Margin Debt Soars To Record High; Investor Net Worth Now Doubly Negative From 2007 Bubble Peak

Tyler Durden's picture

That margin debt kept rising into the last month of last year is no surprise: after all, with a market that was destined to follow the Fed's balance sheet through thick and thin, there was "no risk" - just remember what David Tepper said: no taper is bullish, a taper is even more bullish as it means the economy is recovering and 20x P/E multiples are just around the corner. Sure enough as reported earlier by the NYSE, margin debt rose by another $21 billion in December to an all time high of $445 billion, and up 29% from a year ago - incidentally almost identical to the increase in the S&P.

This much should come as no surprise to anyone.

However what may come as a shock to many is that the other key metric provided by the NYSE - total net free credit - also known as investor net worth (calculated as Free Credit Cash plus Credit Balances in Margin Accounts less Margin Debt) just dropped to a whopping $148 billion, double where it was in February 2013, and double where it was during the peak of the last stock (and credit and housing) bubble, when it rose to a then-all time high of $79 billion in June 2007. It was all downhill from there.

Of course, this is elementary margin debt as reflected by the simplest of analysis using NYSE data - something that in a world of near-infinite rehypothecation is irrelevant. To get a sense of what is really going on out there, we repost from an article we did in November of last year when we showed the ridiculous levels leverage has reached with the "ultra-sophisticated" hedge fund investor class (where apparently the one with the highest beta leverage, wins) in this case Balyasny Asset Management.

Behold a chart that needs no explanation:

From BAM:

During our soft-close period over the last two years, we have doubled the size of our allocations and our balance sheet while keeping AUM roughly the same. Our plan is to accept only enough new capital to allow us to keep our assets / notional dollars allocated ratio at 1 to 5.


We find that portfolio managers on average utilize about 70-80% of their maximum allocations – so $1 of assets to $5 in notional allocated dollars typically results in our target gross leverage of 3.5-4x. We will be very disciplined with this so please let us know as early as possible if you are interested in increasing your allocation next year.

Of course, when one is levered nearly 5x, being "very disciplined" is usually a good idea.

So a pop quiz: if a hedge fund is levered 5x, and there is a 20% drop in the market, what happens?

For some more thoughts on margin debt, here is Deutsche Bank who Hopes "Not All Margin Calls Come At Once In Case Of A Sell-Off"

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TruthInSunshine's picture

"Just the tip."

"I'll pull out."

Mr Pink's picture

What kind of lunatic would BTATH on margin????

Mr Pink's picture

Sorry, that's BTFATH. I only swear when I'm drunk. Gimme 20 minutes

max2205's picture

I wonder how XLY will fare in the next 12 months

johngaltfla's picture

This will end well. Just like 2008-2009. Whew, I thought the sheeple had learned...

1000924014093's picture

Just curious--what made you think the sheeple had learned?

Lore's picture

It's not the sheeple exactly. It's the relentless sociopaths who sell them "Products" and dispense "Advice."  Sheeple are passive livestock, easily herded.

Metaphorically:  Head-Smashed-In Buffalo Jump

Rainman's picture

Good thing there can never be another MF Global ..yuk

hugovanderbubble's picture

Operational Risk,

Counterparty Risk

Credit Risk

Institutiona Rik


Being Free's picture

So a pop quiz: if a hedge fund is levered 5x, and there is a 20% drop in the market, what happens?

Ans: The 20% drop at 10:32am turns into a 40% drop at the close.


[edit-add] Be prepared!

Dr. Engali's picture

Rest assured the policy tool once known as a market won't be allowed to collapse until TPTB let a select few know and they want it to collapse. When it does collapse it will vaporize so fast that nobody will escape.

Julian's picture

yes, this notion that there will be time for an orderly exit is nonsense - if you are in the market now it's already too late ;)

disabledvet's picture

levered 5 times isn't really all that much in my view.

LTCM was levered well over 100 times I believe.
What was it? 4.5 billion with a couple hundred billion "out there"? bad. 250 to one.

How about this "bad boy":

"depends on the accounting."
30:1, 15:1, 60:1.
sound like you better know your risk when your "at capital" moves around like that.

eclectic syncretist's picture

The Fed meeting this week should provide an excellent selling opportunity, at least until wednesday afternoon, as the market is consistently green or nearly flat DURING Fed meetings.

