{"id":51849,"date":"2020-03-19T20:34:58","date_gmt":"2020-03-20T01:34:58","guid":{"rendered":"https:\/\/olduvai.ca\/?p=51849"},"modified":"2020-03-19T20:35:02","modified_gmt":"2020-03-20T01:35:02","slug":"margin-call-you-were-warned-of-the-risk","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=51849","title":{"rendered":"Margin Call: You Were Warned Of The Risk"},"content":{"rendered":"\n

Margin Call: You Were Warned Of The Risk<\/a><\/h3>\n\n\n\n

I have been slammed with emails over the last couple of days asking the following questions:<\/p>\n\n\n\n

\u201cWhat just happened to my bonds?\u201d<\/em><\/p>\n\n\n\n

\"\"<\/a><\/figure>\n\n\n\n

\u201cWhat happened to my gold position, shouldn\u2019t it be going up?\u201d<\/em><\/p>\n\n\n\n

\"\"<\/a><\/figure>\n\n\n\n

\u201cWhy are all my stocks being flushed at the same time?\u201d<\/em><\/p>\n\n\n\n

\"\"<\/a><\/figure>\n\n\n\n

As noted by Zerohedge:<\/a><\/em><\/strong><\/p>\n\n\n\n

\u201cStocks down, Bonds down, credit down, gold down, oil down, copper down, crypto down, global systemically important banks down, and liquidity down<\/strong>\u2026<\/em><\/p>

Today was the worst day for a combined equity\/bond portfolio\u2026 ever\u2026\u201d<\/em><\/p><\/blockquote>\n\n\n\n

\"\"\/<\/figure>\n\n\n\n

This Is What A\u00a0\u201cMargin Call,\u201d<\/em>\u00a0Looks Like.<\/strong><\/p>\n\n\n\n

In December 2018,<\/a> <\/em><\/strong>we warned of the risk. At that time, the market was dropping sharply, and Mark Hulbert wrote an article dismissing the risk of margin debt. To wit:<\/a><\/p>\n\n\n\n

\u201cPlunging margin debt may not doom the bull market after all,<\/strong> reports to the contrary notwithstanding.<\/em><\/p>

According to research conducted in the 1970s by Norman Fosback, then the president of the Institute for Econometric Research, there is an 85% probability that a bull market is in progress when margin debt is above its 12-month moving average, in contrast to just a 41% probability when it\u2019s below.<\/em><\/p>

Why, then, do I suggest not becoming overly pessimistic? For several reasons:<\/em><\/p>

1) The margin debt indicator issues many false signals<\/em><\/strong><\/p>

2) There is insufficient data<\/em><\/strong><\/p>

3) Margin debt is a strong coincident indicator.\u201d<\/em><\/strong><\/p><\/blockquote>\n\n\n\n

I disagreed with Mark on several points at the time. But fortunately the Federal Reserve\u2019s reversal on monetary policy kept the stock market from sinking to levels that would trigger \u201cmargin calls.\u201d<\/em><\/p>\n\n\n\n

As I noted then, margin debt is not a technical indicator that can be used to trade markets. Margin debt is the\u00a0\u201cgasoline,\u201d<\/em>\u00a0which drives markets higher as the leverage provides for the additional purchasing power of assets.\u00a0However, that\u00a0\u201cleverage\u201d<\/em>\u00a0also works in reverse as it provides the accelerant for larger declines as lenders\u00a0\u201cforce\u201d<\/em>\u00a0the sale of assets to cover credit lines without regard to the borrower\u2019s position.<\/strong><\/p>\n\n\n\n

\u2026click on the above link to read the rest of the article\u2026<\/p>\n","protected":false},"excerpt":{"rendered":"

Margin Call: You Were Warned Of The Risk I have been slammed with emails over the last couple of days asking the following questions: \u201cWhat just happened to my bonds?\u201d \u201cWhat happened to my gold position, shouldn\u2019t it be going up?\u201d \u201cWhy are all my stocks being flushed at the same time?\u201d As noted by Zerohedge: […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[8511,4026,15470,690],"class_list":["post-51849","post","type-post","status-publish","format-standard","hentry","category-economics","tag-lance-roberts","tag-margin-call","tag-real-investment-advice","tag-risk"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/51849","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=51849"}],"version-history":[{"count":1,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/51849\/revisions"}],"predecessor-version":[{"id":51850,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/51849\/revisions\/51850"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=51849"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=51849"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=51849"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}