Disruptive Markets  

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Causal Capital ~ The Knowledge Capital Specialists

Market Déjà vu

Thursday, February 18, 2016

Apparently it's not 2008.  Yes, we know that, well some of us do but it is starting to feel like 'Market Déjà vu', that is the sentiment under all of this.

 

Don't Panic 'Experts' agree that it's not 2008 | Zero Hedge [LINK]

 

Here is the crumble with such thinking, if everyone is saying it's not 2008 and we obviously know that is chronologically true, what are all these people saying?

 

Okay then, show me something that looks like 2008, something tangible and straight forward.

 

Let's take a look at how propped up the markets are with short term traded or margin debt. For those that don't know, Margin Debt is the dollar value of securities purchased on margin within a specific account. That is securities or investments, call it what you wish, have been purchased but not by an outright exchange of cash. Instead, a promise to pay what is due when a position is closed and at the new closing price is covered or collateralised by other securities.

 

Margin buying refers to the buying of securities with cash borrowed from a broker, using other securities as collateral.

Margin Finance | Wikipedia [LINK]

 

Margining is a great way to leverage your investments and in bull markets, returns are handsome, much more handsome with a bit of margining thrown in for good measure. However, when the markets turn, highly leveraged positions exacerbate losses driving investors to close positions en masse and a negative feedback loop can develop.

 

Wall Street 2008 - Margin Call | Kevin Spacey & Zachary Quinto

 

Surely not, have we been here before? ... Oh yes we have, back in 2008 to be precise.

 

Is this 2008 all over again?

 

Come on, give me a break, they even made a movie about all of this. Yes they did and ironically it was named "Margin Call". 

 

So where are we right now?

NYSE Margin Debt as a % of US GDP Explodes | National Inflation [LINK]

 

Okay, now that is pretty scary, this is not 2008 again, it's worse! Back in April 2015, margin debt hit a new all-time high for several consecutive months in a row [LINK].

 

A few people have asked me why have the equity markets been so volatile over the last few months and why don't they unwind in a nice orderly fashion?

 

The process of deleveraging or closing margin positions en masse; is expensive, painful and generates volatility as a side effect.

 

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