Margin Debt Soars To 2008 Levels As Everyone Is "All In", Levered, And Selling Vol

Tyler Durden's picture

There were some readers who took offense at our "bloodbath" recap of yesterday's market action (modestly different from that provided by MarketWatch). And, all else equal, a modest 28 step drop in the E-Mini/SPX would hardly be earthshattering. However, all else was not equal, and based on peripheral facts, the reason for our qualifier is that as of last week virtually nobody was prepared for a move as violent and sharp as the one experienced in the last minutes of trading yesterday. In such a context a "mere" 1.5% drop in the futures market has a far more pronounced impact on participants than a 10% or even 5% drop would have had, had traders been positioned appropriately. They weren't. So what was the context? Let's find out.

First as the NYSE just reported margin debt just soared to a near five year high, with Margin Debt at a whopping $327 billion, surpassing the highest print since the Lehman collapse, and the highest level since February 2008. Not only is everyone all in based on , but they are all in on nearly record amounts of leverage.

As noted previously this happened just as the net long positioning of specs soared to an all time high.

In short - the "sidelines" speculator money is already all in, and is using gobs of leverage.

Second, when it comes to high beta, or traditionally the most volatile stocks, those that serves as either leaders or laggards in the market in its year end phases, we take a look at the Russell 2000 Mini speculative exposure as shown by the CFTC's weekly Commitment of Traders update. The chart below needs no explanation: the net non-commercial spec longs in the Russell 2000 have never been more bullish. If the market, which is priced to absolute levered perfection disappoints, the high beta exposure will be annihilated.

Third, and last, for all those who have had a sinking feeling ever since June that something was even more broken with the equity market, more so than usual, we have just one chart to prove all of them right. As this chart of net non-commercial CoT VIX exposure shows, starting in June and continuing ever since, the net exposure in VIX futures has gone down in what is virtually a straight line.

But what changed in June? Well, as some may recall, something very substantial - the head of the Fed's Markets Group, i.e., its trading desk, got a new head: one who has been rumored to have a different PPT style to his predecessor Brian Sack - a style that involves the relentless selling of VIX to take advantage of a market which is drowning in reflexivity, and in which the movement of the vol surface has a far greater impact on the underlying asset than any fundamentals or news flow: want to send the market higher (and have an infinite balance sheet at JV partner Citadel courtesy of your backstop, then just sell, sell, sell VIX).

At least we can now scrap the "rumored" part.

* * *

So to all those who are confused why a 1.5% drop in the market constitutes a bloodbath, now you know: with no hedges on, with massive margin exposure on, and with everyone all in, the last thing the market can sustain is selling, any selling, or else the dreaded margin calls start coming in and PMs have to satisfy margin insufficiency with more selling, setting of an avalanche of even more selling, which ends where, nobody knows. In fact one can argue that in this context a modest 1.5% drop may have a greater impact on sentiment and positioning than a whopping 10% drop did as recently as 2008 when everyone was more or less positioned to expect precisely such a thing. Because if one is 99% levered, a 1.5% move lower just wiped out all equity.

But hey: a few more percent and one can be certain that Wall Street's unofficial branch of government, the Fed, will get a solemn request by such representatives of "the people" as Chuck Schumer to "get to printwork" as soon as possible...

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ZerOhead's picture

Selling VIX = sticking finger in dike

I can just smell the desperation...

RockyRacoon's picture

That's not dyke you're smelling!, I mean dike.  Heh, heh.

And as far as the article ...

I still say it's hooey!  Ha!  1.5% of nothing is still nothing.  VIX, shmix.  I don't care how levered or anything else the participants are.  Call me hard-headed -- go ahead.  Well.  Go on.  Dare ya.

Tell me what's going to happen Monday morning.  I've got my own rear-view mirror thank you very much.

Oh, wait, never mind.  I don't have a dime in the so-called "markets" anyhow.   Carry on.

MrButtoMcFarty's picture

FNA Rocky!


The only consequence that matters is how far down the margin calls depress PM spots.

Love any opportunity to stack at discount.




RockyRacoon's picture

I hope they're margined up to their eyeballs, and then some.  Take gold down, and my truck has a reverse in it.


Just goes to prove that gold is a store of wealth -- when needed it's there to get your ass outta hock.


I'll second that BITCHEZ sentiment.


Orly's picture

I saw the charts on Friday but I was confused as to what they were saying.  Regarding the FX US/EUR Swaps, does it mean that the Fed has stopped swaps with the Euro?  It seems the line drops to near zero as it moves into year-end.

This may be why the European banks have tapped into the ECB window in December.  Is this a year-end "balance the books" thing or does it continue flat after the New Year?

