SP500 Debt over Margin - The $1.2 Trillion of Margin Debt is the Trigger

[Igor Pereira]

The data that just crossed my desk is not just "worried"; they are historical. We are witnessing a disconnect between price and reality that makes the 2000 Internet bubble seem rational.

By Igor Pereira Financial Market Analyst

The autopsy of the three indicators that confirm that Smart Money is about to pull the rug.

The analyses of Financial Times are evidence of the crime of excessive evaluation.

• The Evaluation (CAPE): The top chart shows the Cyclically Adjusted Price/Locture index (CAPE) in vertical levels, rivaling the Dot-Com bubble peak. We're paying astronomical prices for future profits that may not exist.

• The "Buffett Indicator" (Market Cap/GDP): The bottom graph is the most terrifying. The market value of US shares exceeded 200% of GDP.

  • Reading: The real economy (GDP) does not support the size of the financial market. Historically, every time this line crosses the previous peak (red circles), a correction potential of 50% or more follows.

The market is not rising on grounds; it is rising by debt.

• The Data: The margin debt (borrowed money to buy shares) reached the record of $1.2 trillion, climbing for eight consecutive months.

• The Sale Sign: The graph of MRB Partners shows that margin debt growth is overcoming S&P 500 gains by the largest margin since 2021.

• History Repeats: The previous spikes in this indicator of "Euphoria of Leverage" (red circles in the top graph) occurred just before the burst of the 2000 bubble and the 2008 Financial Crisis. The "stupid money" is leveraging at the absolute top.

A critical fact: Market Cap to M2 Money Supply ratio reaches a record of 306%.

• The Meaning: The value of the shares has grown so much that it is now the triple of all the money in the economy (M2). This officially surpasses the peak of the 2000 bubble.

• The Consequence: There is not enough real liquidity to sustain these prices if everyone tries to sell at the same time. The exit door is tiny for an elephant that size.

The market is in a state of PerfectMania. The leverage is at maximum, the ratings are at maximum and the euphoria is total.

My Vision: That's a secular top.

1. Risk: It drastically reduces exposure to technology actions and passive indices (S&P 500 TEFs).

2. The Trigger: When the deleveraging begins (Margin Calls), the fall will not be linear; it will be a liquidity vacuum. The $1.2 trillion margin will have to be settled by force.

3. Refuge: The capital that comes out of this paper bubble will look for real assets that have no counterparty risk: Gold and Silver .

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