More Debt, No Problem…For Now!

Adding perspective to the sustainability of the market upswing we’ve seen over the last year, it is a sobering reminder provided by a Financial Times report on margin debt. They report the following:

Data collected by the Financial Industry Regulatory Authority shows that total margin debt across Wall Street hit $822bn by the end of March — after Archegos had failed. That was almost double the $479bn level of this time last year and far more than the around $400bn peak that margin debt reached in 2007, just before the financial crisis.

To put these numbers in context, ABP Invest, a London-based fund, calculates that during the 2000 dotcom and 2007 credit booms, US margin debt topped out at roughly 3 per cent of gross domestic product. Now it is nearly 4 per cent.

 For the medium term (1 – 3 months) we are going to continue to witness a relative upward move in financial markets thanks to the continuing loosening of restrictive government policy (lockdowns). Let us not forget that the economic issue we experienced since March 2020 had nothing to with the virus, but rather all of it the result of government policy. The virus did not shut down economies, governments did.

Yet, the upswing we’ve seen in equity markets has been the result of massive liquidity injections by the government institutions – a purely Keynesian policy. This is not sustainable. To believe this is sustainable is to believe that the Brooklyn Bridge is for sale. Leverage cuts both ways. Be careful to catch a knife as it is falling off your table.