The economy is still growing only modestly, yet the S&P 500 hit a new record last week.
The Federal Reserve is pumping lots and lots of money into the economy, but it is not going into the production of real goods and services.
Last week I wrote on Seeking Alpha:
"...over the past fifty years or so, the financial community has learned that it can benefit itself by keeping most of the money in the financial circuit and by putting less and less of the funds into the production circuit. Money can be made just as well, if not better, in the financial circuit, as it can in the production circuit.
So it appears as if money is chasing money. Stock prices rise. Hedge funds buy homes, securitize the properties and pay the interest on the debt by the rental payments they collect…and through quite a few other very nice, new financial innovations."
This week, we read from Michael Mackenzie in the Financial Times: "US stocks are being propelled to fresh highs by investors borrowing a record amount of money...."
Going on, Mackenzie writes, "With the S&P 500 registering a fresh closing peak of 1859.45 last week, margin debt hit a record level in January according to data from the New York Stock Exchange."
And further, "Although margin debt has been hitting record highs in recent months, it now stands at $451 billion on the NYSE, a rise of more than 20 percent over the past year and above 2007s peak of $381 billion."
Putting the good light on this, Mackenzie quotes Steven Boyd, principal at Halyard Asset Management, as saying "greater use of margin debt was a sign of confidence that the recent soft tone in the data are attributable to cold weather and that pent up demand will drive a rebound in the coming months."
Of course, we have the Ukrainian situation to deal with in the very near term. Otherwise, it all seems to hinge on the economy hitting a faster rate of growth.
However, we have been watching "green shoots" for four and a half years now, and the economy has not really exhibited any kind of strong post-recession pick up. Fourth quarter over fourth quarter rates of real GDP growth reached 2.5 percent in 2013, up from 2.0 percent in both 2011 and 2012. I am a little more on the aggressive end of the spectrum this year, projecting somewhere in the neighborhood of 3.0 year over year growth. But even this more rapid rate of economic growth does not mean a lot in terms of "goosing up" corporate earnings.
The concern is, as Mackenzie writes, "In past market peaks, excessive levels of margin debt exacerbated the subsequent slide in stocks, as investors were forced to quickly sell holdings as prices fell, sparking a nasty downward spiral."
Still, the market can move higher. As with other measures that stock prices seem to be over-priced, like the economist Robert Shiller's measure CAPE, the market may take a long time before it adjusts back to historical norms.
And we still will have the Federal Reserve pumping lots more money into the economy through the rest of the year. As I wrote in the above post, even if the Fed reduces the securities it purchases by $10 every month until it stops purchasing securities, it still will put an additional $320 billion of reserves into the banking system.
And the commercial banks aren't lending. Yet lending is taking place in lots and lots of areas of the economy. One such area, it seems, is in margin debt for the purchase of common stocks.
Lending is taking place, and the bulk of the lending taking place is solely in the financial circuit of the economy, from shadow banking and other sources of alternative financial solutions.
The take-home from this is that we don't need commercial banks for lending to take place in the economy. It also seems to be that the major banks don't need to be lending in China, either, because those financial institutions in the shadows can do very well, thank you.
So, stock prices could continue to go higher - ignoring the Ukrainian situation for the moment - and could continue to do so for an extended period of time.
Still, we need to be aware of measures like CAPE, and the fact that margin debt for stock purchases are at an all time high. We need to be aware because this knowledge can be interpreted to represent to us signs of caution. It may not be time to withdraw from the stock market because it may still have a ways to go. But this kind of information should cause us to be prepared to be agile… should the time arise.