A month ago we explained why ordinary margin debt [2](such as that tracked by the NYSE) is largely irrelevant as it completely ignores the leverage of the largest investor class (aside from the Primary Dealers who use Fed reserves as collateral against which to purchase equity index futures), namely hedge funds and whose leverage blows out ordinary retail investors out of the water. Nonetheless, NYSE margin debt is still useful as an indicator of prevailing retail and less than sophisticated investor leverage, and thus euphoria, in the market.
It is from this perspective that we observe how after dropping modestly from all time highs hit in February, NYSE margin debt [3]has recouped virtually all its losses and is now essentially back to all time highs. And as a parallel to that, investor net worth, defined as total Free Credit Cash and Credit Balances in Margin accounts less Margin Debt, has once again dropped to all time lows.
[4]
And while it may represent a mere subset of overall market leverage, it is perhaps worth rereading Deutsche Bank's warning on the topic from a year ago, in which the German bank, embroiled in the latest financial reporting credibility scandal, hopes that "not all margin calls come at one in case of a sell-off [5]."
