is how the “free market” works, you see.
About Citadel
Dr. Ben S. Bernanke
Senior Advisor
Ben Bernanke pissed on Wallstreetbets and told them it was raining. Ahhh, the sweet power….
Even when the stock market legitimately tanks, I don’t think housing is going to become noticeably more affordable for the “common man” any time soon.
First, I still expect the government to “do something” to try to prevent it. They won’t succeed completely but can slow it down. I still think they will declare another mortgage holiday and add a foreclosure moratorium to GSE loans.
Second, if the bond bull market dating back to 1981 is finally over, monthly payments are likely to increase even with falling prices.
This will change over time, since as this forum states, nothing goes to heck in a straight line. Interest rates have been rising for two years and are due for a retracement even if the bond bull market is finally over. Interest rates are still very low and with a partial retracement (maybe lasting about a year) could actually see higher prices first.
Third, other carrying costs are likely to increase, possibly even property taxes in a falling market as broke local governments squeeze local taxpayers.
Fourth, real estate is unlikely to fall noticeably except in a very weak economy, meaning a lot of prospective home buyers will lose their jobs. Many of them will also be worse off from declines in other markets too.
Housing prices like stock prices are decided at the margins
Its be interesting .
I know there are many housing bulls saying come what may home prices can’t ever drop.
House prices are already falling in some markets, but houses are not liquid assets like stocks. It takes years for the housing markets to move meaningfully. However, the past year+ of insane gains may prove to mean houses can post massive yearly losses, too. I expect houses to be down over 50% in certain markets in 4 or 5 years time.
I guess we’ll find out how many “investors” have bought second and third houses using securities based lending, now won’t we? LOL @ 100% “cash” buyers.
As long as mortgage rates are so far below inflation…..record disparity….CPI 7+%, MBS 30yr still around 4%…..speculators will buy all they can at those rates and homes below replacement cost. IMO.
The Green Street report also said the four biggest single-family rental owners are Invitation Homes Inc., which owned 81,550 such units as of January; Progress Residential LLC, which owned about 75,000; American Homes 4 Rent, which owned 56,100; and Tricon Residential Inc., which owned 27,500.
Consolidation. Taking up any supply slack that might otherwise keep prices lower than here.
Blackstone this week just bought a bunch of more residential properties. What do they know? Are they buying because interest rates are still below the inflation rate. Supposedly it is an inflation play.
You know the people who sold these propyl Blackdtone will take the money and more properties.
——————————
The Blackstone announced on Wednesday that it would spend roughly $6 billion to acquire Preferred Apartment Communities, a real estate investment trust based in Atlanta that owns 44 multifamily communities and about 12,000 housing units in the Southeast, mostly in Atlanta; Nashville; Charlotte, N.C.; and the Florida cities of Jacksonville, Orlando and Tampa. Preferred also owns several retail and office properties.
The proposed acquisition is the latest sign of Blackstone’s ambitions in real estate. The firm’s investments in rental housing are a key way to offset the pressure of inflation
Real estate has become an increasingly critical part of Blackstone’s performance. The firm generated nearly half its earnings in 2021 from real estate in what Mr. Schwarzman said were “the most remarkable results in our history on virtually every metric.”
I would love to know what the SELLERS are seeing that encourages them to SELL those apartment buildings. Are they seeing the top and they want to get out?
@Wolf. I agree. why are they selling? Historicity. The current rise in house prices and rent cannot continue. Good time to take profits. Then buy during the next down cycle.
What does Blackstone see to keep buying?
Maybe they see the 30 trillion in debt and think the Government will need to keep interest rates low and increasing the deficit. More inflation. Maybe they see housing as a low risk investment as most loans are guaranteed so no worries regarding a housing market downturn.
I have no clue. Looking at charts tells me housing is overbought. But if we are on the crisp of high inflation for the next several years… housing still may be an inflation play?
I am not a buyer here but if I own…. I do not know if I would sell. But if the Fed really does raise interest rates aggressively to tame inflation. I think time to sell
Just asking but if just the the cost of lumber has gone up over $18,000 per new home how far down can homes go?
The home prices are not decided the the price of lumber only.
If no buyers left for whatever reason
People and builders would need to eat their losses and sell homes at loss.
