Never before have investors racked up this much debt to fund their stock purchases. Moreover, that $507 billion is roughly 50% higher than right before the October 2007 market peak.
The reasons for the jump in margin debt are simply investor overconfidence and speculation fueled by the Federal Reserve’s addiction to ZIRP (zero interest rate policy).
The consequence of lowering the cost of money to nothing is that it promotes speculation and drives up the value of the stock market to nosebleed valuations.
Worse yet, the stock market is two standard deviations away from that long-term average, and that is big trouble, according to Shiller, who wrote in a recent New York Times column: “The United States stock market looks very expensive right now. … [CAPE] is above 25, a level that has been surpassed since 1881 in only three previous periods: the years clustered around 1929, 1999, and 2007. Major market drops followed those peaks.”
Margin lending and the stimulus that will never come spook China's stock markets into correction territory
When does a stock market correction become a crash? Right about now if you’re sat in Shanghai watching the value of your portfolio disappears down the Yangtze River.
Since the beginning of the year China’s stock market bubble has inflated to epic proportions as speculators piled in by borrowing money to buy stocks in ever larger volumes. At the beginning of the year, the value of outstanding loans used by securities firms to fund investment had swollen to exceed $260bn. By the beginning of this month that figure had grown to $364bn.
Many of those investments are now worth less than the value of the loan as more traders exit the market in order to cover margin calls on their outstanding debts. Given the scale of leveraging that underpins both the Shanghai and Shenzhen indexes, few experts are predicting that the current stocks rout will end until more of this debt is washed out of the system.
I am honored to share a remarkable data base of Corporate Fines and Settlements from the early 1990s to the present compiled by Jon Morse. Here is Jon's description of his project to assemble a comprehensive list of all corporate fines and settlements that can be verified by media reports.
"This spreadsheet is all the corporate fines/settlements I’ve been able to find sourced articles about, mostly in the period from the 1990’s up to today (with a few 80’s and 70’s). This is by far the most comprehensive list of such things online. At least that I could find, because the lack of any decent list is what made me start compiling this list in the first place."
What struck me was the sheer number of corporate violations of laws and regulations--thousands upon thousands, the vast majority of which occurred since corporate profits began their incredible ascent in the early 2000s--and the list of those paying hundreds of millions of dollars in fines and settlements, which reads like a who's who of Corporate America and Top 100 Global Corporations.
In other words, these were not wrist-slaps for minor oversights of complex regulations
"These are blatant violations of core laws of the land."
The settlements with the banks along with the ongoing investigations have shown that virtually every market is being manipulated; the stocks, metals markets, LIBOR, FOREX, everything. The companies would only break so many laws if they felt they would have a reasonable chance of getting away with it; they would also need a reason to do it, which is provided by the infinite growth model our economy is based on.
DYI
No comments:
Post a Comment