Without the Swaps available to churn the Euro in the overnight, does this mean the Euro is on its own and may suddenly find its true market price?

Inquiring minds want to know...


stocktivity's picture

I can smell QE4 coming soon with Bennie buying stocks.

Jayda1850's picture

More than likely already is, what do you think "other assets" are on the balance sheet. Along with foreign soveveriegn bonds and whatever other markets around the globe needing artificial stimulation.

Orly's picture

Why Greek and Spanish Government debt, of course.

Max in St Moritz's picture



Speaking of Qe, what's going to be the catalyst that sends gold firmly over 2k?

We have infinite Qe. We had the entire financial system in America on the verge of implosion.  The stock of money (in the form of Fed reserves) has grown from 10B to 1.4T and rising.  The death rattle of the Euro was/is loud and clear.  The US lost its AAA rating.  Our debts and deficits have never been worse.  The fiscal cliff is 3 days away.  Every central bank on Earth is debasing their respective currency. 

.... and yet gold can't even stay above $1700, and silver is on a downward spiral towards $20 (*LOL*)

So, in the mind of gold-burying doomer goons, just what exactly will be the event that vindicates all your carnival barking?

Tyler Durden's picture

Funny how quickly people forget and/or prefer to just play dumb. From precisely a year ago: Gold And Silver Plunge As EUR Reaches 15 Month Lows

What drove it? Same thing that always drives year end precious metal liquidation: fulfilling margin calls (ironically in the context of a post saying margin debt is now at all time high) in other assets by dumping winners.

And yet there are those who will continue to troll and prefer to appear stupid instead of pulling up a simple price chart.

Max in St Moritz's picture



Tyler, are you suggesting that as soon as "the year-end precious metal liquidation" is over (Jan 1st), gold and silver will continue their parabolic rise?

By the way Tyler, as much as you loathe me, I do actually have enormous respect for you.  I just happen to think that this forum is more lively and enjoyable with conflicting opinions - that's all.  No disrespect intended.


akak's picture

An honest 'conflicting opinion', to BE an actual opinion, must have a logical and factual basis behind it.  Otherwise, it will be seen as merely being contrary for contraryism's sake, if not actual trolling.


PS: I fail to see the parabola in the long-term price chart of gold and silver.  Now, if you REALLY want to see a parabola, check out the chart of US federal debt.

TheFourthStooge-ing's picture

akak said:

I fail to see the parabola in the long-term price chart of gold and silver.

Those parabolic trends can only be seen by visitors to the Eastern Island Surreality Abusement Park, home to rides like the AnAnonymous Tilt-A-Whirl® Insanitation Moebius Loop and the Ben Franklin Time-Traveling Flying Rickshaw.

akak's picture

My favorite one is the Hall of Citizenism Mirrors, in which all of one's own faults (and the faults of one's society) are reflected onto an American flag.

Then, of course, there is the ever-popular Blobbing(-Up) for (Road) Apples.

TheFourthStooge-ing's picture

In Chinese citizenism, road apples and dingleberries are the low-hanging roadside fruit.

Deacon Frost's picture

Try offering a set of evidentiary facts laid out in a cohesive manner, like Tyler, instead of offering your devils advocacy.  

realtick's picture

Here's a simple price chart:

Fed Funds Rate & The Dow Jones Industrial Average

MeelionDollerBogus's picture

A good post but the sense of scale is lost. The DOW truly needs over such a long time to be rendered in log-scale, especially to correspond usefully, visually, to % rates from the Fed. Just sayin'. +1 anyhow

Threethreethree's picture

Margin calls, yes.

Deflationary period coming soon.

Courtesy of the fiscal cliff.

Economy down.

Jobs down.

Gold down.

Market down.

Housing down.

Everything down.

The Right Wing will be blamed.

Then, when the world appears to be ending, and the financial system is in ruins....

They will save us.


Orly's picture

The yield on the 10 year US Treasury note goes to 1% and headed lower.

All risk assets are going to get monkey-hammered, precious metals included.  Except yours, of course.  You should continue to buy as much gold and silver as you can hold.

See you in the Big Top!

akak's picture

Orly, you just described one possible short-to-medium-term scenario.  However, the long-term scenario is still RIP for the US dollar, and you know it.

Orly's picture

Sorry, that's just not correct.  I have said many times and offered much proof as to why the USD will not fail.  The main one being that it is the dollar that is going to prop up every other asset in the world, especially the Euro.

Ask me why the Euro has to be so highly over-valued and I'll say that I have no idea.  But if the Fed would stop its "Other Assets" purchases (Greek and Spanish government bonds, just as Dr. Bernanke laid out in his famous speech as one of the final tools available to the Fed...), the USD would rocket to the moon.