They’ll sit on them and not sell.
Better look at your 401k account = it affects everyone
Margin is not always bad…. Shorting SPY (SP500 EFT) and QQQ allows 4X leverage on margin and they are large enough NOT to be squeezed. It is the only way a poor guy and get ahead and you can stay just stay short till the ride is done.
You are right, sometimes moving out on the risk curve makes sense. But it seems most don’t execute this so well.
If this wasn’t the biggest mania ever, shorting the most overpriced US stock market in history would be a relatively low risk proposition. I made some money doing that after both the 2000 peak and during the GFC.
I haven’t taken any meaningful short positions in a long time since, regardless of how stupidly overpriced the market has been for years, it’s just become more stupidly overpriced.
4 x leverage is intraday only. 2x is overnight
I have been trading for two decades and have yet to use my 4x Margin. No way I am that reckless , especially for retail traders Best way now are long term puts at at least .5 delta out to June. I buy the time and have my downside targets in place
Schadenfreude: pleasure had at the misfortunes of others.
I’m lovin’ it. Arrogant smirks and remarks are being wiped clean. The Wile E. Coyote off-the-cliff cartoon springs to mind. Hubris and nemesis. Timeless cosmic laws, so graphically displayed.
Funny how quiet some of those high-handed tout voices are now, eh? The condescending and cutting comments are still back there, on the record. Old fools, ya just don’t get it, right? Hockey sticks aim downward, too. What’s the opposite of “to the moon”?
To the basement?
To the bunkers? Wealth has been sunk into having a personalised palatial air raid shelter – a basement bunker – elaborate in its advanced technology for offgrid electricity generation lasting a few years to ride out civil unrest or pandemic and capacity to grow hydroponic foods. Cinemas gyms and lighting to simulate sun – I mean – because money buys technology and technology drives the future – not technology designed to assist. Some want robots instead of humans. What does this say about a person when they wish to rid the Earth of human diversity?
They will sit in their involuted little fantasies, jabbing buttons and being ridiculous. It is quasi-religion. Scientism. It does not (yet) provide answers to their all-too-pedestrian human longings. And it is, consolingly for me, funny to watch.
Are you blocking a major international highway and trade crossing? Then don’t worry.
They should have just stuck with the burning and looting.
Maybe set up a CHAZ autonomous zone.
Not helpful. I have bitter feelings towards the Fed, but please don’t even joke about violence.
The FED is violent. They have killed countless people through impoverishment.
You’re right, violence is never the solution. The founders should have pleaded with the King instead.
They actually did.
2banana – seriously you’re going to go with that? eventually they had enough. way to intentionally miss the point.
On October 25, 1774, the First Continental Congress sends a respectful petition to King George III to inform his majesty that if it had not been for the acts of oppression forced upon the colonies by the British Parliament, the American people would be standing behind British rule.
You can compare or contrast to Modern Day Canada.
“seriously you’re going to go with that? eventually they had enough. way to intentionally miss the point.”
If one wants to discount the future deeply enough, smoking crack might make him the most incandescent guy at the bar.
Going to heck in a straight line.
Note that it is not bank account confiscation as such, they are just being frozen, presumably to be released again eventually.
I’d enjoy watchig that.
Leverage dropping = deleveraging = the big boys are getting out
Is it historically true? Have there been confirmation examples of deleveraging meaning exactly the fat sharks leaving the equities?
Genuinely curious, not trying to argue here.
Microsoft unloaded a heap of their stock in November last year. It helps to have insiders to tell you what to do and when to do it. I don’t believe in coincidences.
Well, we can only speculate, but logic dictates that if joes like us can see a downturn ahead, people who are in the know can see the same much more clearly as it their wealth at stake. It’s reasonable to assume that they are de-risking, ie lowering their leverage exposure, right now in order to protect their gains.
Like the Beatles tune ,Big boys say good bye, Dumb money says hello.
Margin debt will bounce back and be much, much higher, than we had just a month ago. And it will probably continue for the next 2 yrs, based on my guesstimate of where the yields will be.
Based on Figure 2 on page 3 here,
I’m not expecting a major stock market downturn (i.e. -30-50%), as the margin debt as a percentage of the Wilshire 5000 is still fairly low. We still have nothing like we did in 2007 or 1999 or even most of the 2010s.
