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Whenever Margin Debt Goes Over 2.25% Of GDP The Stock Market Always Crashes

Bubble - Photo by Jeff KubinaWhat do 1929, 2000 and 2007 all have in common?  Those were all years in which we saw a dramatic spike in margin debt.  In all three instances, investors became highly leveraged in order to “take advantage” of a soaring stock market.  But of course we all know what happened each time.  The spike in margin debt was rapidly followed by a horrifying stock market crash.  Well guess what?  It is happening again.  In April (the last month we have a number for), margin debt rose to an all-time high of more than 384 billion dollars.  The previous high was 381 billion dollars which occurred back in July 2007.  Margin debt is about 29 percent higher than it was a year ago, and the S&P 500 has risen by more than 20 percent since last fall.  The stock market just continues to rise even though the underlying economic fundamentals continue to get worse.  So should we be alarmed?  Is the stock market bubble going to burst at some point?  Well, if history is any indication we are in big trouble.  In the past, whenever margin debt has gone over 2.25% of GDP the stock market has crashed.  That certainly does not mean that the market is going to crash this week, but it is a major red flag.

The funny thing is that the fact that investors are so highly leveraged is being seen as a positive thing by many in the financial world.  Some believe that a high level of margin debt is a sign that “investor confidence” is high and that the rally will continue.  The following is from a recent article in the Wall Street Journal

The rising level of debt is seen as a measure of investor confidence, as investors are more willing to take out debt against investments when shares are rising and they have more value in their portfolios to borrow against. The latest rise has been fueled by low interest rates and a 15% year-to-date stock-market rally.

Others, however, consider the spike in margin debt to be a very ominous sign.  Margin debt has now risen to about 2.4 percent of GDP, and as the New York Times recently pointed out, whenever we have gotten this high before a market crash has always followed…

The first time in recent decades that total margin debt exceeded 2.25 percent of G.D.P. came at the end of 1999, amid the technology stock bubble. Margin debt fell after that bubble burst, but began to rise again during the housing boom — when anecdotal evidence said some investors were using their investments to secure loans that went for down payments on homes. That boom in margin loans also ended badly.

Posted below is a chart of the performance of the S&P 500 over the last several decades.  After looking at this chart, compare it to the margin debt charts that the New York Times recently published that you can find right here.  There is a very strong correlation between these charts.  You can find some more charts that directly compare the level of margin debt and the performance of the S&P 500 right here.  Every time margin debt has soared to a dramatic new high in the past, a stock market crash and a recession have always followed.  Will we escape a similar fate this time?

S&P 500

What makes all of this even more alarming is the fact that a number of things that we have not seen happen in the U.S. economy since 2009 are starting to happen again.  For much more on this, please see my previous article entitled “12 Clear Signals That The U.S. Economy Is About To Really Slow Down“.

At some point the stock market will catch up with the economy.  When that happens, it will probably happen very rapidly and a lot of people will lose a lot of money.

And there are certainly a lot of prominent voices out there that are warning about what is coming.  For example, the following is what renowned investor Alan M. Newman had to say about the current state of the market earlier this year

“If anything has changed yet in 2013, we certainly do not see it. Despite the early post-fiscal cliff rally, this is the same beast we rode to the 2007 highs for the Dow Industrials. The U.S. stock market is over leveraged, overpriced and has been commandeered by mechanical forces to such an extent that all holding periods are now affected by more risk than at any time in history.”

Unfortunately, most Americans never get to hear such voices.  Instead, most Americans rely on the mainstream media to do much of their thinking for them.  And right now the mainstream media is insisting that we are not in a stock market bubble…

Forbes: “Why Stocks Are On Solid Footing And This Is No Bubble

ABC News: “AP Survey: Economists See No Stock Market Bubble

Businessweek: “Prognostications: It’s Not a Stock Bubble

Yahoo: “This Is NOT a Stock Bubble! Says Ben Stein

MarketWatch: “Is a stock bubble coming? No, say economists

So what do you think?

Do you believe that we are in a stock market bubble that is about to burst, or do you believe that everything is going to be just fine?

