Wall Street margin debt hits record high

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Wall Street’s S&P 500 index hit a new high on Thursday on the back of the Fed’s decision the day before that its continued stimulus to financial markets, thanks to the injection of more than $ 1.4 trillion per year asset purchases, would continue for a year. “Long time.”

Trading on the floor of the New York Stock Exchange [Credit: AP Photo/Richard Drew]

This commitment came despite indications of increased economic growth in the United States and rising inflation which, in the past, would have paved the way for tighter monetary policy. But such a fear is such that even the suspicion of a move in that direction will trigger a collapse in the speculative financial boom that Fed Chairman Jerome Powell took every opportunity at his press conference to rule it out.

The extent of the speculative mania, which goes far beyond anything seen in the past, is indicated by major financial trends and specific events.

One of the most significant general indicators is the escalation of margin lending, in which investors borrow money from brokers to fund stock purchases and trade in financial markets. The collateral for the loan is the financial asset purchased, with the broker being able to demand more cash from the investor – a margin call – if its market value drops.

The dangers of margin trading were exposed last month with the collapse of previously little-known family-owned investment firm Archegos Capital following such a call. He had amassed some $ 50 billion in loans from some of the world’s major banks, most notably Credit Suisse, and his demise left the banks with a total loss of $ 10 billion.

But despite this warning sign, the escalation of margin debt continues. The Financial Sector Regulator, a supposed Wall Street watchdog operating under the supervision of the Securities and Exchange Commission, reported that margin debt at the end of March was a record $ 822 billion .

This compares to the figure of $ 479 billion in the same period last year and more than double the peak of $ 400 billion in 2007 on the eve of the 2008 financial crisis.

Putting these numbers in context, the Financial Times Calculations reported by London-based ABP Invest show that during the credit booms of 2000 and 2007, US margin debt reached a level equivalent to about 3 percent of gross domestic production. It is now equivalent to almost 4%.

But even the figures provided by FINRA are a major understatement of the total debt involved because, through the use of financial derivatives, banks are able to finance more highly leveraged transactions, such as ‘revealed the collapse of Archegos.

The cheap money provided by the Fed allows an orgy of speculation that has seen the transfer of trillions of dollars into the hands of the world’s richest individuals, as millions of people in the United States and around the world face to a return to conditions never seen since. the time of the Great Depression of the 1930s.

A revealing exchange took place during the CBS 60 Minutes program earlier this month when Fed Chairman Jerome Powell was asked about escalating margin debt.

Interviewer Scott Pelley noted that there had been a 49% increase in margin debt so far this year and asked, “When does the Federal Reserve start to curb this? speculative increase in stock prices based on borrowed money? ”

Powell replied, “It looks like margin debt. I don’t know this statistic. I really cannot comment on this statistic. “

The Fed chief’s claim that he completely ignores the level of margin debt, given its importance to the stability of the financial system, only flouts belief.

Powell chose to respond as he did out of fear that any comment on the matter – and even the vaguest suspicion that margin debt was reaching dangerous levels and which perhaps should be brought under control – would set off turmoil at Wall Street, so dependent it has become on the central bank’s ultra-cheap money flow.

Another general indicator is the increase in funds raised by Special Purpose Acquisition Companies (SPAC). The companies, sometimes described as blank check companies, raise funds and get a stock exchange listing in an effort to take over another company that wants to go public and join the stock market boom without having to go through the process often. complex to make a first public offer.

In the first three months of this year, PSPCs raised nearly $ 88 billion, more than for all of 2020.

Many individual phenomena express the extent of speculation. Chief among them is bitcoin, which peaked at $ 64,000 earlier this month before falling back somewhat.

The rise and rise of Tesla shares is in the same category. The company is also linked to bitcoin speculation. On Thursday, he announced that his net profit for the March quarter was a record $ 438 million. The company revealed that it sold $ 1.5 billion worth of bitcoin, which contributed $ 101 million to the bottom line.

As a producer of electric vehicles, Tesla has also raised $ 518 million by selling regulatory credits to other companies to help them meet their emissions mandates. As the WallsTree log put in a title “Tesla makes more money exchanging bitcoin than selling cars.”

The complete divorce of the company’s stock market value from the underlying real value – a hallmark of the stock market boom as a whole – is indicated by the fact that Tesla’s $ 700 billion market value is more than five times its value. combined Ford and General Motors. Sales of the first in the United States in the first quarter alone were more than double Tesla’s worldwide sales for a year.

Perhaps the most egregious expression of the market mania is the case of Hometown International, which owns a small grocery store in Paulsboro, New Jersey. The deli had sales of just $ 21,772 in 2019 and just $ 13,976 in 2020 when it was closed for six months due to the COVID-19 pandemic. But recently, its market valuation exceeded $ 100 million. As one hedge fund manager commented, “the pastrami must be amazing”.

The rise and rise in the market value of Hometown indicates a larger process. Stocks and other assets, including major industrial products such as lumber and copper, are bought only on the basis that other buyers will come at an even higher price.

While commentators, barely able to see beyond the tip of their noses and arguably dazzled by the rise of their own portfolios, hailed the market rise as a resurgence of the US economy out of the pandemic. , it is an expression of his sick character.

It should be remembered that the origins of the current manic phase of the stock market boom lie in the massive intervention of the Fed from March 2020 when the markets collapsed and the $ 21 trillion market in US Treasuries, based on of the global financial system, frozen.

The Fed’s intervention, amounting to trillions of dollars and supporting all financial markets, including the purchase of shares for the first time, has been an extension and a qualitative development of the policies it has pursued since. the stock market crash of October 1987, when it initiated the program of supplying ever cheaper money to the markets in response to a crisis.

The history of these interventions shows that whatever their effect on short-term stabilization, they set the stage for a resurgence of the underlying crisis in an even more virulent form.

All the conditions are now developing for another crisis, far exceeding the scale of the 2008 crash, in which the working class will be directly confronted with the necessary task of seizing political power into its own hands in order to begin the reconstruction of the American and world economy on socialist foundations.

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