I'm sure trading on margin is for some reason actually a positive concept for the economy at large for reasons I can't understand, but god damn does it feel like a bad idea to see huge spikes of debt to prop up what already feels like an absurdly out of balance market.
I don't know how to actually tell if the market is overvalued, but man when I see Palantir has a PE of like 500, Tesla almost 200, and Apple is like 35, I can't help but think there too much hype.
But I have literally no idea. Macroeconomics is way out of my wheelhouse, and I'm usually wrong.
The thing is, you can simultaneously be completely correct about the market being insane, while also entirely wrong in expecting it to behave in a sane way.
Cue the famous quote: “The market can remain irrational longer than you can remain solvent.”
I have a vague theory that as the amount of wealth inequality increases in a system along with “money printing” (lending, hypothecation, etc where the wealthy are permitted privileged leverage and risk), the more detached markets become from reality in general. In such a case, an increasing majority of the money circulating has no need to be grounded in anything close to the common basic needs and values that most normal people have to live with.
Instead, most important to such wealth is to tap into the source of inflation to be on the winning side of that. This becomes a game of its own, where an investment’s connection to reality or fundamental value is mostly irrelevant compared to how it leverages or monopolizes the state-created and privately created instruments of “money printing” (sketchy lending, rehypothecation, etc.) and other such “games” that only the wealthy are allowed in on.
> Cue the famous quote: “The market can remain irrational longer than you can remain solvent.”
It's not necessarily about things being (ir)rational, but about 'psychology' and the multi-player system that is The Market™. Because it's all very well and good to buy and sell individual products (securities) on their merits, but one also has to take into account what other people's ideas on them is as well (as you are buying/selling from them).
This factor has been known about for almost a century:
> A Keynesian beauty contest is a beauty contest in which judges are rewarded for selecting the most popular faces among all judges, rather than those they may personally find the most attractive. This idea is often applied in financial markets, whereby investors could profit more by buying whichever stocks they think other investors will buy, rather than the stocks that have fundamentally the best value, because when other people buy a stock, they bid up the price, allowing an earlier investor to cash out with a profit, regardless of whether the price increases are supported by its fundamentals and theoretical arguments.
> I have a vague theory that as the amount of wealth inequality in increases in a system along with excess money printing (lending, hypothecation, etc where the wealthy are permitted privileged leverage and risk), the more detached markets become from reality in general.
If you want to make it less vague, you can read Keynes.
It's inequality that is the important one, money printing doesn't impact it (except for it impacting inequality). In simple language, people don't want to spend all their money on consumption (the "demand is infinite" you see on econ101 is an approximation), and so when only two dozen people have all the money there aren't many things you can sell and turn a profit. But those people still want to invest all the money they aren't using, there is just nothing to invest into.
At the turn of the 19th to the 20th century, explaining this was a huge open problem in economics.
Yeah its important to decompose those two sources (among others) of "money printing". The obvious one people think most about is when our federal government does it. But a more concerning one is: Enforced banking reserve ratios. If a bank holds a trillion dollars in assets and is allowed to hold a reserve ratio of 10%, they can print $10T out of thin air, because they're allowed to issue debt up to that amount.
As far as I'm aware, in 2020 the reserve requirement in the US was set to 0%, and it has not been changed since then.
Notably, very little of the US economy is plausibly basic needs (a roof over ones head, basic nutrition, actual basic medical care, etc.). The vast, vast majority is essentially luxury goods and services, but Americans have been conditioned to think what the rest of the world considers luxury is actually basics.
If Americans actually cut back to actual basics (a fixer upper small house in a less desirable area), shared a older used car instead of buying several new ones (or a big truck!), made homecooked stews and beans and rice instead of eating out all the time or prepackaged food, stopped buying the latest fancy phones, took care of their health instead of gastric bypasses, dialysis, etc.
Hell, even if the average American stopped taking expensive vacations!
The world economy would likely collapse overnight, no joke. And it would likely be uglier than the Great Depression domestically.
> I have a vague theory that as the amount of wealth inequality in increases in a system along with excess money printing (lending, hypothecation, etc where the wealthy are permitted privileged leverage and risk), the more detached markets become from reality in general.
Except that the Gilded Age, which had some of the highest levels of wealth concentration and inequality, was during the period of the Gold Standard where money could not be 'printed excessively'. And this was true not just in the US but most of the major countries in the world.
Further, while wealth inequality has risen in the US under the non-gold fiat system (to levels similar to the Gilded Age), other countries do not have as much wealth inequality even though they are also non-gold fiat.
