Author Topic: Bubble in Margin Investing?  (Read 1167 times)

gpyros85

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Bubble in Margin Investing?
« on: May 30, 2018, 03:40:13 PM »
Seen this chart today! The margin debt is able to sustain itself since the market is relatively stable, however this chart shows if there is a correction it will be VERY severe... More severe than tech bubble and the great recession!


desert_phoenix

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Re: Bubble in Margin Investing?
« Reply #1 on: May 30, 2018, 04:08:49 PM »
Can you explain it to me like I am 4? haha

gpyros85

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Re: Bubble in Margin Investing?
« Reply #2 on: May 30, 2018, 04:13:39 PM »
Can you explain it to me like I am 4? haha

It simply shows that people are investing in stocks with borrowed money. With rising rates and if there is a pull back in market prices, there will be a margin call where the investors will not be able to meet then force sell. Thus, unloading shares and with few buyers being able to be there to purchase.

solon

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Re: Bubble in Margin Investing?
« Reply #3 on: May 30, 2018, 07:40:34 PM »
I'm no expert, but it looks like the Top is In.

Indexer

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Re: Bubble in Margin Investing?
« Reply #4 on: May 30, 2018, 07:50:02 PM »
Markets trend up over time. In a normal market there is margin trading. As markets hit all time record highs, which is natural over time, margin trading will also hit records over time. That isn't surprising.

Nothing to see here.

Quote from: gpyros85
It simply shows that people are investing in stocks with borrowed money.

Margin is also used for shorting and hedging strategies. Risk parity strategies in particular are much more common than they were 20 years ago. In other words, a lot of the leverage out there right now might be hedging against a down market.  ;-)
« Last Edit: May 30, 2018, 07:52:29 PM by Indexer »

MustacheAndaHalf

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Re: Bubble in Margin Investing?
« Reply #5 on: May 30, 2018, 11:05:59 PM »
I'm not convinced either way.

Leverage magnifies a crash, but doesn't create one.  A small crash in real estate was multiplied into the international 2008 crisis through leverage layered upon leverage.  Without CDOs containing morgages, and synthetic CDOs containing stuff almost nobody understood, you get a slump in real estate.  Banks also had the "moral hazard" of offering loans where they had no money at risk.  They made the loans and shipped them off to wall street.  The success of CDOs caused riskier and riskier loans to be offered by banks.

So what trigger are you suggesting as the starting point for a crash fueled by margin?
Are there well known sources reporting on this?

PDXTabs

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Re: Bubble in Margin Investing?
« Reply #6 on: May 31, 2018, 06:08:55 PM »
Are there well known sources reporting on this?

I don't know. Does Bloomberg count?

MustacheAndaHalf

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Re: Bubble in Margin Investing?
« Reply #7 on: June 01, 2018, 10:19:19 AM »
Assuming you don't mean to be sarcastic, that article doesn't mention anything specific triggering a crash.

PDXTabs

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Re: Bubble in Margin Investing?
« Reply #8 on: June 01, 2018, 12:52:59 PM »
I agree with you that the debt won't cause a crash. I guess I disagree with you that it isn't a big deal. That is, eventually there will be a crash (there always is), and record debt is not going to help things when there is distressed selling,

jjcamembert

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Re: Bubble in Margin Investing?
« Reply #9 on: June 01, 2018, 05:15:14 PM »
I don't really see that anything can be inferred from this chart. Markets 101: markets move up when there are more buyers than sellers, and down when more sellers than buyers.

The market has steadily been going up, so net there have been more buyers (could be one institution or person continuing to buy also, doesn't matter). Currently buying stocks is much more expensive than it was 10 years ago, so it makes sense that one would need more buying power today to hold the same amount of stock, which would increase your margin requirements. However at the same time your position (assuming you didn't sell) has also increased in value. So if there was a large correction you're not going to be margin called unless you have insufficient capital to hold the position, which if you bought a long time ago has to be a huge drop.

Basically all this chart tells me is that as prices go up more investors are holding stock (because more bought), and as prices go down investors have more capital available (because they sold).


LAGuy

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Re: Bubble in Margin Investing?
« Reply #10 on: June 01, 2018, 08:16:22 PM »
Markets trend up over time. In a normal market there is margin trading. As markets hit all time record highs, which is natural over time, margin trading will also hit records over time. That isn't surprising.

Nothing to see here.

Quote from: gpyros85
It simply shows that people are investing in stocks with borrowed money.

Margin is also used for shorting and hedging strategies. Risk parity strategies in particular are much more common than they were 20 years ago. In other words, a lot of the leverage out there right now might be hedging against a down market.  ;-)

That was my first thought too. Does this represent longs, shorts or both? Eyeballing the historical data, it looks like there's a pretty rapid ability for things to "balance" out when the market changes directions. Probably just long margin and short margins cancelling each other out. Anyways, at negative 300 billion outstanding it's kind of chump change anyways.