From Wolf Richter, at wolfstreet.com:
The sudden bloodletting that leveraged currency speculators experienced when the Swiss National Bank yanked the cap on the franc should have been a warning: central-bank promises that everything is under control are meaningless. And because of leverage, innumerable trading accounts blew up in a matter of moments.
Leverage acts like a powerful drug. It creates buying pressure and inflates asset prices further on the way up. But when asset prices sink, leverage begets forced selling, which drives down asset prices further, which begets more forced selling….
And stock-market leverage, encouraged by the Fed’s monetary policies that make nearly free money available to all sorts of speculators, has ballooned.
Some of it is closely watched, like margin debt. FINRA’s 4,000 member securities firms reported that their customers carried $496 billion in margin debt by the end of December, after a multi-year surge. Margin balances had peaked in September at $504 billion, by far the highest in absolute terms, and at 2.8% of GDP, the highest ever in relationship to the economy. Alas, the last two stock-market leverage bubbles ended in phenomenal crashes – the dotcom implosion and the Financial Crisis.
And corporations are issuing mountains of debt to buy back their own shares at peak prices – replacing equity with debt on their balance sheets, leveraging them up to the hilt, like others leverage up their brokerage accounts. In many cases, such as IBM, “tangible net worth” has turned negative, and stockholders are already under water.
Other forms of stock-market leverage are more difficult to quantify, like people borrowing against their home equity lines of credit or their credit cards to plow that moolah into stocks to make that quick buck that their neighbors have been bragging about.
This risk-taking with other people’s money works as long as stocks keep pushing relentlessly higher, powered by central-bank policies, ever more borrowing to buy ever more stocks, and a firm belief that everybody believes that stocks will continue to go up, thus creating momentum in the right direction.
But no form of stock-market leverage is riskier to the mostly unwitting public and taxpayers, and crazier in overall terms, than the leverage that desperate, underfunded public pension funds in cash-strapped states or municipalities take on to buy stocks.
http://wolfstreet.com/2015/02/15/stock-market-leverage-intoxicates-politicians/
To continue reading: Reckless Stock-Market Leverage Intoxicates Politicians
See also, “They Really, Really Want Your Money,” SLL, 10/13/14