If the very most you need to live on is 10 million. You can gamble the rest. Buy apartments, jack up the rents like crazy worst thing to happen to you is that people may move out. Buy stocks on margin, win some loose some. The real economy your play toy.
I’ve seen nobody talking about this, so it’s probably wrong, but I can’t shake the feeling that a lot of the seemingly-nuts things we’ve seen the last 20ish years, from house prices going to the moon to LOLWTF P/E ratios sustained for years on end, and even the magnitude of VC activity, are an outcome of having way too large a proportion of our money in capital, desperately seeking investments to buy, with an underlying economy (ignore stock prices and net-drag economic activity like over-paying for healthcare, I mean actual productivity) that hasn’t grown anywhere near fast enough to give that money anything useful to do.
Every independent economist has been saying this for the last 10 years- see for example "Capital in the Twenty-First Century", a book written by French economist Thomas Piketty.
I've had the exact same thoughts, so if you're wrong you aren't alone. I personally believe this is due to the imbalance of wealth. Where money isn't circulating properly and we end up with these massive funds that move from one investment type to another destroying everything in their wake
Haven't we been talking about that for a long time? Even the whole "go to college to make more money" was premised on the idea of people leveraging college research facilities to create new opportunities for money in recognition of the walls closing in. The game of telephone saw that turn into "go to college to get a job" with few compelling creations to come from it and, thus, stagnant incomes, but you can only lead the horse to water...
I know we are at ground zero here on HN, and ironically HN is pretty good evidence of this, but
The pros of software are so OP that it hard to justify investing in anything else. Software has incredibly low cap-ex and incredibly high margins. Five humans with five laptops can create a lawn maintenance app worth tens of millions.
To get that same value from, say, building lawn mowers, you need a factory...annnd already the value prop is "nope".
Take note that there is no hardware version of Hackernews. There is no hardware/manufacturing VC scene. Hell even the hardware that is produced today is just a vessel to sell a $19.99/mo software subscription to use the product. Look at what Tesla did, they are getting a reality check on their cars, but Ah!, Tesla is now a software company developing a software package that turns hardware (their cars) into reoccurring profit machines!
Software has eaten the first world, and this is what is looks like. A hyper inflated tech scene where all innovation is happening, and a totally anemic everything-else scene (except finance, that's huge too).
It seems like this would be a pretty good argument for increasing taxes on the high end and having large public works projects to drive forward particular useful goals on a national level (ignoring whether or not a particular governmental organization is currently capable of this, more just focusing on that as a backstop that allows prioritization of economic goals).
I think you're on the right track there. Stock markets used to be a place for developers of Things (initially, railways) to acquire money for investments too large and/or too risky for a single bank, for companies to acquire money for growth, and for farmers / their customers to get reasonable pricing for their goods.
The problem is, once the gold standard fell and the rise of fiat money began, the financial markets became self-serving, with hordes of middlemen extracting the tiniest amounts of profits along the path, speculative trading driving up food prices, and people's care in old age no longer backed by the government in the form of a "societal contract" but by, essentially, betting on the economy ever growing and growing.
The gamble went on decent for a few decades, partially powered by ruthless exploitation of natural resources, but in the end the fundamental and long ignored issue of infinite growth being impossible (as anyone who ever played Paperclip should know) is now coming home to roost. The domestic resources of many countries are effectively exhausted (coal, gas and oil in Western Europe), leading to unhealthy dependencies on those countries that still do have these resources, and the consumer markets are either already saturated with cheap foreign-made goods or simply don't have enough money any more because rents are extracting too much money out of the people.
Nvidia has current market cap equivalent to ~8 times ExxonMobil. If tomorrow ExxonMobil disappears from existence, you'd get half of the world paralysed. If Nvidia tomorrow gets replaced by a massive hole in the ground, you'd just shrug, go down the road a bit and buy AMD. Sure, they can't make cards as fast as Nvidia does, but they still work, the old cards won't suddenly stop working, and they don't even manufacture their own hardware.
The AI stocks nowadays are pumped up by pure hype, and it's inevitable that the market will recalibrate sooner or later
I'm not sure that's a fair comparison. The difference in the product lifecycle is too big. A GPU has a 3 year depreciation cycle and continues working for well over a decade after that, if I buy gas today I need new gas tomorrow. The market can react in the timespan of years, it can't react in the timespan of weeks, and having a product that isn't used up makes timelines more elastic.
