The worrying (or not) rise of margin debt
The FT’s Michael Mackenzie reports that the amount of money borrowed on margin to buy stocks on the NYSE hit a new, nominal high of $451 billion. That’s up 20% over last year, Mackenzie reports.
The article didn’t have a chart, however. So here it is, real (adjusted for inflation) terms, since 2005:
“Peaks in the use of borrowed money have in the past been a precursor to big bear markets”, Mackenzie reports. Not only does a rise in margin debt, the theory goes, mean that the consensus is worryingly positive, but when that consensus breaks, the use of leverage makes the fall even nastier. Jeff Gundlach thinks rising margin debt is consistent with market highs, but isn’t sure whether it’s a cause or effect of overvaluation.