Wednesday, May 6, 2015


Hyman Minsky (1919-1996), professor of economics at Washington University.

More and more investments in the biggest stock markets in the world are being purchased with borrowed money, or with what's called margin debt. Put another way, increasingly more (on margin) market activity in the New York Stock Exchange (NYSE) and in the Shanghai Stock Exchange (SSE) is happening with managed debt.

This story is important to you and me for two reasons.

First, the last two stock market bubbles in the U.S. peaked and popped with margin-debt-ratios that equaled between 2.6% and 2.65% of total market capitalization. 

Not only are we currently within this range, but the Shanghai stock market - which is now trading more dollar volume than the NYSE - has already surged past the NYSE's margin-debt range, coming in at 3.44% of China's total market capitalization this year.

Below is another way of looking at the margin-debt figures (note how the NYSE margin-debt-to-GDP ratio in the U.S. hit a record 2.73% in 2014) ...

Second, as I pointed out in my book, economist Hyman Minsky told us many years ago about the danger posed to national economies when their growth is based on debt. The key is understanding that it's not debt as much as the economic instability we create for ourselves (his financial-instability hypothesis) by not keeping tabs of who's using borrowed money to make purchases in the market.

We're all in trouble, according to Minsky, when our economy becomes dominated by speculative market players (who can find the money only by selling stuff) and Ponzi or Pyramid market players (who are just one step ahead of the next market collapse) rather than by hedged investors (who can back their bets with their own cash).

It’s not difficult to see which group of market players we were dealing with in the lead up to 2008 (and, make no mistake, they‘re still out there). Recent history tells us that we're probably not in a good place now. Hyman Minsky would definitely agree. 

But I'll let you be the judge of this. Sigh ... 

- Mark 

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