Please don't forget that all 4X transactions are relative.  As long as there is a global economy, there will be a US Dollar.  And as long as there is a US Dollar, it will be the strongest currency in the world.  RIP for the dollar simply makes no reasonable sense whatsoever, though I do understand your sentiment.  None of this is good but ours will be way "less bad" than everyone else's.  Therefore, it follows that the US Dollar will not only survive but remain the go-to, world-reserve currency for many, many decades to come.

You should check out Marc Chandler's (of Marc to Market, posted on ZeroHedge...) book Making Sense of the Dollar so that you can better understand the mechanics of it.  If the US Dollar dies, then what will replace it?  The Euro?  The ECB has gone out of its way to discourage that kind of thinking.  Plus, without Great Britain in the Euro, there is no way that would happen and the British are in no mood to convert now.  The renmimbi?  Nowhere near enough of them.  Yen?  No way.  Maybe the Brasilisan real?  Etc, etc, etc.

I hear what you're saying: shadow money can be really, really bad.  But when you think about it, the idea of the demise of the US Dollar gets further from reality every day.


fonzannoon's picture

Then print some of those precious dollars and send them our way. I will STFU I promise. (500k should do it).

Orly's picture

Half a mill, fonz?  C'mon.  It's Christmas!


TheFourthStooge-ing's picture


As long as there is a global economy, there will be a US Dollar.

So in the long term, the dollar is doomed.

Orly's picture

Of course.

It follows.

<rolls eyes and sighs>

RockyRacoon's picture

You admit that you don't know why the Euro is doing its thing.  So, how can it follow that you know why other currencies are doing their hideous things?  You can't feign to be certain about one thing when other things impinge upon its reliability.  Too many holes in your argument(s).  Denial is a necessary aspect of maintaining sanity in an insane environment.  It lends certainty (a sane facade) to what is obviously a lie.

akak's picture

Orly, you historically ignorant slut.

By your specious logic and nonsensical argument, the British pound must still be the world's reserve currency.  No, scratch that --- it is the denarius of the never-fallen Roman Empire.

If and when the world returns to sound money, the very concept of a "reserve currency" is made moot --- one's OWN money (i.e., gold and/or silver) can and would function as one's own monetary reserves.  Or do you envision a permanent and indefinite continuation of the financial and monetary repression and corruption of today?  Need I point out that that which is unsustainable will not be sustained?

Really, your desperately pro-status-quo argument is utterly laughable.

Orly's picture

"When you got nothing, call names."


disabledvet's picture

and there i was basing my "am i pro dollar or not?" argument...and then refuting it... on a "so called economic recovery." silly me...i still stand by my phrase "the first to debauch wins." that would be the good 'ol USA. Japan and Europe are only "getting in the game" as i speak. We got THREE years on ya' you so called rich people! Let's lets see Pepsi try and sell a soda for hundred bucks! I dare ya! I DOUBLE DOG DARE YA!

BooMushroom's picture

In 1945, a six pack of 12 oz bottles of Pepsi was 23¢.

I'm sure there was an asshole just like you saying they could never sell a single bottle for a dollar.

He was wrong too.

akak's picture

And how's life in your 2000+ year-old Roman Empire going for you, Orly? 

Because of course Rome, like your US dollar, is "eternal", right?

Your lack of any sort of historical perspective is both laughable and to be pitied, but merely reflective of the typically insular and proudly ignorant average American citizen.

Go hug your paper all the way to the bottom.  He who laughs last, laughs best (even in a world of hyperinflation).

schadenfreude's picture

Your argument is about timing akak. As long as there is no reserve currency available, Dollar is king. EUR and RMB will devalue with the Dollar to maintain their exports. So Orly is right. Brithish Pound got replaced by USD after a World War if you are looking for a catalyst to the fall of the American Empire. Although I can't see a World War rising actually. Time will tell, but at least in a medium time frame I support Orly's position.

akak's picture

I still would claim that Orly is an intellectual captive to a rotten and transient status-quo, in that he/she assumes that there MUST be a reserve (fiat) currency in the first place.  Actually, that is a modern phenomenon, and largely an (unfortunate) result of the 20th century abandonment of sound money. 

When gold and silver were the basis of the world's monetary system, it was gold and silver themselves that were the "reserve currency" --- to the extent that anyone even thought in such terms.

I suspect that like so many today who are beholden to, and who profit by, the current if unsustainable financial and monetary paradigms, Orly feels threatened by any discussion of the manifestly corrupt and unsustainable nature of those paradigms, and can only fall back on arguments from authority in his/her insecurity when his/her assumptions are logically confronted.