If we eliminate both factors by imagining a world where GPUs just stop working every three years and where AMD doesn't have time to ramp up production we'd be pretty screwed without Nvidia, and everything depending on GPUs would quickly grind to a halt. AMD sells a tiny number of dedicated GPUs compared to Nvidia, and right now they have no spare capacity
I think you're missing part of the story with stocks like NVDA. The value of a stock is also based on expectations, so it could be that all of NVDA's growth for the next decade has already been frontrun by the market, and it's essentially partly a prediction market on how valuable the infrastructure will be for AI, given that the chip requirements will only increase as AI systems are implemented in more and more hardware (robots / appliances / transportation / medicine, etc.). While the growth potential of carbon fuels really remains as it is with modest growths aligned with demand/population, but tempered by alternate energy taking greater and greater marketshare.
So it could simultaneously be hype (very optimistic predictions) and yet still valued appropriatey by the market with future expectations priced in, just with some additional premium due to that demand/hype.
> Nvidia has current market cap equivalent to ~8 times ExxonMobil.
$XOM's current revenues are known and no one will suddenly be throwing billions at them for CapEx purposes. People are throwing billions at the general direction of $NVDA. That's the difference: which company has a better change of (growing) more revenues and profits in the future?
> The AI stocks nowadays are pumped up by pure hype, and it's inevitable that the market will recalibrate sooner or later
And until that recalibration happens you can buy now and see your holdings go up; then, once you're happy with the ROI (10%? 20%? More?), you can sell and realize your capital gains and have a large number in your account. Or you can not buy now and potentially miss the ride up.
Just because The Market™ is (allegedly) irrational does not preclude the possibility you can make money.
> If tomorrow ExxonMobil disappears from existence, you'd get half of the world paralysed. If Nvidia tomorrow gets replaced by a massive hole in the ground, you'd just shrug, go down the road a bit and buy AMD.
That's the wrong way to think about it, because the stock price is about all future profit over time, not the current moment. Over the next 50 years, which one do you think will have made more profit?
Imagine you're in the year 1900, and you're comparing a light bulb company with a steam engine company. Industry needs steam engines, you say! Half the world would paralyze if they stopped working! Meanwhile, who cares about a light bulb company?
But you can understand why light bulbs actually turned out to make much more money moving forwards.
You should probably think of it with a different perspective. The long term outlook for oil majors is stagnating at best. They provide great logistics for fuel globally but haven't expanded past that.
If we continue to go to electricity and go via solar, energy storage, wind and nuclear - you end up in a spot where oil and gas are limited.
NVIDIA has blue sky ahead of it -- are valuations totally out of line? Most likely. That said it has a highly desirable product globally. Oil is a valuable commodity but there are many other providers that could snatch up exxonmobil share.
Also if you want a better example -- good look at any critical supplier in the food space. Thats way more important - we lose that we get in a world of hurt.
All you're really highlighting is the difference (from an economic perspective) between needs and wants. The world needs petroleum. But once that need is met, extra petroleum production is pointless.
Whereas the world (or, perhaps, a specific class of investors within a specific segment of the world) WANTS generative AI. The amount someone wants something (and, by extension, is willing to pay for it) is potentially unbounded, and can even be uncorrelated with real utility. (See: gemstones, trading cards, cryptocurrency...)
I wouldn't be so quick to pick on AI hype. Investors are always desperately looking for where to put their money. That it is AI suggests, perhaps, that all the alternatives look less promising right now? (And that is a bit tragic.)
I hope this doesn't come across as pedantic and negative, but there is a good reason Why a resource extraction company in a market that topped out a few years ago has got a lower than average PE ratio.
On the other hand, Nvidia is a result of the AI bubble. Oddly, though, there's a case to be made that Nvidia could come out of this, even after a correction, looking pretty good.
But what I really can't grok is how Tesla keeps an insane P/E ratio after several consecutive quarters of bad news. Or how Grok gets a high valuation without even anything close to OpenAI's money-losing revenue levels, while swallowing a decrepit old social media site. Or how that big rocket can keep blowing up without dinging the valuation.
Data shows that retail participation has been near all-time highs, which does tend to correlate with bubbly market activity.
The market in general is fairly highly valued when looking at the standard valuation metrics, but corporate earnings have been strong as well. That said, the most obvious grey swan would be the market concentration in the top names, which market cap weighted index funds do not avoid and indeed contribute to on a mechanical level. That said, the names will eventually swap around within the index, and as long as capital flows to US financial markets don't reverse (see the back to back 7% down days for market cap weighted indexes during the tariff scare) these rotations won't ultimately be a problem.
