This could well be one of those rare instances where you want to be short just about everything; or, if shorting isn’t your cup of tea, have your money in cash and short-term T-bills . From Alasdair Macleod at alasdairmacleod.substack.com:
There is little doubt that the credit bubble is at or close to its peak. There are signs in the Mag7 and cryptocurrencies that bullish momentum is fading in these leading indicators.
All the signs of a market top are showing in US equities today. Value is the least consideration: momentum and investment fashions are what matters overwhelmingly. Relative to bonds, equity valuations have become more stretched than ever. Bank credit has been expanding to finance demand for the easy money made in a bull market. But the psychology of easy money is fading in cryptocurrencies, which before bitcoin declined some 25% in recent weeks were seen as a surefire path to riches.
Ignored by the bulls, higher equity prices are dependent on the continual expansion of credit to inflate prices. FINRA’s estimate of US dollar margin finance has just been posted for October, and it’s a further rise to a record $1.184 trillion. In the context of
trillion-dollar stocks, it might sound minor, but it probably finances over $3 trillion of leveraged positions.
The effect of additional credit-fuelled demand for equities has to be considered in the context of overall supply and demand. Examples of supply factors include new issues, management stock sales, and liquidation of deceased estates. In the absence of an increase in credit and no change in the business outlook, theoretically their values should set at the point where their attractiveness persuades investors to adjust their allocation of savings in favour of equities, restoring the balance of supply and demand. Without that adjustment, prices will tend to decline for lack of new buyers.
Clearly, the expansion of credit directed at equity valuations has a significant impact on what otherwise is a fine balance. But bank lending recorded by FINRA is only of the total reported by its members, who are brokers. Brokers are not licenced to create credit, and must supply it either from their own balances, or alternatively from their bankers.
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