MARGIN DEBT CONSENSUS: Monthly records for leverage becoming the norm

March 10, 2014

Cheap money continues to act as a can of Red Bull, enticing investors to borrow more to juice their returns. The latest numbers from TrimTabs show that margin debt – money loaned to investors by brokerage houses to invest, rose to $452 billion in January, the seventh straight month it has risen and marks the seventh straight month of setting a new record. Since July 2012, margin debt has risen a staggering 63 percent.

There are two schools of thought regarding margin debt. One side believes high margin levels signals that investors are extremely confident and believe stocks will continue to rise which allow them to generate enhanced returns with little investment out of their own pockets. The other side believes this overconfidence, marks a dangerous turning point, where any sudden pull back will become more pronounced as banks will start demanding their margin debt be covered forcing investors to sell stocks and further drive prices down. As this is the seventh straight months of increases in debt, the bubble hasn’t popped. As we’ve seen in the past though, when the investors move to a position of extreme behaviour and in this case, it is walking with quite a swagger, the time may be right for them to get run over. When it does, some intriguing investment opportunities may emerge.