The latest data released by the U.S. Financial Supervisory Authority (FINRA) shows that the financing balance of U.S. stocks (margin debt) is rising at a record pace, and after the market experienced the Archegos blowout, this development is particularly worrying for investors.
FINRA pointed out that, as of the end of February this year, investors in their portfolios borrowed a record $ 814 billion, a 49% jump over the same period last year, the fastest growth rate since 2007.
During the turbulent periods of the stock market in 2000 and 2008, the highs in financing balances preceded the collapse of the stock market.
(Chart taken from fxstreet)
Edward Yardeni, president of the consulting firm Yardeni Research, says financing balances have fueled bull markets, exacerbated bear markets and, to some extent, created irrational exuberance.
The situation is easy to understand, financing allows investors to invest more, however, once the value of collateral falls below a certain level, they will face margin calls, need to invest more money, or forced to sell shares for cash, which may increase the stock market downtrend.
From the other hand, the Wall Street Journal pointed out that this data does not accurately reflect the scale of borrowing money to buy shares, because investors mortgage securities to obtain funds, may also be used for other purposes.
The U.S. Commodity Futures Trading Commission (CFTC) warned that short term speculative trading is always risky, if unfamiliar with financial products and markets, the use of leverage and follow the advice of anonymous people, it is likely to end up in disaster.
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