But, I guess it’s anybody’s guess.
Casino bosses gotta keep rubes comin’ in the door.
Sometimes you get a casino boss who turns out to be the rube. One in particular comes to mind. Bankruptcy 4 times. Is a fifth on the horizon?
The big boys make money in both directions.
You can only get them if they are caught by surprise.
That is not now.
The only unknown here is Fed action (or inaction), at this point in time, isn’t it?
I feel like that’s all the markets are hinging on right now.
The FED to its member banks and friends:
“Blue Horseshoe loves………(name your tune)……”
Wolf thanks for the invitation to review key moments. Listing in this way allows reflection. Creates a space to see.
Dot com 2000 era – looks like real estate purchased in Aug 1999 timed a bit too early. Should have waited one year more it seems.
Had extrordinary experience of analysing Sept to Dec 2008 period from an MBA classroom with 46 comrades from all over the world sharing thoughts and analysis. One week remains in my memory. All classes and modules were cancelled. We sat in classroom with all tutors dipping in and out throughout the day and the game was to guess which bank wouk drop next. Tutors were scratching their heads applying frameworks and models to predict. Talk about a masterclass. Having this reflection space to share and debate with people not in and of the western debt casino mindset was fascinating. How to explain to Burma student implications of what we were watching. Japanese student was our tutor one morning that week – turned up with analysis from an all nighter. Fascinating conversations. Views of western model and the values that lay beneath. A true carvery and re-evaluation on my part of what it was to be born in UK. Some of it hard to swallow. Humbling. Computer automated share purchasing coming into its own with all the weakness of system laid bare
People are also borrowing against their crypto. Bitcoin “guru” Mark Moss just bought a ranch for 2m in Texas, sight unseen by doing exactly this. I can’t imagine he is the only one.
Also, I would like some analysis on these cryptos where you can lend and get paid absurd rates. Seems like a scam. I looked up borrowing rates on crypto and the rates are all over the place. Just a hive of scum and villainy.
I just came across a crypto site that will pay you 13% interest on your stablecoins. They also. charge you -2% to borrow against your own coins. that is right. they will pay you 2% to borrower. so deposit your cryptos. Buy stable coins. Get 13% and then borrow against your coins for a total of 15% yield. At the end of the day you still have the same amount of cryptos in your ewallet.
Are they controlled by a smart contract whose execution guarantees return of either the coins or collateral, or are they instead handed off to an exchange that simply issues a promise of the given rate?
Stuff like this is often financed by inflating the amount of coins that are circulating
Heard there was a cave-in @ a bitcoin mining operation and 427 investors are trapped.
“Stuff like this is often financed by inflating the amount of coins that are circulating”
Wait a minute… that sounds oddly familiar……….
Only a person steeped in finance could mistake Fed skulduggery for the foundation of human civilization. How inane.
On a percentage of market cap basis the charts don’t look so scary
Dave,
READ THE ARTICLE.
That’s circulatory nonsense. As I said in the article, the surge in margin debt in 2021 and 2020 helped push up market cap (“margin debt is the great accelerator on the way up”), and now you want to say that this huge amount of margin debt isn’t a problem because it pushed up market cap?
It’s the other way around: margin debt is a problem BECAUSE it pushed up market cap. And now market cap is coming down, and brutally hard among the high-fliers. That’s how leverage works. Look at the historic relationship between margin debt drops and sell-offs.
There is nothing benign about this amount of leverage in the stock market!!
If the smart money is looking for companies that are still making money, that target is going to get a lot tinier. When everyone’s sphincter closes at the same time. You can’t buy shi*
When buying on margin to go long you are leveraging companies that already have a lot of leverage. Can make for a lot of risk.
Been running conservative portfolio for six years and under performing market. But this year so far I am up a few percentage points while market is down. Pretty happy about that as it seems high flying gamblers may get smacked down this year.
Yes, I think most people don’t fully appreciate the many layers of leverage in the system, stacked on top of one another:
1) Margin debt to buy stock of companies that
2) are themselves highly leveraged, while
3) their profit margins are artificially high, caused by
4) massive government deficits, that are enabled by
5) ridiculously loose central bank policies, which also supported
6) ridiculously high P/E multiples expansion and
7) stock buybacks that together with “stimulus”
8) masks that the secular growth trend is actually not as good as it looks…
etc etc etc
Not all of this is “leverage” in a literal way, but it does work in creating a self enforcing multiplier.
