At the Margin?

In June of this year we wrote a piece called, “Margin for Error,” commenting on what margin debt is, how it can be used as a good contrarian sentiment indicator and more worryingly, just how high it had grown to in both nominal terms and as a ratio to US GDP. The figure at the time, which equated to the end of April 2013 tally, was at $384.4BN, a new record high and surpassing the previous record high of $381.4BN seen in June 2007. Fast forward to the latest figure, at September’s end, and we have a new all time record of $US401.24BN, a jump of 4% against that April number. Interestingly, over the same period the S&P 500 index rose by 5%, which marginally (sorry) exceeds the increased debt.


Note that the higher stocks rise, as shown by the S&P 500 index in black, the more investors borrow to invest. Likewise, as stocks bottom, they borrow less. So you see what we mean by a contrarian sentiment indicator? Furthermore, September was the largest monthly jump since January of this year, which is surprising given all of the anticipation of a US Federal shut-down. Of course, margin is used for both LONG and SHORT positioning, so some of the jump could be down to hedging, but either way, it’s now exceeded the 2007 level, as shown by the red dashed line. The second chart shows an update of margin debt as a percentage of GDP, or the size of the US economy


With a repeat of the two observations made in June:-

  • Over the 35 years from 1959 to 1994 margin debt never exceeded 10% of GDP, until mid-1995 since when it has remained in double-digits.
  • At a near 23%, margin Debt/GDP is nearly 10 times the ratio seen at the 1974 stock-market low.

At the margin would suggest that we are very close to a turning point.



3 responses to this post.

  1. […] « At the Margin? […]


  2. […] this column we have often commented on sentiment indicators, including the above and the recent, “At the Margin,” observations, which together with the excitement over the recent Twitter IPO provides anecdotal […]


  3. […] about a year ago we wrote a piece called, “At the Margin,” commenting on the continued rise of margin debt to an all time record of $US401.24BN, adding […]


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