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From "The Economist": By August, American brokers had extended $1.1trn of margin debt to their clients, a figure that has climbed by 33% over the past year, reaching a record high. As a share of GDP, it is only just below the level reached during the meme-stock frenzy of 2021 and well above the peak seen in the dotcom bubble.

https://archive.ph/K0vCL

Good times indeed for most investors. Envied by the ones having missed out this and the previous years, like myself. When will they, the last men standing, finally jump onto the bandwagon and join the crowd, signalling the end thereby?

The term "Broker's Loan" bis essentially what we would call "margin: today (and leverage of 90% was permitted)

From "The Great Crash 1929" by John Kenneth Galbraith:

Excerpted from: CHAPTER IV, The Twilight of Illusion

More than the prices of common stocks were rising. So, at an appalling
rate, was the volume of speculation. Brokers' loans during the summer
increased at a rate of about $400,000,000 a month. By the end of the
summer, the total exceeded seven billions. Of that more than half was
being supplied by corporations and individuals, at home and abroad, who
were taking advantage of the excellent rate of return which New York was
providing on money. Only rarely did the rate on call loans during that
summer get as low as six per cent. The normal range was seven to twelve.
On one occasion the rate touched fifteen. Since, as earlier observed, these
loans provided all but total safety, liquidity, and ease of administration,
the interest would not have seemed unattractive to a usurious
moneylender in Bombay. To a few alarmed observers it seemed as though
Wall Street were by way of devouring all the money of the entire world.
However, in accordance with the cultural practice, as the summer passed,
the sound and responsible spokesmen decried not the increase in brokers'
loans, but those who insisted on attaching significance to this trend. There
was a sharp criticism of the prophets of doom.

Scholars also reacted against those who, deliberately or otherwise, were
sabotaging prosperity with their unguarded pessimism. After soberly
viewing the situation, Professor Dice concluded that the high level of
brokers' loans should not be "as greatly feared as some would have us
believe." 3 In August the Midland Bank of Cleveland made public the
results of calculations which proved that until loans by corporations in the
stock market reached twelve billion there was no cause for concern.4
The best reassurance on brokers' loans was in the outlook for the
market. If stocks remained high and went higher, and if they did so
because their prospects justified their price, then there was no occasion to
worry about the loans that were piling up. Accordingly, much of the
defense of the loans consisted in defending the levels of the market. It was
not hard to persuade people that the market was sound; as always in such
times they asked only that the disturbing voices of doubt be muted and
that there be tolerably frequent expressions of confidence.

Jeff

Thanks Jeff, so not an all-time high. But we need to consider that we can’t get margin loans as high as we could in the roaring 20’s. If it’s highest since post-depression sec regulations that’s still VERY significant.

Today the appetite for risk at the level of 90% leverage offered in the 1920’s is met by stock options, and IBKR forecast trader. This is why our Chairman made an offer for the NYSE only if he could split it free from the options market it included. And why we have the warning that they are dangerous like nuclear weapons.

It's nice to hear someone writing about margin debt as a fraction of GDP, rather than the more usual fraction of market cap. The latter is usually an article saying that margin levels aren't so bad, missing the point that elevated prices make the ratio look high. The two things, not coincidentally, tend to rise to the moon at the same time.

This bit of the article is a bit misleading:
"Instead of margin-calling its clients—demanding money when the value of their collateral drops too low—Interactive Brokers sells the underlying assets to return the investor to their borrowing limits."


Though true, it makes it sounds almost reasonable and convenient. It would be better phrased thusly: When they discover you are in violation of any one of their margin rules, the start selling your portfolio, and they keep on going as long as they feel like it. They don't consider the minimum amount of liquidation which would be needed to bring things into balance.

Sad tale of woe:
I had a secondary account that I wasn't paying attention to, and it had a cash deficit of $684 (margin loan) on a portfolio value of about $110k. No short option positions or anything which could require that cash be found, just long positions. One of their margin rules triggered (having to do with which portfolio balance is allowed which margin rules), so they liquidated positions to cover the deficit, as is their right. Can't complain. But (a) they liquidated $79400 worth of positions to cover the $684 margin loan, which seems a bit excessive. This was during a one-day market freak-out, and (b) they didn't notify me, so a couple of months later when I checked the balance, I had missed the rebound, foregone gain of $69800. They also mention that IB's trading group may be the counterparty when things are liquidated.

So, moral of the story: don't *ever* be in the situation that they might do liquidations. As they can change the margin rules without notice, this means don't ever have a margin loan.

Jim

Man, that's a brutal Interactive Brokers horror story. Another reason not to have an account there unless you badly want to buy international stocks (if you are a US investor). Even then better to have a (no margin allowed) account there.

Does this factor in “limited margin” used to day trade in brokerage accounts where the “margin” is a one day loan in anticipation of funds already coming into your account from an unsettled trade?

Sure this was true in 2021 but this is something that didn’t exist in the dot com bubble and the major brokerages were slow to adopt due to questions about its legality at first. Now everyone offers it and it’s big volumes. Offering access to funds a day before the funds are deposited in your account is not traditional margin, but it is technically borrowing.

This would make comparisons with historic margin use apples to oranges imo..

Man, that's a brutal Interactive Brokers horror story. Another reason not to have an account there...

Yes, but again, it's like those stupid cheese graters. Until they do something horrible, they're the best in a lot of ways. It's like being entirely aware you're in an very slightly abusive relationship.

Jim

It's like being entirely aware you're in an very slightly abusive relationship.

😃 LOL

Yeah and having a cash based account at IB (i.e., no ability to take on margin) is like having a prenup before marrying such a person.

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