Beyond that though, it's not as bad as it looks at first glance. Other areas of the market have pretty large pockets of value, or at least more average valuations. Some names in consumer discretionary are still at the bombed out post tariff scare valuations (ex: LULU which is a good example of a name that had optimism and now has extreme pessimism and low valuation, ANF which has good earnings despite tariffs and is cranking buybacks sub-10 PE) and sectors like healthcare (you have to be a real contrarian to get in here, but when Buffett is buying the value proposition is usually pretty extreme), and energy (quality energy names like FANG trading near single digit PE with management that is showing extreme capital restraint in the face of uncertainty, for once). Smallcaps in general aren't that expensive, since they are on the back-end of the huge, crowded long/short trade (that has been unwinding for a few days now).
Even in megacaps it isn't all bubbly. Google has a lot of pessimism and isn't that expensive, which may or may not be warranted but it is a counterexample. The ridiculous valuations are quite concentrated in the AI related space, specifically in specific names which retail is obsessed with (ex: PLTR( or hedge funds are obsessed with (ex: GEV).
When you say retail participation being at a high correlates with bubbly market activity, is that based on recent data? I'm concerned it doesn't take into account the increase in access to the market app based trading has proliferated.
If a company has strong growth in real dollars or inflation is high then a higher P/E is approximately valuation neutral. P/E ratios don't exist in a vacuum and low isn't always better. The price-to-sales ratio is often more indicative of whether something is overvalued than P/E in high-growth cases because earnings are used to finance growth.
P/E ratios tend to be small only if revenue growth in nominal dollars is flat, which tacitly treats the stock more like a bond.
I do trade using margin account, but I don't borrow. The primary reason I use margin account is to be able to trade with unsettled funds. Probably don't need it now that the settlement times are T+1, but when it was T+2, it was kinda annoying.
If you had only invested in companies with sane P/E in the 2010s you would have probably missed some of the biggest runs for companies that today are some of the most valued in the world.
Worrying about P/E is more for really big institutional sized investors who are very conservative because the loss of principal is far more difficult to recover for even small % of loss.
You are an individual investor who can probably recover losses with a year or two of salary.
These high PE's imply an expectation of further profit growth - by rational investors. There's a strong element of less rational investors with FOMO jumping on as well.
Index funds offer some defense against crazy PE's through diversification, but keep in mind that when an asset bubbles, it also takes up a greater percentage of the index fund. The big tech stocks make up a significant % of the SP500.
Many of us consider macroeconomics to be out of humanity's wheelhouse. The divide between micro and macro economics is where the real science ends and the bullshit starts. Many of the findings in macroeconomics are politically motivated, tenuous, and haven't reproduced well, just like in the other social "sciences".
So just under 9%. Significant, I suppose, for just 3 of 500 stocks.
EDIT: since "etc." was mentioned, I thought I'd toss in some of the other top stocks in the S&P500:
• Apple Inc. (AAPL) ~6.7 %
• Microsoft Corp. (MSFT). ~6.6 %
• NVIDIA Corp. (NVDA) ~6.0 %
Amazon.com Inc. (AMZN) ~3.8 %
Another 20% or so. So the above seven stocks comprise about 30% of the S&P500 (Apple, Microsoft and NVIDIA are the "Big 3" at about 20% when combined).
It's crazy to me that these companies are essentially holding up the stock market, but are hemorrhaging money on buying GPUs. The magnificent 7 have spent $560 billion of capital expenditures between 2024 and 2025 leading to $35 billion of revenue, and zero profit. It feels like a complete house of cards to me. No one has made any profit on AI.
There can be a lot of mundane reasons to use margin. Making purchases while cash is in movement as an example. This type of debt is one of the safest as you are borrowing against assets with an up to date valuation.
Disclaimer that if you own any of the popular market-cap-weighted index funds (VOO, VGT, VTI) you are exposed to this risk and, conversely, have benefited from this ballooning in valuations.
NVDA, AAPL, TSLA and PLTR are together ~16% of VOO at the moment. NVDA alone is ~8%. Berkshire Hathaway is about the same % as TSLA, 1.61%.
One of the two major worldviews (ideologies) says the market is fully valued. One says it's severely undervalued. Nobody is capable of considering that their world view is wrong and they're living in a fantasy. The next 12 months will be fascinating and (for some) extremely satisfying.
