NYSE Margin debt exceeds tech bubble high.

WABAC

Read all about it.

The amount that investors are borrowing to buy stocks on the New York Stock Exchange, known as margin debt, has exceeded the tech-bubble highs to reach a new record, according to data from the Financial Industry Regulatory Authority. [AKA FINRA]

The rest of the article is about meme stocks (crazy), trading volumes (crazy), rate-cut expectations (oh yeah!), industry analyst opinions (who's on first?), etc.

yogibearbull

There are multiple red flags - margin debt, Buffett Indicator (Stock Market-Value/GDP), top 10 as % of SP500, US market-cap as % of global market-cap, etc. But this time maybe different, or many think so.

WABAC

It's the speculative debt that I worry about. I haven't read Hyman Minsky directly, but I think Kindleberger does a good enough job explaining his theories in Manias, Panics, and Crashes.

For those not familiar, wikipedia offers a nice summary:

Hedge Phase: This phase occurs right after a financial crisis and after recovery, during a point at which banks and borrowers are overly cautious. This causes loans to be minimal ensuring that the borrower can afford to repay both the initial principal and the interest. Thus, the economy is most likely seeking equilibrium and virtually self-containing. This is the "not too hot not too cold" Goldilocks phase of debt accumulation.

Speculative Phase: The Speculative period emerges as confidence in the banking system is slowly renewed. This confidence brings about complacency that good market conditions will continue. Rather than issue loans to borrowers that can pay both principal and interest, loans are issued where the borrower can only afford to pay the interest; the principal will be repaid by refinancing. This begins the decline to instability.

Ponzi Phase: As confidence continues to grow in the banking system and banks continue to believe that asset prices will continue to rise, the third stage in the cycle, the Ponzi stage, begins. In this stage the borrower can neither afford to pay the principal nor the interest on the loans which are issued by banks leading to foreclosures and vast debt failures.

This section is followed by an examination of the Minsky cycle in the sub-prime crisis:

Economist Paul McCulley described how Minsky's hypothesis translates to the subprime mortgage crisis.[14] McCulley illustrated the three types of borrowing categories using an analogy from the mortgage market: a hedge borrower would have a traditional mortgage loan and is paying back both the principal and interest; the speculative borrower would have an interest-only loan, meaning they are paying back only the interest and must refinance later to pay back the principal; and the ponzi borrower would have a negative amortization loan, meaning the payments do not cover the interest amount and the principal is actually increasing. Lenders only provided funds to ponzi borrowers due to a belief that housing values would continue to increase.

No doubt we all remember how the final stage of lending was financed.

I don't claim to know which stage the stock market is in.

hank

Link to 60s classic “Up Up and Away” - by The 5th Dimension for the musically inclined.

Gosh - 2022 feels so far away. It isn’t. Most of us have vivid memories of the near daily pounding - in both equities and bonds. I think there are pockets of value still, but the question is - will they hold their own … possibly rise … or succumb to mass hysteria and fall when all the bubbles pop?

Old_Joe

"I don't claim to know which stage the stock market is in."

Well, I don't know for sure either, but I'll put all of my money on "it isn't the Hedge phase", and a whole lot of my money on "it isn't the Hedge phase or the Speculative phase".

WABAC

Old_Joe said:

"I don't claim to know which stage the stock market is in."

Well, I don't know for sure either, but I'll put all of my money on "it isn't the Hedge phase", and a whole lot of my money on "it isn't the Hedge phase or the Speculative phase".