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Borrowed Money And The Stock Market

Apr. 08, 2021 4:48 PM ET33 Comments
John M. Mason profile picture
John M. Mason


  • Today, the S&P stock index is reaching its 17th historic high this year, April 8, and "borrowed money" seems to be one of the driving forces behind the rise.
  • Figures from late February indicate that investors have reached a new historic high in terms of the amount of money that they have borrowed on their portfolios.
  • And, these borrowings are expected to go even higher as the Federal Reserve continues to help "underwrite" the advances taking place in stock prices.
  • Investors are placing a lot of confidence in the Fed, a confidence built up over the last eleven years, and the Fed's ability to sustain high stock prices.

New York Stock Exchange Christmas
Photo by TriggerPhoto/iStock Unreleased via Getty Images

Credit has been one of the major factors that has been driving the stock market over the past decade. One of the major reasons for this is that Ben Bernanke, the Chairman of the Board

This article was written by

John M. Mason profile picture
John M. Mason writes on current monetary and financial events. He is the founder and CEO of New Finance, LLC. Dr. Mason has been President and CEO of two publicly traded financial institutions and the executive vice president and CFO of a third. He has also served as a special assistant to the secretary of the Department of Housing and Urban Development in Washington, D. C. and as a senior economist within the Federal Reserve System. He formerly was on the faculty of the Finance Department, Wharton School, the University of Pennsylvania and was a professor at Penn State University and taught in both the Management Division and the Engineering Division. Dr. Mason has served on the boards of venture capital funds and other private equity funds. He has worked with young entrepreneurs, especially within the urban environment, starting or running companies primarily connected with Information Technology.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (33)

If one divides the total margin debt (the first exhibit) by the S&P 500 index (the second exhibit) one gets no increase, which kind of defeats the main thesis of this article? Looks like just dollar inflation with respect to the stock market.
@iyanachk , Interesting division problem!
Good article!
Mygrandkidswillbenefit profile picture
A very insightful article, thank you.

Never wager what you are not willing to lose, and most certainly the act of borrowing to wager more in hopes of "lottery winning" gains is a fools errand.
I'll follow the Get Rich Slow approach, it's been working well for the past 30 years.

Remember, pigs eat well, but hogs get slaughtered....

Happy positive returns to all!
Jamjack profile picture
None of this is problem until it is. The problem may be sooner than we think and bigger than we realize. Question: was the recent "family office" blow up the caniry in the coal mine?
@Jamjack , No, but the canary toppled over!
I hear 90% of SP500 Market cap is essentially DEBT. It gets rolled over continuously and ever lower interest rate. Any higher interest rate is going to make SP500 implode of epic proportion.
@What-the , That makes sense!
Investors using margin more like gamblers. And in the long run the "House" always wins.
@nopilikia margin debt always pole-axes ordinary folk when the borrower / gambler cannot make the margin call
@henry133 , That's why gamblers like to sit facing the front door.
"Investors", eh? Any more specific idea who? Would they be hedge funds, making huge bets using someone else's money? I suspect that is what is happening.
We'll find out if interest rates rise sharply, and someone can't meet a margin call.
@vinyl1 , There will be a debt based crash one day!
@kimbillro - Yeah, we're always having crashes - that's what markets are like.
@vinyl1 , I have a vinyl record about crashes @vinyl1 .
I'm at 50% cash and going to 60% shortly. This market will eventually serve up some great deals, but they are not on offer now.
@DigitalRobberBarons , I have a larger percentage in cash.
aurora58 profile picture
There is no more obvious example of Moral Hazard than what the Fed has perpetuated, and what we are witnessing in the financial markets today. Same in the EU with their central bank.

It started after the Dot Com Crash, (LTC collapse in ‘98 could be argued), and has only gotten more flagrant with each ensuing Crisis. A’la The “Greenspan Put”.
@aurora58 , Yes, and there was the Bernanke put.
aurora58 profile picture

Right. And the Yellen, and now Powell.

I'm sceptical of the Reverence and supposed Omnipotence of Central Banks. I think history will not treat this era of monetary authority well.
@aurora58 , I'm out to lunch on that one. I'll get back to you after I finish this cheese burger.
As the Investor Athletes say " Go`Yard or Go`Home !" . Most Investors have a debt relationship with their Life ; so What's New ?
In the Financial Markets it's All about Capitalism and when it's not Bankruptcy .

I guess there's no difference in spending your money materially versus financially ; however the risk is called addiction .

We are a Country of Life Liberty and Risk ; " Go'Yard or Go'Home ! ".
aurora58 profile picture

It’s all fun and games,
Until someone looses a house.
@aurora58 , Or a fortune!
Buyandhold 2012 profile picture
"Investors have borrowed a record $814 billion against their portfolios."

For what?

Absolutely inexcusable behavior.
pdtor profile picture
@Buyandhold 2012

Not to worry, the market will correct that
For someone starting out with a small portfolio, leverage can help a lot. I don't see the issue for these cases.
aurora58 profile picture

Margin cuts both ways.
@qqqchaser sounds as if you never experienced a margin call
@gret I was talking about leveraged funds such as TQQQ that function similarly to trading on margin, except you can only lose your initial capital and no more.
Your articles are always incisive, thank you. Once again I feel like I'm on the crest of a fast moving wave, knowing it will break, and I'll fall. With moderate injuries hopefully.
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