Hidden in the IMF’s Global Financial Stability Report is a doozie of a chart. “Seek cover, implosion in sight,” it screams. It depicts the bubble in covenant-lite and second-lien loans, the same that helped blow up the banks in 2008. Only this time, they’re even worse.
Margin debt is a crummy predictor of a crash. But it has a bone-chilling habit of peaking right around the time stocks do crash. In the last fifteen years, it spiked three times: during the final throes of the bubbles that imploded in 2000 and 2007; and now.
“Our new normal is not the only new normal possible.”
When BlackRock CEO Larry Fink grumbled about “way too much optimism” in the markets, he wasn’t kidding. An entire mindset is benchmarking today’s record metrics against the splendor of 2000 and 2007: not to warn, but to prove that this time it won’t end in tears.
The stock market has soared for five years, risks have ballooned, home prices have jumped. Gains built on the quicksand of endless liquidity and a lackluster economy. “Irrational exuberance” is back in the Fed’s vocabulary. As the Fed’s Fisher said, it may end “in tears.”
“Paranormal liquidity stimulus” leads to “paranormal activity” to deliver that “parabolic overshoot” in asset prices. And there is no bubble in sight, not even in the Nasdaq Biotech index, which is up a cool 375%. Money is once again growing on trees.
Small investors are having fun in the stock market again, after years of sitting out the most phenomenal rally. They’re leveraging up their portfolios. Margin debt is spiking beautifully. Alas, spiking margin debt has a nasty habit of ending in a crash. In one painful chart.
National averages paper over gritty details on the ground and are a crummy indicator as to what is happening in specific metro areas. But even with this caveat, a national average suddenly sounded an alarm for the housing market: the smart money is bailing out.
Teachers are a symbol of the middle class. In California, they earn on average $69,300 annually, fifth highest in the country. Not exactly a pittance. But it is a ludicrous pittance if they’re trying to buy a home.
Since the introduction of QE 3, honest-looking Fed chairman Bernanke told the Wall-Street media circus after each FOMC meeting that the money-printing binge in the coming month would expand the Fed’s balance sheet by $85 billion. A fact cited worldwide. And a big lie.