Zerohedge.com had a very interesting article earlier today summarizing a new research piece by Deutsche Bank about the current level of margin debt and the stories on said margin debt. In particular, the report looks at articles in 1999 and 2007 for correlation with today’s headlines.
As DB says, “we prepared a collection of press articles which were published around the key events during the past financial crises. Our key finding is straight forward. Irrespective of the publishing date, the articles read alike throughout the two major crisis periods, i.e. the “new technologies market equity bubble” (1999-00) and the “Great/Global Financial Crisis” (2007-08). Most interestingly, literally the same content can be found in todays’ press. Universal phrases include:
- “A rising stock market encouraged more investors to go into debt to buy stocks, sending margin debt levels past their all-time high”.
- “The National Association of Securities Dealers (NASD) has asked members to review their lending requirements in a sign of increasing concern that rising levels of margin debt could exacerbate a stock market plunch.”
- “The Fed is concerned about a sharp rise in margin debt but has been unwilling to attack stock market speculation as high levels of leverage do not necessarily translate into high risk. The last time the Fed adjusted the margin rules was in 1974, when when it reduced the down payment required for stocks to 50 percent of the purchase price, from 65 percent.” […] “The Fed should return to its pre- 1974 policy of actively changing margin requirements in response to stock market speculation”.
- “High margin debts show the effect of over-leveraging and mispricing of risk”.
- “The movements in stocks cause brokerages to stop allowing customers to buy some of the volatile stocks on margin or require clients to put up more cash.”
- “Either the market rises dramatically to make those loans good or in any down move there is tremendous selling pressure”.
- “Until recently, most investors ignored red flags raised by regulators”.
I’m presenting this without further comment for the time being.
Relevant ETFs: SPY, SH, IWM, RWM