Please feel free to express your opinion by posting a comment below…

  • markthetruth

    Their paid to say it or now some inside info that the Fed will not stop funding it. All they do is wait to see what big Ben is going to hint. as per margin debt is a sign that “investor confidence” . We live in a world where they love to see us B

    • markthetruth

      ______where is everyone ?____

      the end…

    • CB

      THE FEDS PAYS THERE DEBT WITH MORE DEBT AND THERES NOTHING TO BACK IT ITS NOT BACKED BY GOLD ANYMORE WHY DO YOU THINK THAT THEY INBED FIBER STRIPS INTO THERE PAPER CURRENCY TO STOP COUNTERFEITERS AND TO THINK THAT THE US GOVERNMENT HAD PRINTED ITS OWN MONEY WITH OUT A PROBLEM UNTIL THE [RICH MEN BANKERS[GOT TOGETHER AND MEET ON JEKYLL ISLAND OFF THE COAST OF GEORGIA TO COME UP WITH A PLAN TO CONVINCE THE GOVERNMENT THAT THEY COULD PRINT THERE MONEY AND LOAN IT TO THE UNITED STATES WITH INTEREST AND MAKE THE AMERICAN CITIZEN PAY FOR IT MAKING YOUR TAX S TO SERVE AS DEBT AND THUS THE FIAT PAPER CURRENCY WAS MADE WHAT A SCAM OUR WHOLE ECONOMIC SYSTEM IS BASED ON A LIE AND FRAUD WOW

  • K

    Yes the crash is coming. And because of the manipulation and games, it is going to be worse this time. Would not be surprised if it reached 3500 before it levels out. That level of damage, is just beyond what most people can imagine. And those that had little, or no responsibility for what is coming, the young people will be the most affected. The fact that so few seem to care about that, does not speak well for us as a society.

    • K

      If you want some idea what is coming. Go to youtube and search Brazil protest, than multiply what you see by 10. That is what I expect here.

  • RICHARD

    We all know it is coming. I thank God that my bills are all paid off and I have a wife that does all her shopping at the 99 cent store.

  • Bad_Mr_Frosty

    I still think the big collapse won’t happen until late 2014 or early 2015. Maybe I’m being optimistic. These guys have perfected the art of inflating bubbles and I believe this one is going to get huge before it bursts.

    • Ayn Rand

      I suppose the only thing we can do is prepare. And hope to god you are ready when it comes.

      • yallready

        I totally agree. We are finally wise enough to see where this is all going and old enough to avoid the

        penalty to get to our 401 K money. We took it all out and bought food storage. Now THAT’s a sound

        investment. Got a great deal at http://www.srmaketplace,com. Their food tastes really good.

    • markthetruth

      Yep ! remember the only way to get the bubble bigger is with more Soap !

      the end…

      • billy bob

        don’t bend over in shower

  • Patrick Schwartz

    The problems are systemic and out of control. There will be a crash within the next 12 to 18 months.

  • GSOB

    “All that we can do is just survive. All that we can do to help ourselves is stay alive.”

    RUSH – Red Sector, A

  • Mondobeyondo

    Apparently stockbrokers still do margin calls. I thought that was a 1920’s thing…

    (someone please correct me if I’m wrong on the following! I’m not certain if this is 100% right – I am NOT a financial guru guy!)

    A “margin call” is when.. okay, let’s start at the beginning. You want into the market, and hire a stockbroker. Let’s say you want to buy $10,000 in stock. You can pay a certain percentage – say 10 percent, or $1,000 – to your stock broker guy or girl. You promise to pay the remaining $9,000 to Mr. Stock Broker Guy/Ms. Stock Broker Gal at a future date – maybe 1 year from now when the Dow hits 20,000. Both you and your stockbroker are in happy land!

    That $1,000 is supposed to ensure your $10,000 stock bid. Your $1,000 is the MARGIN.

    A margin call happens when your initial stock purchase falls below your initial amount ($1,000.00) posted. Say your stock falls to $907.30 a share. Your broker gives you a CALL, saying that your MARGIN is below level. At this point, you have to pay your broker the $92.70 to cover the spread, or risk losing your investment. If the market crashes, well… bye bye savings! That’s what happened in 1929.

