As so often happens, every time there is a ramp in the stock market,
especially one which is not accompanied by retail buying, those who are buying,
are forced to do so on increasingly more margin, as there is only so much cash
in the market without booking actual profits. Sure enough, as of the end of
February, margin debt was $289 billion, the highest since July 2011, while Net
Free Credit (Free Credit Cash plus Credit balances in margin accounts less
Margin Debt) of negative $33 billion (meaning investors have negative net worth)
was the lowest also since July. What does this mean? Simply said, that if the
cross asset rout continues, which means bonds yesterday, and stocks and
commodities today, the margin calls will once again resume, as they used to in
the fall of 2011, leading to a toxic liquidation spiral, pushing prices even
lower. So in keeping with the times, and sticking heads in the sand, watch out
for that 3pm call from your repo desk. Best idea would be to just let it go
through to voicemail.
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