Thursday, June 12, 2014

Update: "Hussman's Ratio" of Margin Debt to Commercial and Industrial Loans

I've posted twice before [1,2] about "Hussman's Ratio" of Margin Debt to Commercial and Industrial Loans, after he pointed out in December 2013 that,

"the amount being borrowed to buy stocks on margin is now 26% the size of all commercial and industrial loans in the entire U.S. banking sector."
Here is what the ratio looks like now:



The ratio spent much of the second half of the 20th century below five percent. It was not until the Fed induced bubble in the mid-1990s that it went parabolic, cracking 15% for the first time ever in September 1997.

Here are all the months when the ratio has been above 25 percent: February and March 2000; April through August 2007; February through May 2011; April 2013; and September 2013 through April 2014. The most recent stretch, at eight consecutive months, is the longest ever.

Keep in mind that we are deflating the margin debt series using commercial and industrial loans, which grow very swiftly themselves during credit bubbles.

By the way, here are the months where this series hit a local minimum: July 2012, February 2009, October 2002, October 1998, January 1991, September 1982, January 1975, October 1970.

This ratio is a good indicator. It is amazing that people are so bullish at a leveraged extreme like this. Anecdotally, the bullish macro wizards that I follow on Twitter are now very, very cocky. They have seen Hussman driven before them and heard the lamentation of his women.

14 comments:

whydibuy said...

So you have no problem with a new norm of 0% interest rates but a corresponding new norm of utilizing those super low rates is a danger sign.
HHHMMMMM.
I guess a man sees what he wants to see and disregards the rest.

Anonymous said...

Given that financial institutions face negative real returns on cash/equivalents, it is not surprising that they are borrowing to invest in other assets.

Institutions can borrow on margin at historical low rates, which further incentives such behavior.

What do you think makes good investments when rates rise in the UK, QE gets tighter in the US, and the costs of leverage increase?

AllanF said...

That's right! We've all got to put our money to work (since we can't) and we've got to really make it sweat (we need the income)!

There's no other choice. Fed said so.

AllanF said...

went parabolic, cracking 15% for the first time ever in September 1997.

Not only has it cracked it, it's barely looked back. Only a couple times has it been below 15%. 20% is the new 5%, a 4X increase in leverage.

CP said...

This ratio increases when people buy stocks on margin *faster* than banks make commercial and industrial loans.

Are "financial institutions" (banks?) the ones buying stocks on margin? I would assume that it's hedge funds and individuals.

I think that long bonds will do best in tightening.

CP said...

I think it's actually funny how closely this graph matches a graph of the S&P 500 (same inflection points).

Think about it - why would a stock index simply mirror the amount of leverage people were using?

Because the stock index is just an expression of social mood, like Prechter says.

James said...

Anecdotally, the bullish macro wizards that I follow on Twitter are now very, very cocky. They have seen Hussman driven before them and heard the lamentation of his women.

There's an entire blog that's devoted to passive-aggressively dissing Hussman.

CP said...

"that groditi guy could hate with the best of them (silky johnson, buck nasty, et al)"

https://twitter.com/jschembs/status/474237128692338689

CP said...

Yep I was thinking of that guy in particular and one or two others.

CP said...

If we have one more crash it's going to discredit buy and hold investing.

And then we'll be able to buy at low valuations and hold!

Anonymous said...

Retail investors--like multinational corporations--are hoarding cash so it must be institutional investors than are over-utilizing their margins:
http://www.ft.com/intl/cms/s/0/6e7a1918-f222-11e3-ac7a-00144feabdc0.html#axzz34jiThCYx

Anonymous said...

Bond funds hold much of the credit risk now. Eventually there will be large outflows of capital, resulting in the immediate sell offs of corporate bonds by mutual fund managers. Are any high-yield ETFs optionable?

Anonymous said...

Woooo Treasuries!

Hartzman said...

Conan the Barbarian