Tuesday, March 1, 2016

Stock bubble: It now takes more credit to hold up stock prices today than it did just before crashes of 2000 and 2007

Last year was the year of the buyback in the stock markets, where corporations borrowed and spent trillions just to prop up their companies because earnings and revenues were no longer growing.  And for awhile this program was able to take the Dow, S&P 500, and the Nasdaq to new all-time highs.

But in May of 2015 things began to fizzle out, and while there would be a few rally's to counter any major selling, especially during the tumultuous months of July and August, the markets had reached their apex and the trend was fully set for a bear market that began in earnest in January of this year.

Yet perhaps most importantly for those hoping that Wall Street can calm the markets as we head into the 2nd quarter of 2016, an interesting piece of data was just compiled by Bill Holter that shows that corporations and central banks have reached their limit in being able to protect stocks from selling pressures as credit (debt borrowing) is now more costly than during the market peaks of 2000 (Dot Com) and 2007 (Housing Bubble, Credit Crisis) just prior to their collapses.

Just a short comment on a VERY BIG problem! The below chart shows “margin” balance on the NYSE with an inverted chart of the S+P 500 laid over it. 
NYSE-investor-credit-SPX-since-1995-inverted
Please notice the amount of credit being used to carry stocks now is significantly larger than it was at previous market tops in 2000 and 2007. Also, the amount of credit has begun to contract, this is a classic margin call being met …so far. The danger of course is as it always has been when margin builds like this. As the equity market pulls back, margin calls are issued and in some cases “forced sales” are done. This can, has in the past and most likely will occur and morph into a virtual loop where forced sales weaken prices, creating new margin calls and more forced sales in a negative feedback loop…otherwise known as a market panic. - Silver Doctors
What this all means in layman's terms is that when the market tilts completely downward, neither the Fed, nor the banks, will be able to provide liquidity to keep the markets propped up, with margin calls on their outstanding debt they already have causing stocks to unravel even more.

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