Thursday, February 19, 2015

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

I've posted several times before [1,2,3, 4] 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; October 2007; February through May 2011; March and April 2013; and September 2013 through December 2014. The most recent stretch, at sixteen 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.

The oscillations have been getting bigger over time. The 2007-2009 peak-to-trough was bigger than the 2000-2002 peak-to-trough.

I think the Federal Reserve and government's over-controlling of markets is conditioning investors to get maximum leveraged when these institutions are "supportive" and to dump everything when they are not.

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