That is a fascinating point of view. Thanks for sharing…
Please show margin debt as a percentage of underlying market cap.
No because that’s circulatory nonsense. As I said in the article, the surge in margin debt in 2021 and 2020 helped push up market cap (“margin debt is the great accelerator on the way up”), and now you want to say that this huge amount of margin debt isn’t a problem because it pushed up market cap?
It’s the other way around: margin debt is a problem BECAUSE it pushed up market cap. And now market cap is coming down, and brutally hard among the high-fliers. That’s how leverage works. Look at the historic relationship between margin debt drops and sell-offs.
There is nothing benign about this amount of leverage in the stock market!!
QQQ : yesterday higher low 0.886 and reactions to a lower low might form a cont triangle.
Bull markets ultimately end; A yield rally will be very painful for bondholders.
b
1) Donbass in packed buses children and women evacuation.
2) Noah ARK Mont TRMB reaction to 0.618.
3) TY US10Y (price) might test the highs.
4) JP is happy. The Fed might throw a 0.25 – 0.5 to the Wimmer to keep
them whining.
5) A new type of pandemic might be born. It’s contagious, spread like CA fires, an old assassin.
That last chart… just imagine we would retreat in the coming months towards the March 2020 level (which is still about on the long term trend)!
But even without the margin debt: what would happen if the older generation (who own most stocks) decide that they should really cash out now. Valuations are historically very high and with less years left to live than the younger generation, and with Fed largesse likely to get scaled back, it wouldn’t be worth to take the risk to stay in stocks at this point.
The problem then is: who is going to buy? The younger generation doesn’t have the money. After they pay off their $80k student debt, aren’t they more likely to want to buy a house first (which they can’t afford either)?
Precisely. That’s why the Fed has to step in and act as buyer of last resort…
who is likely to buy? Private equity, Blackrock, Vanguard, State Street etc. perhaps?
The ultimate buyers are individuals, not intermediaries.
Blackrock Vanguard same thing
I almost understood you, which is frightening as compared to the usual gibberish put forth.
Hmmm applying a little bit of math to this… if the Margin Debt dropped 8.8% in January and the S&P 500 dropped 5.6% that same month then the sensitivity of the markets to Margin Calls is 60%… or 40%?
Lots of caveats of course… starting with the sensitivity will be more with such an elevated amount of margin at play.
Have got in my change a couple FRNs where ‘In God we trust’ is crossed out and replaced with
“In Fraud we trust,” and “Federal” in Federal reserve note” is replaced with “Fraud.”
What freaks me out is the number of dimes and quarters I’m seeing in the “take a penny, leave a penny bowl’ on our local bakery check out counter.
When paper money is in there, the Bidenpression will be here for sure, if the bakery is still open.
Last depression we had Hoovervilles. We’ve already got tent cities that make those look luxurious by comparison, and this depression hasn’t even gotten started in earnest.
DC…
Someone said..
“People will finally realize why their grandmothers washed their tin foil and saved their bacon grease.”
I Hope they’re wrong.
Lars sandwich
This kind of gloom and doom is not typical of a market top. We are most likely in the midst of a correction that is an Elliott Wave 4 (down wave) in this bull market. Yes, things look terrible for the moment, and the wave might not be over. But I doubt we’ve reached the end of the bull market… probably at least 1-2 years away. There will be few bears left by then and all the talk will be about how great our economy is and things have never looked better.
I’ll take the other side of that bet.
Tony
They don’t ring a bell a the top.
Stocks are STILL a crowded trade, since the Fed has run its cattle drive and forced investors to take more risk.
The Fed will crush the economy BY NOT ADDRESSING INFLATION…
businesses will go out of business, and the middle class will be wiped out.
Inflation IS A RACE TO THE BOTTOM…and we have a Fed that promotes it.
Shame on Sherrod Brown and the Senate Banking Committee that allegedly oversees the Fed.
