Juggling Dynamite

The use of margin debt is an important indicator of market sentiment. Over the past year we have commented several times on how NYSE margin use in 2012 had moved higher than the manic levels seen just before the 2000 market crash and was fast approaching the peak achieved just before the 2008 market crash. This week we confirmed that in April, NYSE margin debt officially surpassed the previous all-time-peak from 2007 as the year-to-date QE rally year spurred participants to borrow more than $384 billion against their portfolios in April a jump of 29% over the same month last year. See WSJ: Margin debt hits a record, showing confidence

Confidence? How about madness? In one of the most dangerous and contrived, market environments ever, participants are virtually assuring the likelihood of extreme capital evaporation. This trend also presents clear and present danger for un-levered investors who are not using margin debt, but are trying to follow the conventional wisdom and hold equity assets for dividend income. Forced liquidation selling is always the eventual outcome of high margin periods once asset prices begin to weaken. And this tanks the asset prices of both those who are using margin, and those who are not but are trying to be patient “long-term investors.”

But here is the part of the story that really screams nightmare. Apparently some financial advisers sellers have been recommending that people use margin debt to fund other “investments”:

“…advisers say that margin debt can be a cheaper and easier way to borrow than a traditional loan, so they are recommending margin borrowing for uses like home renovation and business expansion.”

Wow! Make long-term, illiquid allocations by borrowing it on margin debt that can be called on a moments notice when securities prices fall.  With financial advice like that who needs enemies. Can you say financial suicide waiting to happen? It would be better to take your cash out and burn it in a bonfire in your backyard. At least then you could get some enjoyment and heat off of its destruction.

I will be speaking at the Cambridge House Vancouver Resource Conference this weekend with a Keynote on Sunday at 1:30, a presentation Monday at 11:00 am and a panel discussion on World Outlook Monday at 5:00 pm. You can register to attend or see more on the agenda here.

Last time I attended this show was January 2013 when I gave this presentation and did this interview laying out the likelihood of an incoming global recession, continued weakness in commodity prices, precious metals and Canadian stocks, along with a stronger US dollar and continued bid for North American bonds. (So far so good.) I also explained why we were expecting weakness to materialize in over-valued US stock markets…definitely taking longer than average for US stocks to turn down, especially as global Central Bankers are committing hari kari every day to try and stall the inevitable. That said the vector of the slowing global economy remains in tact and US stocks are now even more over-valued than 6 months ago. As they say on planes, during periods of extreme turbulence, best to remain calm and keep our seat belts fastened.

When then Presidential hopeful, Mitt Romney dissed Tesla (and therefore Musk) as a “loser”, I thought he was speaking volumes about himself. In a world filled with over-paid corporate executives who take obscene riches while inventing nothing and managing companies into the ground, Musk is the rare breed of hardworking visionary, who could have retired as a multimillionaire in his 30’s but instead chose to put all of his personal net worth on the line more than once in order to develop new technologies and companies that are helping to solve some of the most pressing issues facing humanity today. Would that the world had a whole lot more “losers” like Musk.

Elon Musk, chief executive officer of Tesla Motors Inc., talks about the automaker’s early loan repayment to the U.S. Energy Department and growth strategy.Here is a direct link.