    The more your stock falls, the more money you have to ante up to pay your stock guy/girl.

    Sounds like Las Vegas to you? THAT’S EXACTLY WHAT IT IS!!

    • Buddy199

      Just without free drinks and awful buffets.

    • jog222

      You’re correct except you now have to put 50% down not just 10% to buy stocks on margin, in 1929 I think it was 10%. I know this article is about the stock market, but the real estate market is even a better example of over leverage, remember zero money down mortgages? And you know the rest of that story…

  • Mondobeyondo

    “A crash is coming, and it may be terrific.”
    – Economist Roger Babson, autumn of 1929

    ——————————————-
    Babson made that statement several weeks before October of ’29. He was a well respected economist at the time, so (some) people listened to him.

    The market fell sharply the next day after Babson’s speech, and then quickly rebounded. A few weeks later, the bottom fell out.

  • MAL3313

    Andrew Dickson White was president of Cornell university, Professor of History, Ambassador to Germany and a noted author. He wrote a book called Fiat Money Inflation in France. In it he gave a detailed history of the revolutionary government of France’s “economic policy”. That government engaged in repeated rounds of stimulus by printing fiat money that resulted in runaway inflation. Each round of printing caused ever growing bubbles and bursts. Merchants couldn’t afford to restock their shelves with the paper money. The government turned a blind eye and even encouraged looting and pillaging of the evil bourgeoisie. Farmers were unable to replant with the fiat currency they were paid for the previous harvest. The government sent the army out to confiscate livestock, farm equipment and even the farms. The government then imposed draconian penalties including death for anyone who demanded payment in gold or silver coin or foreign currency. The author relates stories of carriage drivers making and losing fortunes overnight in the volatile markets based on tips from the brokers they were driving to work. The end result was economic collapse and Napoleon. It all seemed very familiar. The amazing thing about Professor White is that he has been dead for over 100 years and he wrote the book in 1910.

  • Whining Canadian

    Plz dont make the stock market crash.Unfortunately Canada is only working to find it’s young females
    employment, not it’s young males, be it university entrance or customer
    service jobs, females are over represented. The only partial equalizer
    are the construction and resource jobs with poor working conditions and
    environments that females refuse to take, but demand managerial positions in construction or demanding 20/hr for directing traffic on the construction sites.

  • Rufus T Firefly

    If Ben Stein says it is not a bubble, then it most definitely is not a bubble. He was smart enough not to invest with Bernie Madoff because his system didn’t make sense.

    • Buddy199

      He was half right. But I think the market is way over priced compared to the worst recovery on record underpinning it. The two things have to adjust to each other at some point.

    • David

      Ben Stein is wrong this time.

  • chilller

    Gubermint today has far more reaching control over everything than they did in times past. This enables them to keep kicking the can down the road much further than before. They have no doubt felt things would turn around before all their reckless ways caught up with them…they were wrong. To add insult to injury, trust and confidence in gubermint has fallen to historical levels due to all their lies, programs like NAFTA, laws like NDAA and destruction of constitutional values. The US is the obese bully on the block who won’t hesitate to beat someone up who refuses to pick them to play on their side.

    Never forget the bankers, media, politicians and corporate mobsters responsible for creating this monster they call America, because after it all falls down, they will no doubt claim they can fix it. NEVER give these charlatans a second chance…for their idea of fixing it keeps them right where they want to be…in power.

  • Buddy199

    I don’t see a huge crash until late 2014 or into 2015. However, when it does happen it will be an amazing $$ opportunity by shorting the market, just as 2007 – 2008 was.

  • Harrison Terran

    It looks like the economic crisis is hanging on tooth and nail. It’s my belief that our politicians need to take on the problems with more professionally. Maybe they need the services of the economic crisis specialists, the way certain counties have done in the US. By hiring the Orlando Bisegna Index, they have resolved deficit problems and unemployment.

  • chris

    If you look at the chart given of the S&P over the last several decades the implication is that the next crash could be any day, which seems reasonable based on the stupidity around. The third and final crash that will break the system and bring in the new financial world order?