Historicus—
I absolutely agree. I just am not sure of the timing of the stock market and/or real estate collapse. As an example, the Venezuelan stock market hit all-time highs as inflation roared. Obviously it was all an illusion, as their currency has become increasingly worthless. The same could happen here. The stock market may not be done going up.
The meme thing was like the hippies: a fad that, in the end, had no new or deep solutions. Like flappers and stock-trading shoe shine guys: ephemeral as the mayflies. I can’t begrudge them. Enjoy youth, it flies.
I just saw some info from a local real estate agent in the south bay (los angeles) near the ocean. It shows that the number of new listings is at a 30 year low – historically low numbers. So of course prices remain sky-high.
So why is this? Because everyone believes that home prices will continue to appreciate and they are not selling. This is a self-fulfilling belief, until it reverses.
Demand has probably not yet taken a big hit, as the initial stage of an increase in real estate actually causes buyers to try to buy a home before interest rates increase further. Of course, this is a naive buyer. With higher interest rates more and more people get priced out of the market, so the only buyers left are the cash buyers who think of real estate as an investment. They are just buying to acquire exposure to the real estate. Which might make sense in a supply constrained environment, but once supply re-adjusts upward and you have limited demand – big problems. Prices plunge.
So when do people decide to sell their home? Summer will always have a big increase in supply. But I think the real time supply will get unlocked is once the price appreciation stops and these “investors” realize that exposure to real estate in a market where incomes are not keeping up with inflation and interest rates have skyrocketed, is just dumb.
Prices will also be a result of supply and demand, so prices wont fall right away, it will take time. Inventories need to build. But once prices start to fall, alot of people holding onto real estate will want to sell – at the same time and that will tip the supply demand equation in favor of the buyers and away from the sellers.
My prediction is that mortgage rates rise to 5% by May and inventories begin to build from April on, by October of this year, price cuts will be the norm and by summer next year, the whole bubble in housing prices of the past year will be unwound. But it wont stop there, housing prices will continue to fall for another 2 years after that and will end up in certain areas at a 50% decline from today’s prices.
Real estate takes time to adjust. The current environment is set up for stagflation, which is the worse possible combination of higher interest rates and poor economic growth for the majority of people. But investors who have dollar signs in their heads are looking at the past year of price appreciation and projecting that into the future. Noone every sees the very top of the bubble.
get the RE agent drawer secret list. Plenty offering under his desk.
i agree with all of this, i just think the time frame is going to be quicker than you think. i don’t think it’ll take anywhere near a year and a half.
Has something changed to make real estate prices substantially less sticky on the way down than they were in 2006-2012?
Two things have changed, one good and one bad. The good is that there are not all the sub-prime mortgages, so there will be less foreclosures than in the 2008-2010 collapse. But on the downside, the Fed will not be able to cut interest rates to soften the fall. I think that will result in a slower, but longer top to trough.
“So why is this?”
First, who wants to sell the largest hard asset they own in an inflation….and then put the money in a bank where it loses 7.5%?
Also, you sell your house then try to close on a new one and get into a bidding war with someone or some business looking to put money to work, ie borrow at 4% below inflation to buy a house selling under replacement value/
Historicus – That is the investor psychology that is gripping the market right now. The amount a family can afford to pay for a house is built on the monthly payment, monthly payment is built on price and interest rate. You just cant get around those facts. So the only way this does not unwind is if interest rates do not move much higher. If I am wrong about interest rates, then sure, maybe the prices are sticky.
Inflation in goods and services means Americans have less to spend on a home, not more.
The idea that real estate performs well in an inflationary environment only holds up if interest rates dont move substantially higher. Prices were build on the lowest interest rates in history.
Good point histoicus.
I was talking to a real estate agent friend about housing. He owned 3 rental houses leading into the HB1. All his tenants lost their jobs. He panicked and sold the houses at their lows in 2009 and 2010.
LOL. He said he would not make that mistake again.
Old with ceramic plates. No Armata T 14, it’s all media info game.
“It’s hard to make predictions. Especially about the future.”
— Yogi Berra
Investment banks (were) short this market, and the drop in margin debt is the shorts covering. Going into a possible Euro-war the banks don’t want to be short US assets. Soros closed his position in QQQ in December, and the OTC is very oversold. Wall St is cheering for Putin, because it means no rate hikes in March? If Putin invades the dollar goes to the moon, and all that LNG we sell them is at a premium. US comes out on top any way you slice it.
