Thursday, September 25, 2014

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

I've posted several times before [1,2,3] 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 August 2014. The most recent stretch, at twelve consecutive months, is by far the longest ever. With the exception of the most recent (which remains to be seen), these were the worst possible times to buy stocks.

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.

Here is something that I'm noticing on my fourth look at the time series of this ratio: the oscillations are getting bigger. Granted, it's not a very big sample size, but the 2007-2009 peak-to-trough was bigger than the 2000-2002 peak-to-trough.


whydibuy said...

So what good does this chart do you?
If you saw the sharp rise in '95 and got out, you missed about 10k points on the dow.
Great advice there. Sure wish I took it then......not!

And for this charts so called future predictions....whatever.

John said...

I've been following Credit Bubble for years and I have a subscription to the comments.

CB is always basically bearish (not that that stops him from making profitable trades); however commenter whydibuy shows up sporadically.

The correlation that I have noticed is that whydibuy shows up during corrections when high beta junk is getting slammed. He must have an absolute trash portfolio that keeps him up at night when the market has fallen a few percent from peak.

whydibuy said...

Don't quit your day job and become a detective, John.
I said at the beginning of this year on this board that I liked bank stocks like BAC . My quality portfolio does just fine.
The fact is I chime in when I read permabear article # 87945 from Cb. This guy always gives the negative slant to a chart or company while failing to turn around the interpretation and see it a different way, namely a positive way.
I see you suffer from the same malady as you do the ad hominem attack but can't refute the point of the post that following this chart in the past was a huge mistake and deadly to your wealth.