Doom Index Says Beware! by Bill Bonner

There are flashing economic red lights out there, indicating that full speed ahead may not be the best investment strategy right now. From Bill Bonner and bonnerandpartners.com:

GUALFIN, ARGENTINA — We have not had any word from our attorney in the city of Salta, but we assume the case was dropped.

Grand theft auto was the charge (catch up in full here).

But the alleged wrongdoer, your editor, claimed his actions were motivated by stupidity, not criminality.

Our ranch foreman Sergio came and switched the trucks.

With the cops off our trail, we turn back to the financial markets…

Doom Index

A dear reader helpfully suggested that we put together a “Doom Index” – with indicators of an approaching bust.

Our research team in Delray Beach, Florida, is working on it.

In the meantime, one doom indicator we highlighted earlier this week is the flow of credit.

This is an economy that depends on bank lending. If it slows, so does the economy. And credit growth is falling at a rate not seen since 2008.

Another indicator that will surely be a part of our Doom Index is the level of margin debt.

When an investor buys stocks on margin, he borrows the bulk of the purchase price from his broker.

Because he only puts up a portion of the total amount – the margin – he stands to gain more if the market goes up. But if the market goes down, he gets a “margin call.”

He has to put up his shares as collateral for his loan. His broker can now sell these shares (without notifying him) if he doesn’t meet his margin requirements.

“Markets make opinions,” say the old-timers. When stocks are near an all-time high, investors imagine they will only go higher.

But when they go down, all of a sudden they ask themselves why they ever bought them.

Squeezed and panicked, the margin buyer is forced to sell. And the higher the margin debt, the greater the number of shares that must be liquidated, sending the whole market down even further.

Today’s level of margin debt was last seen near the dot-com peak in 1999.

To continue reading: Doom Index Says Beware!

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