Warning: Stock Market Margin (Borrowing) Reaches All-Time High

key stock indicesI’ve been writing in these pages how more and more time-proven stock market indicators are starting to scream “Danger!” for the stock market.

Investors are getting too bullish on stocks (an omen of lower stock prices ahead), as seen in the American Association of Individual Investors (AAII) Investor Sentiment Survey. It shows 48% of investors were bullish towards key stock indices on November 7. Going back to just June of this year, the number of bullish investors stood at 32.97%. (Source: American Association of Individual Investors web site, last accessed November 11, 2013.)

Investors are flocking towards key stock indices, buying stocks in hopes they will go up in value. According to the Investment Company Institute, long-term equity mutual funds have been seeing inflows since the beginning of this year. (Source: Investment Company Institute, November 6, 2013.)

To me, this sounds all too familiar. I don’t have to go very far back to see what happened when the majority of investors turned so bullish. Remember 2007? Or the Tech Boom? In both of those situations, the common notion was that key stock indices would continue to soar and those who talked against it were ridiculed.


The reality is that the risks on key stock indices continue to increase. And the higher this market gets, I question how bad the market sell-off is going to be when it finally hits.

I’d say the “bubble” in the stock market has become the biggest I’ve seen in years, as evidenced by the amount of money investors are borrowing to buy stocks, which is often referred to as margin debt.

Leverage is a double-edged sword: When the stock market rises, investors profit heavily. But if the market falls, those investors who borrowed money to buy stocks tend to panic and sell. During the Tech Boom in 1999/2000 and again in 2007, we saw margin debt on key stock indices reach historical highs; subsequent to reaching those highs, key stock indices crashed.

With this said, below I’ve created a chart for my readers that shows the margin debt on the New York Stock Exchange (NYSE). In September of this year, margin debt on the NYSE (the amount of money investors borrow to buy stock on the NYSE) reached its highest level ever! It stood above $ 401 billion.

margin debt new york stock exchange chart

The above chart is further evidence we are being set up for a big market sell-off. Key stock indices have moved higher on very weak fundamentals. And the higher they go, the bigger the market sell-off is going to be. I remain very cautious.

Michael’s Personal Notes:

It’s “fairly good protection against fluctuation of the Dollar and risk diversification,” said the President of the European Central Bank (ECB), Mario Draghi, about gold bullion recently at Harvard University. He added, “Central banks which had started a program of selling gold a few years ago substantially stopped; by and large they are not selling any longer. Also the experience of some central banks that have liquidated the whole stock about ten years ago was not considered to be terribly successful from a purely money viewpoint.” (Source: “Central banks are unwise to sell their gold: ECB president Mario Draghi,” Mining.com, October 17, 2013.)

At the very core, the President of the ECB reiterated the point I have been trying to make in these pages for some time now: central banks are in dire need of gold bullion because the fiat currency they have created provides them with nothing but uncertainty. Gold bullion, on the other hand, keeps central banks’ reserves in check.

Dear reader, it’s a fact: central banks around the global economy are in a race to devalue their currencies to the bottom. They are printing money and keeping easy monetary policies in place to make sure that their currency value is suppressed. They think this act brings prosperity in the form of export demand. The central banks are wrong.

Our own central bank, the Federal Reserve, is printing $85.0 billion a month to bring economic growth to the U.S. economy. The Federal Reserve has also kept interest rates at artificially low levels for years. But if we take out the strengthening of big banks and the rally in the stock market, we don’t have much left to show for the trillions of dollars in new money being created by the Fed.

Unfortunately, other central banks are doing the very same, and the list is getting longer each day. The ECB has lowered its key interest rate again—a surprise move that brought the value of the euro lower. But the eurozone crisis remains and continues to take its toll.

The Czech National Bank (CNB), the central bank of the Czech Republic, had promised to keep its key interest rate the same, but then decided it needed to intervene even further. The statement from the central bank said, “The CNB will intervene on the foreign exchange market to weaken the koruna so that the exchange rate of the koruna against the euro is close to CZK 27.” (Source: “CNB keeps interest rates unchanged, decides on interventions,” Czech National Bank, November 7, 2013.)

All this money printing and other easy money policies are bullish for gold bullion prices ahead.

While the press and many financial advisors have become negative on the precious metal these days (largely because prices stopped rising and have come down), I’m sticking to my bullish stand on gold bullion and my belief that the well-managed gold producing companies are presenting tremendous opportunities to investors.

What He Said:

“Interest rates at a 40-year low: The Fed has made borrowing as easy as possible, resulting in a huge appetite for loans and mortgages. We are nearing a debt crisis.” Michael Lombardi in Profit Confidential, April 8, 2004. Michael first started warning about the negative repercussions of then-Fed Governor Greenspan’s low interest rate policy when the Fed first dropped interest rates to one percent in 2004.