Margin Debt as a percentage of nominal GDP shot up 9% in May, reaching a new all-time high.
Margin Debt is the amount of money borrowed by investors to buy stocks on margin. It is an important measure of the public’s appetite for risk and the degree of speculation in the equity market. It also represents “hot money” – or the funds that will head for the exit quickly at the earliest sign of trouble or when margin calls are triggered and leveraged positions must be sold.
What does this latest Margin Debt release mean for investors?
The level of leverage (and dangerous investor psychology) today far exceeds the heights at other major market tops including prior to the 2000 Tech Bubble Washout and the 2007-09 Great Financial Crisis. Parabolic increases in Margin Debt –like that in May– tend to occur toward the end of bull markets and are indicative of a high degree of equity market risk.
With market volatility heating up, the trend in Margin Debt could reverse in the coming months as leveraged money starts to head for the exit. If it does, the result could be disastrous as forced selling drains liquidity from the market accelerating the downside pressures. Buckle your seat belt – it could be a wild ride!