This past week, Mark Hulbert wrote an article discussing the recent drop in margin debt. To wit:
“Plunging margin debt may not doom the bull market after all, reports to the contrary notwithstanding.
Margin debt is the total amount investors borrow to purchase stocks, which historically has risen during bull markets and fallen during bear markets. This total fell more than 6% in October, according to a report last week from FINRA. We won’t know the November total until later in December, though I wouldn’t be surprised if it falls even further.
A number of the bearish advisers I monitor are basing their pessimism at least in part on this plunge in margin. It’s easy to see why: October’s sharp drop brought margin debt below its 12-month moving average. (See accompanying chart.)”
“According to research conducted in the 1970s by Norman Fosback, then the president of the Institute for Econometric Research, there is an 85% probability that a bull market is in progress when margin debt is above its 12-month moving average, in contrast to just a 41% probability when it’s below.
Why, then, do I suggest not becoming overly pessimistic? For several reasons:
1) The margin debt indicator issues many false signals
He’s probably right. From Brandon Smith at alt-market.com:
At the beginning of 2018 I wrote extensively on what was likely to happen under the administration of Jerome Powell, the new Federal Reserve Chairman. In my article ‘New Fed Chairman Will Trigger A Historic Stock Market Crash In 2018‘, published in February, I predicted that the Fed would continue interest rate increases and balance sheet cuts throughout the year and they would knowingly initiate a crash in equities.
To be clear, this was not a very popular sentiment at the time, just as it wasn’t popular when I predicted in 2015 that the Fed would launch interest rate hikes instead of going to negative rates in order to start a catalyst for economic crisis. The problem some people have with this concept is that they just can’t fathom that the central bank would deliberately crash the system. They desperately cling to the notion that the Fed and other central banks want to keep the machine rolling forward at any cost. This is simply not true.
The claim is that the banking elites are “required” to keep the system propped up in a state of reanimation because they are reliant on the system to provide capital and thus “influence.” The people that assert this argument don’t seem to understand how central banks operate.
As most liberty activists should know by now, central banks are essentially a legally protected counterfeiting scheme. Using fractional reserve banking at a ratio that is secret, central banks create their own capital from thin air, and they can infuse capital into international banks at will when it suits their purposes. There is no “profit motive” for the banking syndicate. They can print the cash or digitally conjure it anytime they wish, and they can use it to purchase tangible assets before their printing diminishes the buying power of the currency, passing price inflation on to regular citizens.
Rising interest rates and widening credit spreads are one good indication of financial stress. From Tyler Durden at zerohedge.com:
In the clearest indication yet of just how severe the recent spike in Italian yields has been on the country’s financial institutions, Italy’s largest bank, UniCredit, surprised the market today when it sold $3 billion in dollar denominated five-year bonds. To find a willing buyer, the bank had to pay the equivalent of 420 basis points over the euro swap rate, which is six times more than the 70 bps over swaps it paid on five-year euro senior non-preferred bonds just this past January.
The spread on the new issue was a shock as it represented a nearly 150bps concession to current market rates, and is an indication of just how much even the strongest Italian banks have to pay up if they hope to access capital markets during the ongoing Italian political turmoil.
The next financial crisis will bring a general clamoring for the government to do something, which always translate to more power for the government and less for its subjects. From jeff Thomas at internationalman.com:
Americans were taught about Paul Revere’s ride in school. He was said to have ridden from his home in the North End of Boston, to Lexington and Concord, to warn the people there that Federal troops had landed in Boston Harbour and would soon reach the townships.
Of course, the story was tarted up a bit for the history books. First, it’s unlikely that he shouted, “The British are coming,” since, at the time of the ride, in 1775, he was in fact British – a British colonial – and would have regarded himself as British, as would the townspeople.
It’s also unlikely that he galloped through the towns shouting, “To arms! To arms!” since a major portion of the British colonists, particular those who were older and had a lot to lose, were loyalists, and taking up arms would be treasonous. (At that time, treason was one of only two capital crimes.)
So, what did he shout on his ride… or did he in fact shout anything? It’s more likely that he simply went to the back doors of select sympathisers and asked them to spread the word that the Federal troops were on the way. But, of course, that would have made for a far less colourful story.
Will Italy face off with the European Union? From Tom Luongo at tomluongo.me:
Deputy Prime Minister Matteo Salvini just declared himself the leader of the Europe’s future. He refuses to budge one inch in negotiations with the European Union over Italy’s budget now threatening to take down the government.
And in doing this he not only speaks for Italians, he is now speaking for that growing part of the European population who sees what the EU is morphing into and recoiling in horror.
Protests in France over Emmanuel Macron’s new tax on diesel have turned violent. The British leadership has completely betrayed the people over Brexit. They may win this battle but the animosity towards the Britain’s leadership will only grow more virulent over time.
As the core leadership in France and Germany fades in popularity, held in place because of domestic political squabbling, Angela Merkel and Macron are ratcheting up the rhetoric against the rising nationalism Salvini represents and are now pushing hard for their Federation of Europe before both of them leave the scene in the next few years, at best.
If they lose their battles with Salvini and Hungary’s Viktor Orban they may be run out of office with pitchforks and firebrands.
On a mark-to-market basis, is Deutsche Bank worth anything? From the Global Macro Monitor at macromon.wordpress.com:
Whenever we see markets tanking as they have been for the past few days with the Dow down almost 1,000 points (3.7 percent) since Friday’s close, we think counterparty risk may be spooking traders and investors. We suspect, and we could be wrong, there is a growing concern over Deutsche Bank’s (DB) stock making new all-time lows.
Biggest Globally Systemically-Important Bank (GSIB)
Deutsche Bank, which has been labeled by the IMF as the biggest contributor to global systemic risk, hit a new all-time low in Frankfurt this morning, closing at around €8.17, down over 91 percent from its pre-GFC high and almost 50 percent year-to-date. The latest hit comes from its involvement with Danske Bank, who is wrapped up in a money laundering scandal in Estonia.
Whenever a GSIB stock is making a new low, it’s time to sit up, stand up and listen.
If everybody guarantees everybody else’s debt, what happens when one or entities default? It’s interesting, to say the least, and China my get very interesting. From Tyler Durden at zerohedge.com:
On November 8, China shocked markets with its latest targeted stimulus in the form of an “unprecedented” lending directive ordering large banks to issue loans to private companies to at least one-third of new corporate lending. The announcement sparked a new round of investor concerns about what is being unsaid about China’s opaque, private enterprises, raising prospects of a fresh spike in bad assets.
A few days later, Beijing unveiled another unpleasant surprise, when the PBOC announced that Total Social Financing – China’s broadest credit aggregate – has collapsed from 2.2 trillion yuan in September to a tiny 729 billion in October, missing expectations of a the smallest monthly increase since October 2014.
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