Those who do not learn from history are bound to repeat it. To us, 2017 is starting to look more and more like 1999-2001, with some B.S. from 2007 sprinkled in. Our evidence to support the argument is pretty substantial, but the only weakness lies in how long the music can continue to play. We don’t like to make predictions of stocks or market direction in-general, but when something smells like a turd, it’s usually a turd.
Our first point: Margin debt amounts are higher than they’ve ever been in history. Okay, so what’s the trigger? A short term consolidation. As in musical chairs, those buying into the market while it’s running are going to come out on the plus side, and man has it run since December. But what happens when news such as the potential for hiccups in conservative policy cause a halt to the speculative run that’s happened while Trump has been in office? The music stops. As a retail investor and trader, I can account personally for this, as margin is needed for your average investor who makes <$100,000 per year to buy into index funds like SPY when they’re over $200 per share. Even more so, who wouldn’t want to leverage themselves to buy into a higher risk equity or stock that has been in a >40% run, since December? The stock market is a rich man’s/woman’s game, and margin leverage is needed in order for traders to attempt to even make a dent in their account growth. When investment banks, commercials, news, or whatever are pitching “growth” securities, some of which trade at a price multiples times their revenue (ahem, Amazon (AMZN)), then the frenzy continues with financing until the music eventually stops. Then the proverbial #$#@ hits the fan.
Those who have bought on margin wind up closing their positions out of fear of losing more than they can afford, or worse, they wake up only to receive the margin call, not including their interest payments on the short term loan. Once that 2-3 day market consolidation happens, the market will likely tank back to where it was at least in December, if not further over the course of about a month due to fear.
Our second point: household debt has increased substantially, specifically with student loans and auto loans since 2007 and 2008 according to the Fed. Since the irresponsible banking sector’s sub-prime mortgage issuance up until the 2007 crisis, regulations forced the banks to seek other forms of interest revenue. Enter student loans and car loans. There’s a reason why car loan terms have increased from 4 years to almost 7 or 8 years since the mid-2000s. It’s easy money, and it’s tempting for the unassuming car buyer to want their monthly payment to be lower, not knowing they end up underwater at the end of the loan (not to mention the car likely being in terrible condition by the end of the 7 years). Not only are the banks responsible for this “free money” but also the auto companies themselves by allowing their lending arms to generate interest payments to their receivables as a hedge against lower sales figures.
As for student loans, it’s all in the numbers. The new President’s plan is a cap at 12.5% (an increase in 2.5%) of the borrower’s income, with debt forgiveness in 15 years with full payments. An average student loan is ~$10,000/year (in state) and ~$23,000/year (out of state). That’s $40,000 at a bare minimum at the end of the student’s enrollment. The average salary coming straight out of undergraduate programs is $50,000 a year, capped at $70,000-$80,000 for most jobs if the individual doesn’t have a Masters.
Read the rest of this article on our site from our Tradingview homepage.
Our first point: Margin debt amounts are higher than they’ve ever been in history. Okay, so what’s the trigger? A short term consolidation. As in musical chairs, those buying into the market while it’s running are going to come out on the plus side, and man has it run since December. But what happens when news such as the potential for hiccups in conservative policy cause a halt to the speculative run that’s happened while Trump has been in office? The music stops. As a retail investor and trader, I can account personally for this, as margin is needed for your average investor who makes <$100,000 per year to buy into index funds like SPY when they’re over $200 per share. Even more so, who wouldn’t want to leverage themselves to buy into a higher risk equity or stock that has been in a >40% run, since December? The stock market is a rich man’s/woman’s game, and margin leverage is needed in order for traders to attempt to even make a dent in their account growth. When investment banks, commercials, news, or whatever are pitching “growth” securities, some of which trade at a price multiples times their revenue (ahem, Amazon (AMZN)), then the frenzy continues with financing until the music eventually stops. Then the proverbial #$#@ hits the fan.
Those who have bought on margin wind up closing their positions out of fear of losing more than they can afford, or worse, they wake up only to receive the margin call, not including their interest payments on the short term loan. Once that 2-3 day market consolidation happens, the market will likely tank back to where it was at least in December, if not further over the course of about a month due to fear.
Our second point: household debt has increased substantially, specifically with student loans and auto loans since 2007 and 2008 according to the Fed. Since the irresponsible banking sector’s sub-prime mortgage issuance up until the 2007 crisis, regulations forced the banks to seek other forms of interest revenue. Enter student loans and car loans. There’s a reason why car loan terms have increased from 4 years to almost 7 or 8 years since the mid-2000s. It’s easy money, and it’s tempting for the unassuming car buyer to want their monthly payment to be lower, not knowing they end up underwater at the end of the loan (not to mention the car likely being in terrible condition by the end of the 7 years). Not only are the banks responsible for this “free money” but also the auto companies themselves by allowing their lending arms to generate interest payments to their receivables as a hedge against lower sales figures.
As for student loans, it’s all in the numbers. The new President’s plan is a cap at 12.5% (an increase in 2.5%) of the borrower’s income, with debt forgiveness in 15 years with full payments. An average student loan is ~$10,000/year (in state) and ~$23,000/year (out of state). That’s $40,000 at a bare minimum at the end of the student’s enrollment. The average salary coming straight out of undergraduate programs is $50,000 a year, capped at $70,000-$80,000 for most jobs if the individual doesn’t have a Masters.
Read the rest of this article on our site from our Tradingview homepage.
