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Margin Debt: Move Along, Nothing to See Here

Posted by nexvucapital on October 25, 2013

“NYSE Margin Debt just reached another record high, and an increasing number of market skeptics are expressing concerns.  They reason as follows.  Increased investor willingness to buy stocks on margin suggests increased investor confidence and optimism.  But markets don’t perform well when investors are already confident and optimistic.  Moreover, people invested on margin are less able to tolerate price fluctuations.  As their presence in a market grows, so does the risk that otherwise healthy challenges to the market’s advance will provoke rapid, self-fulfilling unwinds of positions.  These unwinds have an uncanny ability to grow into more ominous things.”

“To ground these concerns, the skeptics appeal to history.  They point out that extreme margin borrowing was the primary cause of the 1929 stock market crash, and that the market crashes of 2000 and 2007 both involved blow-off peaks in margin debt.”

Margin Debt: Move Along, Nothing to See Here.


Source: Philosophical Economics


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