Friday, August 9, 2013

Don't Think There is an Equity Bubble? People Are Using Margin Like It's March of 2000.

When the stock market is doing well and people think the Federal Reserve "has their back" (aka the Greenspan Put and now the Bernanke Put), they tend to start borrowing more and more to try to make more money on the market.  All they think about is the upside and they really forget about downside and the risk of things going the wrong way.  Eventually, the margin debt on the street gets so high that they just can't borrow any more and the incremental additional buyers simply aren't there.  At that point, the bubble bursts and people find out that margin works both ways and the market overshoots on the downside.  It looks like we are getting to that point again with inflation-adjusted NYSE margin debt now at March 2000 highs and pretty close to the highs of 2007 (h/t Doug Short).

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