“Wall St is cheering for Putin, because it means no rate hikes in March?”
Inflation gets worse if he invades.
Who does the Fed serve? The markets? Or do they stand to their mandates?
Silly questions.
Blackstone this week just bought a bunch of more residential properties. What do they know? Are they buying because interest rates are still below the inflation rate. Supposedly it is an inflation play.
You know the people who sold these propyl Blackdtone will take the money and more properties.
——————————
The Blackstone announced on Wednesday that it would spend roughly $6 billion to acquire Preferred Apartment Communities, a real estate investment trust based in Atlanta that owns 44 multifamily communities and about 12,000 housing units in the Southeast, mostly in Atlanta; Nashville; Charlotte, N.C.; and the Florida cities of Jacksonville, Orlando and Tampa. Preferred also owns several retail and office properties.
The proposed acquisition is the latest sign of Blackstone’s ambitions in real estate. The firm’s investments in rental housing are a key way to offset the pressure of inflation
Real estate has become an increasingly critical part of Blackstone’s performance. The firm generated nearly half its earnings in 2021 from real estate in what Mr. Schwarzman said were “the most remarkable results in our history on virtually every metric.”
Someone is SELLING these apartment buildings to Blackstone!!! What do THEY know? Trying to get out at the peak?
Exactly.
Its not always about perception of a change in business climate though. Some developers build to sell. When the project is completed they move on.
I don’t know diddly about the particular deals here so I couldn’t say.
The companies that buy to rent are looking for immediate returns. You buy and start collecting an income stream. Blackstone is doing this.
Build to sell locks up your money until the project is completed and sold. Your investment is used to build the project. My guess is that some of the sellers never intended to own these developments long term.
Blackstone and Larry Fink (CEO) have a lot of Chinese connections. Maybe this is a back door way for Chinese investors to diversify in US Real Estate without sending up too many red flags.
And the most remarkable mortgage rates in history courtesy of the Fed.
The firm that “assisted” Powell in 2020 March seems to have benefited greatly from a remarkable entry into mortgage rate managment by the Fed.
The Fed now owns 24% of all residential mortgages….in 2006 held none.
40,000 Million a month (40 billion) of lending by the Fed to the mortgage markets!! Why?
This RE bubble is completely different from RE bubble which popped around 2008-09
Back then the whole world financed it by buying US MBS sliced into tranches and REITs.Later on numerous pension funds in faraway countries suffered huge losses and got smarter.
Now US RE is pulling itself up by the bootstraps.
In March 2020 Fed lowered bank reserve requirements to ZERO.
Commercial bank writes $1M mortgage on 4’×4′ windowless tool shed then dumps it like hot potato.Fed puts this hot potato on its balance and gives the bank UST backed by the Full Faith and Credit of the US Govt.
As a result:
1.$1M of new money starts circulating in the economy.New money created by the commercial banks (about 95%) are no different from money created by the Fed (monetary base-about 5%)
2.Banks are fully capitalized and protected from mortgage defaults.
3.Skyrocketing RE leads to skyrocketing property tax collections and fixes budget holes in profligate states like CA,IL & NY
What could possibly go wrong O Ye of Little Faith ???
The Fed has been buying MBS since 2008.
Black stone is buying property because that’s what smart money does= create a return,excellent tax benefit, until the riots come and it’s all burned to the ground ,history repeats
I was using a bit of margin, 10 thousand, then Ameritrade wanted it back, they did me a huge favor. Didn’t profit on the trade but cut my losses substantially.
Relying on price signals from the markets.
“Everything is getting better and better look at the stock market” the 1920’s believer in free markets
Oh dear.
In the 1930s, they were wondering what had gone wrong with their free market beliefs and worked out what had happened.
What had inflated the stock market to such ridiculous levels in 1929?
1) Share buybacks
2) The use of bank credit for margin lending.
The US stock market is doing really well with share buybacks and margin lending driving prices ever higher.
A former US congressman has been looking at the data.
He is a bit worried, hardly surprising really.
Unfortunately, we never learnt a thing from past mistakes.
Auto loan margin accounts might have a stabilising effect.