  • Donald Wilson

    The meat puppets are all freakin idiots. The country and the 300 million citizens are doomed.

    Good luck and good night.

  • Paul

    The thing is. Can’t the FED just keep printing money to feed the market to keep it afloat? In prior crashes the FED was not participating yet in QE. They are now at an unprecedented level of pumping money into the system but I think they can carry this on for quite awhile longer. Yes it has to bust at some point but as long as the USD carries value and the US is in the position of being the world reserve currency and they are able to keep printing money then I think they can keep doing what they are doing.

    • Winston Smith

      The dollar is being rapidly marginalized.
      Just look at all the direct currency swap
      deal struck over the last two years.
      Even the Brits have struck one.
      The writing is in large print on the wall
      for the dollar as reserve currency.
      At that point the notes on your pocket will not even be good for toilet paper.

    • SAM

      Hey Michael I would like your thoughts on what Paul wrote because this exactly what my father thinks. My father thinks that the U.S. can be absolved from the debts it owes to other countries since it is the superpower of the world.

    • domedude

      There is nothing that guarantees the dollar will remain the World’s reserve currency. The Fed can’t continue to print more and more dollars, because our trade partners will soon no longer accept those dollars, since they know they are being devalued daily.
      The funny thing right now is that they are planning on tapering their $85B/month pace, but the problem is that if they slow down, there’s no other source of revenue for the gov’t to pay its bills. It’s like someone who is working three jobs and needs every penny to scrape by, but then they decide to cut back their hours at one of those jobs. It just doesn’t work.
      The gov’t claims that the IRS revenues are higher than expected, which must mean the economy is improving. In reality, many wealthy individuals and companies simply shifted their income and capital gains to 2012 so they could pay the taxes before the rates went up. The revenues for the 2013 tax year, which will be paid in the first quarter of 2014, will be much lower than they expect. That’s when the cuts will really kick in.

  • Winston Smith

    Problem is Michael there are no shorts left in this market. When this rolls over there is nothing to
    prevent a terminal swan dive.No shorters to stop the
    fall,not that you could frontrun the algo’s and sell anyway.

    • MichaelfromTheEconomicCollapse

      Very good point Winston.

      Michael

  • Dave Webb

    Where does this leave the people that do not invest in the stock market, have minimal savings in the bank(enough in checking to pay the monthly bills), and living week to week on the grocery bill?
    That description includes a huge number of Americans right now. We are not talking about a minority. We are talking about the majority of everyday Americans that have not inherited their wealth.
    The economy is based on these people. IT is based on tax-paying people earning a living. Only right now those people are in the minority! The second greatest group of stable people financially are those on Social Security and pensions. If it all goes down, all of those pensions and possibly Social Security will go down with it.
    When that happens, Humpty Dumpty falls. And all the financial experts and all the Congressional Representatives and even the President will not be able to put it back together again.
    Prosperity is not based on inflation. It is based on the discretionary income of the average person. This is where all the business comes from.
    Right or wrong, you destroy that base and the economy of the entire country goes down the toilet. And that is what all these fancy experts are not able to figure out.
    How many greeters at retail stores are elderly?
    These are the people trying to survive in their old age because their pensions do not cover them.
    Or are they cashiers at the local hamburger place?

    The problem is they have no retirement!
    At one time, we had sensible people in the Congress from both parties. Where are they now? Because the senseless policies that are happening put too much pressure on the working class to support the non-working welfare people.
    The old get sick. They lose everything when they do and medicaid takes over. What kind of system supports this reward for a lifetime of work?
    The only real winners here are the welfare bums that cannot and will not work for a living.
    There are a lot of real welfare people that have no way of making a living.
    There are a lot of people in jail that do not belong there. We are supporting them as well.
    It is time to change the game rules back to something that actually supports our working population.
    I think a complete bankruptcy of this country is inevitable at this point. Maybe the next bunch will figure it out. Cause this bunch sure haven’t.

    • Gugo

      No. Most elderly people work at places like Mc Donalds and walmart because they are bored,want the extra cash, or don’t have insurance. It is not becaue they ‘have to’. I know…. I have asked them.

