Bubble Watch: US Margin Debt Now Equal the Economy of Taiwan

Phoenix Capital Research's picture

When Central Banks attempted to corner the sovereign bond market via ZIRP and QE, they forced ALL risk in the financial system to adjust lower.

Remember, in a fiat-based monetary system such as the one used by the world today, sovereign bonds NOT gold are the ultimate backstop for the financial system.

And for the US, which controls the reserve currency of the world, sovereign bonds, also called Treasuries, represent the “risk-free” rate of return for the entire world.

So when the Fed moved to corner this market, forcing the yields on these bonds to drop to all-time lows, it was effectively forcing ALL risk in the US financial system to adjust to an abnormal risk-profile.

Put simply, the Fed created a bubble in bonds, which in turn fueled a bubble in everything.

Yes, everything… corporate bonds, municipal bonds, stocks, even consumer credit. Indeed, nine years into this insanity things have reach such egregious levels of excess that even tertiary debt instruments such as margin debt have reached levels greater than ever before.

What is margin debt?

Margin debt is money that stock investors borrow in order to buy stocks. It is direct leverage. And it just hit a new record… or $561 billion.

To put this number into perspective, it is:

  • Equal to the entire economy of Asian powerhouse Taiwan.
  • Nearly greater than the amount of margin debt borrowed at the peak of the last bubble in 2007 50%.
  • DOUBLE the amount of margin debt borrowed at the peak of the Tech Bubble.

Now, no one in their right mind would argue that late 2000 or late 2007 were periods of fiscal restraint.

Well, today investors are borrowing hundreds of billions or dollars MORE to invest in the stock market than they were at those times.

As I explained in my bestseller, The Everything Bubble: the Endgame For Central Bank Policy, the bubble in bonds is what finances this entire mess.

By creating a bubble in bonds, the US Federal Reserve has created a bubble in EVERYTHING because borrowing costs are at absurdly low levels.

This is why I coined the term The Everything Bubble in 2014. It’s also why I wrote a book on this issue as well as what’s coming down the pike: because when this bubble bursts (as all bubbles do) the policies Central Banks employ will make those from 2008-2015 look like a cakewalk.

We are putting together an Executive Summary outlining all of these issues as well as what’s to come when The Everything Bubble bursts.

It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here:

https://phoenixcapitalmarketing.com/TEB.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

 

 

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surf@jm's picture

I`ll pay you Tuesday, for some Tesla stock today.......

Thats if Tesla stock will trade on Tuesday......

If not, see the taxpayers for your free bailout.........

But, you will have to stand in line behind Musk and Tessla.......

Iconoclast421's picture

I wouldnt call it "direct leverage". That implies 1:1 leverage. It is not 1:1. It would take far more than $561 billion in stock market declines to unwind all that margin debt.

Antifaschistische's picture

" investors are borrowing hundreds of billions or dollars MORE to invest in the stock..."

put 20k on your credit card, to put into stocks, where you then margin that equity investment in a company, where the company itself, has borrowed billions and billions MORE, etc...

the amount of levering across the board is staggering to think about..

JailBanksters's picture

2018 the Great Bubble Extension

It's just going to get bugger.

You gotta be in it to win it !!

But all this money is not even worth the money it's not even printed on.

 

 

blindman's picture

the only way to win is to not play.
someone said it

Dante Inferizzo's picture

Seems most american traders like to max out margin and get secrewed in the end.  Good article here.

 

Shepwave has a market turn date coming that i believe could prove profitable for traders.  They have not steered us wrong yet. Look at the Naz alone for this week. plus they were the only ones to call the rally when Trump won and have been calling it right ever since. 

Iconoclast421's picture

My indicator caught the trump rally, not to mention the giant sept 2015 rally, the feb 2016 rally, the brexit rally, and the current rally.

https://gab.ai/iconoclast421/posts/2201048

However it does tend to exit trades before tops are reached. Not that any of this matters when the market is melting straight upwards... no indicator is very useful right now.

Stuck on Zero's picture

In an exponential growth period the first derivative is positive. The second derivative is positive. The third ... and so on. Why not invest in any kind of instrument? The higher the derivative the more you make. However, an inflection point at any derivative will cause a cascade failure and rapid wipeout.