Looking at the chart above, notice how quickly margin debt levels recovered from their Covid lows back to their 2018 peak after the initial shock of lockdowns. And now, 12 months on, margin lending has stormed even higher, setting new record highs with each new month.

This rate of change is, quite frankly, frightening. As with market prices, the larger and quicker the spike, the higher the potential of it ending badly, as straight line moves (in price and in margin lending) more often than not reflect speculative fervor, if not outright mania.

Going back to 2000 and 2008, we observe the same phenomenon occurring just before those bubbles burst. In the Dot Com bubble, margin debt jumped higher by approximately 60% over a period of ~9 months before peaking. In the lead up to the ‘08 Crisis, it leapt higher by about 66% over a period of ~12 months before turning down again. 

As of the FINRA data available to us, which is up to March 2021, margin debt has leapt higher by 71% from the Covid low it made 12 months ago.

While the rates of change are similar across all three years, the numbers given above are not a prediction that the current equity market has peaked, or will peak soon. While this may very well happen, the idea behind looking at the data in this way is to illustrate that something is amiss in US equity markets; another piece of corroborative evidence for the “market’s in a bubble” argument, if you will.

Of course, the spike in margin levels since 2020’s Covid lows can be partly attributed to the surge in retail investing, and the margin retail brokerages are offering to their new clients.

However, the general trend in margin debt levels since 2008 has been higher, to the extent where current margin levels are at twice their 2008 peak. Considering that the retail stampede into public equities is a 2021 phenomenon, something else has been going on for the past decade or so. The question is what?

While there are certainly a number of factors involved, the 13 year bull market in US equities (since their ‘’08 lows) has to be a big contributing factor, if not the biggest one. As the stock market moves higher, more people choose to get involved and open new brokerage accounts to trade stocks, some of which do so on margin. As a result, total margin lending in the system increases as the bull market draws more and more investors into putting money into the stock market.

Furthermore, ever rising stock prices allow traders to trade with increasingly higher levels of leverage. This is because their equity positions keep increasing in value, allowing them to take higher absolute levels of margin debt. (100% leverage on a $1000 account is $1000, and 100% leverage on a $2000 account is $2000) As such, higher stock prices beget even higher margin debt levels.

All of which brings us back to the issue raised earlier, which is that labeling a market a “bubble” is of little practical consequence. Applying the label does not tell us when the market will peak, while diving into the data and understanding rates of change also provides us with no definitive answers.

What then do we do with information that has no precise trading value?

To be concluded…