Bruce Pile

Margin Debt Down 37.6%; Is The End of Selling Near?

Down 37%? Well, that's nice. But you have to look at that in context. You can do this if you study a historical debt chart comparing the stock market and margin debt and see how the wind-up and wind-down cycles play out. I drew such a chart two years ago, updated it, and borrowed another. They are posted at The Oil Drum. You can view them by putting these addresses in your URL

www.theoildrum.com/nod...
www.theoildrum.com/nod...

As these charts plainly show, the up and down trips for debt are far more than 37%. The 2002 debt decline was about 55% all told and it took over two years.
That means at 37% just since October, we are only about half delevered with maybe the sharpest declines ahead a year or more out. The mid 2002 selling was more intense than the earlier phases.

But here's the thing about comparing these two market debt cycles. The 2002 event was just market debt playing out a cycle. The rest of Debt World was doing just fine and dandy. In fact, credit was free and easy and the housing boom was just getting started. Now we have a market debt cycle unwind, but it is in conjunction with all the rest of Debt World in a gargantuan unwind as well. So you might suspect the down cycle might be a little more extensive this time around, being reinforced with every other kind of debt. But even if it follows the previous, less toxic cycle, we still have a ways to go on the downside of market debt and the market itself as the charts clearly show.

This would agree with the Bernstein survey of fund managers that found that most think we are only about half way through the delevering process (Barron's 12/15).