Thread by @movement_cap

1/7 some thoughts on margin debt

margin debt stats are typically used in clickbait headlines

like so:

2/7 narrative: big numbers are scary and there's ~$600 billion in margin debt, so there's ton of leverage just waiting to be unwound

as with most big number stats - the data needs to be scaled. margin debt relative to the overall market is a boring chart (h/t @EconomPic)

3/7 I used to have a site with graphs like these

historically, it's been bad for stocks if margin debt has contracted over the past year

but this has less to do with margin debt and more to do with momentum

4/7 more often than not, higher prices -> higher margin debt and vice-versa

it's why this momentum chart looks just like the previous margin debt one

you can immediately observe prices. margin debt is released with a ~3 week lag

5/7 so margin debt is mostly noise. there is a rare scenario where it is worth paying attention to IMO

sometimes margin debt has rapidly accelerated

for example, in may 2000 margin debt grew 80% YoY and the S&P was +10% YoY (h/t @topdowncharts )

6/7 this meant that investors were quickly leveraging up at a pace faster than the market's rise

IMO this is a sign of irrational exuberance and increased market vulnerability to small drops

but like I said - really uncommon. last times this happened? may 2000 and sep 2007

7/7 current situation is the exact opposite

margin debt is $568 billion. 12m ago it was $668 billion

it's fallen -15% while the S&P has risen +9%. less leverage + higher prices

summary: next time you read a scary margin debt headline, remember it needs context to be meaningful