Ronaldo's picture

I am so ready for the correction.  Hoping for 70%, but 50% is ok too.

buzzsaw99's picture

a 20% drop, yeah, like that's gonna happen. :roll:

buzzsaw99's picture

$445B, now we know how much in equities yellen will buy. i won't be selling until it's s&p 1999 bitchez.

mt paul's picture

leverage is a symptom


the fulcrum point 

is the problem

Seasmoke's picture

What a house of cards. 

tawse57's picture

Margin debt? Is the amount of money borrowed to buy stocks on margin?

El Hosel's picture

The Wet Dreams and Fairy Dust Market losing its MoJo.....Bithcez

BullyBearish's picture

Don't supply be swellin' when we be gellin' with Yellin

BeetleBailey's picture

It's printing like a felon (which...they ALL fuckin ARE) with Yellen and SMELLING like a stinky piece of JELLIN shit out of the debt cloogin swellin Fedass

williambanzai7's picture

And this is the metric that has Ben and Janet shitting bullion sized bricks.

q99x2's picture

What happens? Banksters steal the little remaining wealth from the little remaining middle class. And the CEO of Balyasney takes his stash offshore.

razorthin's picture

After a fucking year of ramp and zero corrections, I'll be a fucker if I'm not stop-buying the next viscious snap back, even if it lasts only a day.

TheBird's picture

While the point on leverage is taken, it is bad form to assume - as per the implication of your pop quiz- that all the assets are corellated 1:1 and that there are no hedges in place to mitigate adverse moves.


As to your credit stat, I think this is a silly stat.  What is good? What is bad? That number is always going to change and has no context.  What is probably more important is the ratio of margin debt to credit balances in margin accounts (why do you even care about the cash guys? They aren't going to save the overlevered margin accounts).    Just doing a cursory historical look, in Mar 2000, the ratio was 4.28x.  In Sep 87 it was 10.3x.   Today it is around 2.5x.  

pragmatic hobo's picture

ooh, I know this one ... QE6!

deerhunter's picture

I recently had the displeasure of hitting a car broadside while traveling 50 MPH!!! There was no option for me except swerving into oncoming traffic! I had just enough time before impact to realize this was going to hurt!!! I think that is about how much time there will be to exit this market when everyone heads for the door at the same time! Oh, it did hurt! I can no longer swing a golf club or swim properly! Won't get into all that here. Life marches on!!!

kareninca's picture

I have a friend who was just in a car accident and I am keeping her supplied with Biofreeze (I have been getting it for years for various relatives who are in pain).  You can now buy it on Amazon.  It helps far more for those sorts of injuries than anything else that is topical.  Accupuncture helps, too.  And look into curcumin.  best of luck.

AdvancingTime's picture

This stock market run is pushed upward by cheap and easy money. When money is cheap people tend to borrow more and be less careful in how they invest and spend it. More in the post below,

Spungo's picture

You guys worry too much. They can always sell the stock if it starts to go down. It's not like everyone else would be trying to sell at the same time and the market would be overwhelmed with sellers.

ThirdCoastSurfer's picture

So a pop quiz: if a hedge fund is levered 5x, and there is a 20% drop in the market, what happens?

A: Ask John Corzine - borrow principal funds from client accounts until margin can be recovered, or not. 

Spungo's picture

The fund manager gets a bonus is what.

22winmag's picture

Pitchforks and AR15's in 3...2...1.

TheRideNeverEnds's picture

I hear obama is going to draft an executive order mandating all citizens buy e-minis.


Update:  Its ok now, the down move is finished and the markets have normalized with the ES making a V bottom, entirely erasing yesterdays move in the aftermarket on no volume now we are well on our way to the year end price target of 2500, also gold and yen are going straight down again.  


Sound the all clear; everyone back in the pool.

bdub2's picture

I look forward to 2014 rendering numerous humerous ways to say "Buy The Fucking Dip" whilst the s/p rolls to 2500 plus! A great year ahead!

I'll start, if I may...

Buy Yellen! Own Bullshit! =