RedMargin?

Just 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 comment on why it’s a useful contrarian indicator!

Fast forward to the latest figure, at August’s end, and we have another near all time record of $US463BN, after peaking at $465.7BN at 28th February this year, a jump of 15% against that September 2013 number. Over the same period, the S&P 500 index has been stoked by 12%, with half of that thanks to the bounce of the past few days.

23 Oct 14 Blod 1

In other words it is taking ever-increasing levels of debt to push stocks higher, and GDP come to that.

A second chart shows an update of margin debt as a percentage of GDP, or the size of the US economy

23 Oct 14 Blog 2

We’ll repeat the two observations made in last year’s blog (updated):-

  • 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 27%, margin Debt/GDP is nearly 12 times the ratio seen at the 1974 stock-market low.

This is huge and begs the question, “will this ratio move higher still, or is a single digit Margin-Debt/GDP likely to return?”

Frankly, nobody knows, but as a natural contrarian, that horizontal red-line looks to be a good target going forward.

 

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2 responses to this post.

  1. […] of our preferred indicators, Buy, Sell or Neutral, whereas October’s “Buyback Bubble” and “Red Margin,” warned on the distorting effect of US share buy-backs and on margin debt, both of which had […]

    Reply

  2. […] October, as the main US stock-indices started to swoon, we updated on “US Margin Debt,” which included a measure of it to US GDP (the light-blue dot above,) and went on to say, “it […]

    Reply

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