Contact us
CALL US NOW 1-888-GOLD-160
(1-888-465-3160)

Could Rising Margin Debt Be a Sign the Stock Market Bubble Is Close to Popping?

  by    0   0

In another sign the stock market bubble could be near the popping point, investor margin debt hit a new record high, even has the Dow Jones has sold off around 2,500 points since highs earlier in the year.

According to the Financial Industry Regulatory Authority (FINRA) margin debt hit $669 billion in May. That represented a 2.9% increase from April.

What exactly is margin debt and why does it matter?

In simplest terms, margin debt is money investors borrow from their broker to purchase securities.

Let’s say you want to buy $10,000 of ABC stock but you don’t want to put up all of the cash up front. You can borrow a portion of the capital from your broker. Under Federal Reserve rules, the broker can lend the investor up to 50% of the initial investment. In this scenario, the investor would deposit $5,000 and take on $5,000 in margin debt. The shares of ABC stock act as collateral for the loan.

Problems arise if the price of the stock drops. As a recent article in Forbes explains, when stock prices fall, investors have to add funds to their accounts to satisfy a margin call. Under FINRA rules, investors must maintain a maintenance margin requirement of 25%. In other words, the investor’s equity must remain above that ratio in a margin account. If a stock owned on margin falls below $5 per share, most brokerage firms will require the investor to pay for the stock at 100% or face liquidation. As Forbes put it:

A bear market thus accelerates during periods of margin selling as it did into March 2009.”

Margin debt hit its previous record high of $665 billion in January. That was when the Dow topped 26,500 points. But as SRSrocco points out, the market has sold off several thousand points while investors placed an even higher amount in margin bets in May.

At this point, margin debt is nearly $170 billion higher than its peak in 2007. You remember what happened at the end of 2007, right?

SRSrocco pointed out that we are 10 years into the business cycle without a significant correction. The Dow had a minor correction when it lost 2,000 points in early 2016. Investors who thought the air was coming out of the bubble piled into gold and silver. Flows into gold-backed ETF’s spiked the second highest level Q1 2016 during the brief correction.  The quarter with the most Gold ETF inflows was Q1 2009, as investors panicked when the Dow Jones fell to 6,600 points.

It’s impossible to know what lies ahead, but as SRSrocco put it:

Due to the massive debt and leverage in the system, I believe we are going to start seeing major Fireworks during Q3-Q4 2018.”

WhyBuyGoldNowBanner.070815.590

Get Peter Schiff’s latest gold market analysis – click here for a free subscription to his exclusive monthly Gold Videocast.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!


Related Posts

Here’s One Reason Gold Is Money

Gold is money. Gold has been money for thousands of years. And one of the reasons gold is money is because it’s immutable. Related

READ MORE →

Peter Schiff: The Real National Emergency Isn’t At the Border – It’s the Debt

a bomb with US DEBT written on it and a hand lighting the fuseOn Friday. Pres. Trump declared a national emergency. Based on that declaration, the president will reallocate $6.5 billion from other government programs to fund a border wall. In his podcast on Friday, Peter Schiff said there is indeed a national emergency, but it has nothing to do with the border. Of course, the real national emergency […]

READ MORE →

Peter Schiff: Who’s Going to Pay for the Green New Deal? Because You Can’t Print Wealth

In his most recent podcast, Peter Schiff dug into the politics behind the Green New Deal and specifically asked a key question: who is going to pay for all this? Related

READ MORE →

A Record Number of Americans Are Delinquent on Their Car Payments

a check engine light is onA record number of Americans have fallen behind on their car payments. On Tuesday, the New York Federal Reserve released its Household Debt and Credit report covering the fourth quarter of 2018. Not only has indebtedness hit record highs, eclipsing levels seen on the eve of the Great Recession, but Americans are also having a […]

READ MORE →

US Household Debt Breaks Another Record

The national debt has pushed above the $22 trillion mark, but it’s not just Uncle Sam borrowing himself into oblivion. US household debt climbed to a record $13.54 trillion in the fourth quarter of 2018, according to a report released by the Federal Reserve Bank of New York. Total household debt (including mortgages) now stands $869 billion […]

READ MORE →

Comments are closed.

Call Now