      • Wheezie

        Don’t know who you’re asking. My Mom works at 84 because she gets only $500 a month SS. I can only give her $300.00 a month to help. I make $28k a year BEFORE taxes (used to be MUCH more) and live frugally as does she. I have a bad heart and am not considered disabled because I “think” I can work. TRUE. Get real, they are working because they HAVE to. As will you.

  • MichaelfromTheEconomicCollapse

    On my contact page there is information about how to contact me…

    http://theeconomiccollapseblog.com/contact

    Michael

  • mistywindow

    How many times have we heard the “experts” say “This time it’s different.”?

  • Guestie

    There is no bubble, everything is going to be alright. Nothing to see here folks, move along now and buy more stocks, bonds, equities and don’t hedge your bets on stupid things like silver or gold. Bah! No one needs those at all! Are you a conspiracy theorist?!

  • John Jauregui

    Nothing to see here folks. Just move along. Have a nice day.

  • seth datta

    Firstly, type in illuminati backwards into Google; you’re taken to the NS@ website. Try it.

    Next, the Anglo-American elites want globalization so they can enslave populations of developing countries through debt and the world bank. We in the West are already often beholden through ursury; hence why the jobs are shipped overseas as they don’t need to enslave us any more through economic means. The only thing left is to take away the weapons and complete the police/surveillance state, then it will all be complete for all and sundry to see. A world owned by tyranny.

    • Shmeggle Marxist

      the illuminati thing backwards is just a hoax. try Cincinnati backwards too. The NSA doesn’t care about the hoax. Wait, there is someone knocking on my door………………………………………………………………………………………………………………………..

      • seth datta

        When they reveal things like PRISM and you don’t understand the idea of the ‘all seeing eye’, its perhaps understandable that you would make such a comment. However, logic dictates that there must be some truth to the comments I have made.
        Rather than making rude assertions designed to distract rational argument, I urge you to reconsider your opinions based on what you see going down in your country over the next 10 years and get back to me.

        • Shmeggle Marxist

          ok, I’ll get back to you in ten years

  • John Evangelisti

    Stock market 3300, no. Stock market 7000, yes. The stock market is pumped up at about the same rate that the real and not imaginary government calculated CPI is. The timing of the pump and dump will be engineered by the fed, and timed for election results is my guess.

  • CB

    AS FOR AS HISTORY GOS IT DOES REPEAT ITS SELF AS THE ARTICLE HAS MADE IT CLEAR ITS A MATTER OF TIMING AS BEN WOULD KICK THE CAN TO THE LEFT OR TO THE RIGHT THE CAN MY END UP IN THE DITCH AND AS BUSH PUT THE NEW WORLD ORDER HAS POSSIBILITY’S AND THE UNITED STATES HAS TO GO INTO A NOSEDIVE ON THE ECONOMIC AND MONETARY SCALE IN ORDER FOR THE ELITE TO BRING ABOUT THERE PLANS FOR THE WORLD REMEMBER A DEMOCRACY DOESN’T, LAST FOR NORMALLY OVER 200 YEARS UNTIL MEN FIND WAYS OF CIRCUMVENTING ITS RESOURCES AND MAKING MERCHANDISE OUT OF THE WORKING CLASS MEN AND WOMEN AND USING THEM AS THERE ATM MACHINES MAKING IT IMPOSSIBLE TO SAVE ANY AMOUNT OF INCOME TO SURVIVE THUR TAXATION AND MANIPULATION OF THERE INCOME THE FEDS AND THE BANKERS ARE ONE AND THE SAME THINK ABOUT THAT

  • Jason7189

    The crash, then it’s all digital with the mark of the beast.

  • Luigi

    I absolutely agree we are on the edge of a downmove that will most likely occur during the Summer (as happened in 2011) ….

  • Richard

    The fed’s theme song; “I’m forever blowing Bubbles, pretty little bubbles in the air…” They’re acrobats!!

  • swabian

    kaboom! I have 5 different ETF’s that short various stock market indices. When the market tanks, I’ll come out fine. Unfortunately, I bought these a bit too early and have had to temporarily ignore the losses so far. Short term pain, long term gain! At least I hope that will happen.

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