Stock market bubble driven by margin debt

Now, what news on the Rialto?
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Azrael
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Stock market bubble driven by margin debt

Post by Azrael »

Keen tells The Daily Ticker the U.S. stock market is a giant bubble. But the key factor inflating it may not be what you think, according to the economist (i.e. he’s not pointing fingers at the Fed…at least not directly).

Keen has his eye on margin debt. This is the money people borrow from their stockbrokers to expand their holdings of shares. Keen says the ratio is now 70%, meaning with $300,000 you can borrow $1 million worth of shares.

Here’s where it gets interesting. Steve has found a relationship between the change in margin debt and the level of asset prices. Even more importantly, he points to a correlation between the acceleration in margin debt and the rise in asset prices.

If his theory holds true, this means we’re relying on the acceleration of margin debt to drive rising share prices. And when that acceleration slows down, equity prices will fall.
Professor Steve Keen's Minsky page.
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Marcus
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Re: Stock market bubble driven by margin debt

Post by Marcus »

Thanks, Az . . good to know . . .
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Azrael
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Re: Stock market bubble driven by margin debt

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You're very welcome, Marcus.
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Mr. Perfect
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Re: Stock market bubble driven by margin debt

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STPN babay. Elect Democrats, don't be surprised at the results.
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Re: Stock market bubble driven by margin debt

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And keep in mind that bubbles are defined as increases of share price not earnings. Just so you know. We told you all. STPN was going into the stock market. We did tell you that. For years actually.
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Re: Stock market bubble driven by margin debt

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Ben Bernanke Spring 2013: No stock market bubble

http://www.cnbc.com/id/100574063
Cyprus does not pose a threat to the U.S. economy or financial system and there are no signs of stock market bubble, Fed Chairman Ben Bernanke said on Tuesday.
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Re: Stock market bubble driven by margin debt

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Bernanke 2006-2008, no RE bubble.

INmqvibv4UU
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Re: Stock market bubble driven by margin debt

Post by Mr. Perfect »

BTW when we started to tell you guys that the STPN was going into stocks it seems like people didn't understand what we were saying;

Keep in mind that with this being a margin bubble now, there is no soft landing. Much like subprime, when the housing market collapsed alongside there was no way to cushion the blow;

This time, instead of foreclosing on houses at a loss, the margin calls will come in without mercy.

Thanks Democrats.
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Taboo
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Re: Stock market bubble driven by margin debt

Post by Taboo »

Mr. Perfect wrote:And keep in mind that bubbles are defined as increases of share price not earnings. Just so you know. We told you all. STPN was going into the stock market. We did tell you that. For years actually.
What P/E ratio to you generally consider to be "outrageously bubbly"? 10? 20? 40? 60?

Anything above 20 in my book is driven by utter speculation.

Although perhaps with longer life-spans and supposedly undying institutional investors, long-term holding horizons are more palatable now compared to when my finance book was written?
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Taboo
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Re: Stock market bubble driven by margin debt

Post by Taboo »

Azrael wrote:
Keen tells The Daily Ticker the U.S. stock market is a giant bubble. But the key factor inflating it may not be what you think, according to the economist (i.e. he’s not pointing fingers at the Fed…at least not directly).

Keen has his eye on margin debt. This is the money people borrow from their stockbrokers to expand their holdings of shares. Keen says the ratio is now 70%, meaning with $300,000 you can borrow $1 million worth of shares.

Here’s where it gets interesting. Steve has found a relationship between the change in margin debt and the level of asset prices. Even more importantly, he points to a correlation between the acceleration in margin debt and the rise in asset prices.

If his theory holds true, this means we’re relying on the acceleration of margin debt to drive rising share prices. And when that acceleration slows down, equity prices will fall.
Professor Steve Keen's Minsky page.
70%? Seven Zero? Is this for individual investors, or for "legal persons" like Goldman Sachs? Back in 2006, when I was deciding whether to work in finance or go into academia for a while, I did some research and I remember being shocked by deals that were 90-98% "leverage backed." It's awesome (in the old sense of the word, "terrifying") that 20-something Harvard and Stanford grads are allowed to take half-billion dollar bets with virtually no capital of their own, or even of their own bank.

No skin in the game = Complete indifference to taking on limitless long-term risk in exchange for short-term profit opportunities.

Just like Banks have reserve requirements, perhaps investment bankers should put up 1-10% of each deal they make. The percentage can be a combination of their own personal money and of their company's money, but the personal share should be significant enough to hurt if it goes south.

I think that would solve a lot of problems. I also don't think it has a snowball's chance in hell of being turned into actual policy.
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Re: Stock market bubble driven by margin debt

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Taboo wrote: What P/E ratio to you generally consider to be "outrageously bubbly"? 10? 20? 40? 60?

Anything above 20 in my book is driven by utter speculation.

Although perhaps with longer life-spans and supposedly undying institutional investors, long-term holding horizons are more palatable now compared to when my finance book was written?
All P/E ratios are driven by utter speculation.

I will unveil the mystery of the universe to you here. I could do this the hard way or the easy way, but since you have apparently cracked open a finance book I will try the easy way (far less typing);

Don't think in terms of PE, think in terms of present value and the relationship between PV and PE;

A stock's entire value is based on earning that have not happened; they are in the future. The price of the stock is based on discounted sums of future earnings. The impact of the balance sheet is only felt if one can discern the impact on earnings;

So one must think of it this way;

If the expectation of future earnings remains constant the same the stock price will earn a normal return relative to the risk of that income stream;

If the expectation of future earning grows from moment in time to the next the stock will achieve a higher than normal return relative to the risk of that income stream;

If the expectation of future earnings fall from one moment in time to the next the stock will achieve a lower than normal return for the risk associated with that income stream.

As always, one must plug in all the variable to assess what is implied about future earnings of the firm, and the investor must guess/bet/assess whether the market is "right" about

This is the fundamental of all fundamentals.

What it means here is that there is no magic PE that dictates a bubble. A company with a PE of 4 could be overvalued, a company with a PE of 35 could be undervalued.

The "low PE" ideology has some merit however because the bar is set so low to achieve earnings expectation adequate to maintain normal returns. But plenty of people get really filthy rich trading high multiples; Objectives, means, opinions vary.

Determining a market wide bubble is a little different, there plenty of clues. Eg, when capital prices rise in conjuction with increases in leverage debt with no discernible impact on credit prices, you might just have a bubble. In fact probably at least half of all major bubbles fit this description, and guess what, they aren't possible without fiat currencies/central banking.

Thank you leftists.
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