Reckless Stock-Market Leverage Intoxicates Politicians

Monday, February 16, 2015
By Paul Martin

by Wolf Richter
February 15, 2015

The sudden bloodletting that leveraged currency speculators experienced when the Swiss National Bank yanked the cap on the franc should have been a warning: central-bank promises that everything is under control are meaningless. And because of leverage, innumerable trading accounts blew up in a matter of moments.

Leverage acts like a powerful drug. It creates buying pressure and inflates asset prices further on the way up. But when asset prices sink, leverage begets forced selling, which drives down asset prices further, which begets more forced selling….

And stock-market leverage, encouraged by the Fed’s monetary policies that make nearly free money available to all sorts of speculators, has ballooned.

Some of it is closely watched, like margin debt. FINRA’s 4,000 member securities firms reported that their customers carried $496 billion in margin debt by the end of December, after a multi-year surge. Margin balances had peaked in September at $504 billion, by far the highest in absolute terms, and at 2.8% of GDP, the highest ever in relationship to the economy. Alas, the last two stock-market leverage bubbles ended in phenomenal crashes – the dotcom implosion and the Financial Crisis.

And corporations are issuing mountains of debt to buy back their own shares at peak prices – replacing equity with debt on their balance sheets, leveraging them up to the hilt, like others leverage up their brokerage accounts. In many cases, such as IBM, “tangible net worth” has turned negative, and stockholders are already under water.

The Rest…HERE

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