Orly's picture


Maybe just a thoughtful realist and not a vulgar, hyper-reactionary "Mad Max" gold-bug.


akak's picture

Maybe .... but the strawman-building, ad hominem-flinging, pro-Establishment, pro-status-quo, historically ignorant paperbug seems to be getting in that person's way.

DeadFred's picture

Still one has wonder why Brazil needs to but oil from Nigeria using the USD

RockyRacoon's picture

Ask the Iraqis.  They have your answer.

schadenfreude's picture

So what's a realistic scenario then?

MrButtoMcFarty's picture

Don't know if I'll be round to see it ....but I suspect it will be a currency backed by a basket of commodities.

Gold, silver, oil, water, wheat, corn, soy, meat?? Got beef??

But it won't happen until lots more folks pay with their labors and their lives.

Does anyone really doubt the willingness and capacity to KILLEMALL that backs the USD any more?

We are Jack's psychopathic nation state.

LongBalls's picture

You are clearly living in lala land my friend. There may not be an end to the U.S. Dollar but there will be an end to it's world reserve currency status. We are in a debt based economy yes? The Gov/Fed ponzi needs to either issue more currency through bonds or QE to pay back the interest on the existing debt yes? Let's not even get into the fractional reserve lending standard (counterfeiting) of the member banks. So either the debt expands or it is inflated away to service the debt, yes? With Russia, China, Brazil, and countless other countries using their own currencies as settlements in trade and the Fed buying up bonds because the rest of the world has started to realize the value of the return what else do you need? Do you need proof that Central Banks around the world are buying gold up in mass? Do you need proof that the BIS and IMF hold gold in the asset column of their balanace sheets? Do you proof that there is no reason to trust the foreign currency reserves on a banks balance sheet when those reserves are continuously devalued? Do you need proof that the BIS via BASEL III is mandating banks boost collateral to lend against at the same time those reserves are being devalued AGGRESSIVELY? Do you need proof that the EU just solicited Russia to become a part of it's union? After all, Russia is a main supplier of oil and natural gas to the EU's strongest countries.

Wake up. You are going to get crushed. The Dollars life is a long one. But remember, a currencies value is only in the amount of stuff it will purchase. Gold is the only defense. The banks clearly know this. But you?


Orly's picture

Let's take it point by point and maybe with my interested queries you can find some answers...

"There may not be an end to the U.S. Dollar but there will be an end to it's world reserve currency status."

Replaced by what, exactly?  All that gold?  The Euro?

"So either the debt expands or it is inflated away to service the debt, yes?"

Not necessarily.  Does economic growth count?  The world hasn't stopped in its tracks, you know.

"With Russia, China, Brazil, and countless other countries using their own currencies as settlements in trade and the Fed buying up bonds because the rest of the world has started to realize the value of the return what else do you need?"

Fifty billion here, fifty billion there.  Pretty soon, you're talking about a $4 Trillion per day global economy.  Am I right?

"Do you need proof that the BIS via BASEL III is mandating banks boost collateral to lend against at the same time those reserves are being devalued AGGRESSIVELY?"

News Flash: European banks are in a world of over-leveraged hurt.

"Do you need proof that the EU just solicited Russia to become a part of it's union?"

How do you spell C-Y-P-R-U-S anyway?

"After all, Russia is a main supplier of oil and natural gas to the EU's strongest countries."

I guess you haven't heard of all the shale gas reserves being discovered all over Europe?

Gold is very pretty, though.


disabledvet's picture

your talking to a guy who was bullish on the market but bearish on US banks..."right up to the London Whale." Some of those "banks" are English my dear. Those are banks who the United States has deemed "too powerful to prosecute." This is from a country that has NO respect for the rule of law...especially it would it appear when it comes to its own people. Don't tell me "it's for the war effort"! how innocent and pure if so. The fact is the FED has "monkey hammered" the markets more than anything anyone could possibly imagine. It has done this by slamming interest rates to "at or near zero forever." That's without ANY idea of fiscal responsibility coming from our friends in DC. That CRUSHES the carry trade...which is the only way i know of to create true credit creation. That means this whole "thing" we're going through could be based SOLELY on the business cycle. is it looking Orly? "So far so good"? Indeed. But no one lasts "long" in the market by simply "staying the course." At some point the reality of "competition" must be recognized as well. No bull or bear can operate in a vacuum. So "credit flows freely"...but it does not flow "equally." Nice battle tho...we'll see how much longer i can maintain the consistency of my argument or "thesis." I've been surprised at how long it's worked already...