Margin debt problem deniers may be too complacent in ignoring the fact that margin debt hit $465.7 billion in February, the highest absolute dollar amount and highest ratio to GDP ever. Further, $465.7B is what brokers report to the NYSE. It's only a fraction of total stock market leverage. In the article below, Wolf Richter discusses other forms of leverage which are similarly worrisome.   

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Stocks On Speed: Leverage Spikes, As Does Risk Of Crash (Look At That Insane Chart!)

By Wolf Richter of Testosterone Pit

Margin debt is a crummy predictor of a stock market crash. But after it starts spiking, it has a bone-chilling habit of peaking right around the time stocks crash. In the last fifteen years, it spiked three times: during the final throes of the bubbles that started imploding in 2000 and 2007; and now.

In February, margin debt jumped by $14.5 billion to a new all-time crazy record of $465.7 billion. In the last seven months, it soared $82.8 billion. It’s now 22% above the prior all-time crazy record of $381.4 billion set in July 2007, during the glorious moments before the whole construct came tumbling down.

Are we there yet?

Margin debt started spiking in January 1999 and in March 2000 hit a record of $278.5 billion, or 2.66% of GDP. That very month, stocks began their epic collapse, which, after 28 months of cliff dives and sucker rallies, left the S&P 500 down 45% and the Nasdaq nearly 80%!   

Margin debt started spiking again in September 2006 to peak in July 2007 at $381.4 billion, or 2.60% of GDP. The market maxed out in October. Then the fetid air started hissing out of it. As stocks swooned, brokers told their frazzled clients with suddenly too much margin debt to put more money into their accounts or sell their holdings – right now! Forced selling commenced. As margin debt was unwound by dumping whatever could be dumped at whatever price, the selloff turned into a plunge. After a few waves of it, hedge funds, leveraged to the gills and going deaf from the giant sucking sound of redemptions, were forced to sell too, which drove stocks down further and triggered more forced selling. When the dust settled, the S&P 500 had crashed 57%.

And what about now? Keep reading Testosterone Pit - Home - Stocks on Speed: Leverage Spikes, As Does Risk Of Crash (Look at that Insane Chart!).