High amounts of margin debt indicate that a crash is coming. When a lot of the investments fail, the whole house of cards unwinds: A lot of the debts go bad, and then there isn't enough lending to create investments which are then used to create jobs.
> I'm sure trading on margin is for some reason actually a positive concept for the economy at large for reasons I can't understand.
Don't underestimate yourself! A lot of times when something seems stupid and socially corrosive, it is. I don't think there is any reason for margin trading other than it makes a few people a lot of money.
Perhaps there is a different valuation metric relevant for a nearly sovereign entity. Nobody is buying shares for "money returned to shareholders", because nobody is using shares as a conduit, the corporation relies on a low-float to pump their own stocks and delete the shares in buybacks that squeeze the price.
I'm not sure you understand what a buyback is, and given that display of ignorance, I don't see why anyone would care about your (entirely unrelated) observation about Palantir.
> On the flip side, trading with margin debt can also exacerbate losses because if a stock's value were to depreciate, the investor may face a margin call and would need to come up with additional cash to reach the minimum requirement.
That's just the flip side for individual investor. There is also collective risk.
The worst comes when there are too many investors with margin debt and they start to get margin calls at the same time. This causes prices to drop and it triggers even more margin calls, starting an avalanche where stock prices drop just from forced sells.
The main issue are not household investors, the main systemic risks are in overleveraged hedge funds and banks (and a completely corrupted SEC and FINRA, with essentially 0 policing).
See Archegos Capital, Evergrande in China, 2008 financial crisis, Citadel (the hedge fund) with assets almost equal to "securities sold not yet purchased", etc.
Then there's just tons of crime like JP Morgan making 10 billy by spoofing gold prices and then paying a 1 billion fee to pay off the complicit regulator and be able to "keep playing".
It'll pop, the question of course is when? Ponzi's can go on for decades before something breaks.
Hedge Fund net exposure readings are available in Prime Broker reports. Currently, institutional net exposure isn't that high on a historical lookback. They've essentially been forced to chase since April (the market movement since then has essentially been a large front-run until recently). They are at high gross exposures though, so their contribution to the risk landscape has been, well, what we've seen in the past few days with a huge rotation/unwind under the hood, with mild net selling but large amounts of reshuffling.
Bank balance sheets are conservative currently.
>It'll pop, the question of course is when? Ponzi's can go on for decades before something breaks.
Tautological. Broken clock right twice a day, etc etc. We had a massive collapse in March 2020, and in 2022 when the banking system was pseudo-nationalized/backstopped. If you're still waiting for "the collapse", it begs the question about how one was positioned for those events. Frankly, I saw many people cruise right through 2022 without ever switching to bullish, even when Meta was single digit forward PE and such. As someone who was managing a portfolio that heavily deployed after the Fed backstopped the banking system, I clearly remember that this moment (which was one of the best moments to buy in the last decade, and offered a long list of ludicrously low valuations, especially on the fringes ex: I was buying Chinese companies for less than half of the valuation of the cash on their balance sheet, with the actual business with PE under 5 included for free), retail and institutional sentiment readings were the most pessimistic since the Great Depression. Likewise, stepping away from the AI bubble there is a long list of extremely low valuations in the current market (companies with PE under 8, buying back 15% of its shares every year, for example, or energy companies sub-10 PE with conservative balance sheet management, which has been a huge positive shift in the industry, yet everyone wants AI stocks at 300x forward earnings).
>The worst comes when there are too many investors with margin debt and they start to get margin calls at the same time. This causes prices to drop and it triggers even more margin calls, starting an avalanche where stock prices drop just from forced sells.
Yep, liquidity matters so much in the short run, and people getting margin calls will get disproportionately hurt. It's the same reason why GME shot up in price even though it was just marginally profitable, all the liquidity dried up, and there was still pressure on the buy side. I'm a big fan of Taleb when it comes to finance: the #1 rule should always be "don't blow up." Trading on margin is a good way of allowing that to be a possibility.
This article is from a month ago and based on June numbers. July numbers are now available from FINRA. Total margin debt continued to increase from June to July, but by a much smaller percentage than the May to June:
Money doesn't get invested in the market; when you put money into the market, someone else takes it out, because you're trading assets. What can happen is that the price of those assets goes up when more people have money that they want to invest, because the price has to rise to the point where there are as many sellers as buyers. So the market price can grow up, but there's no vault of money tied up in the market.
However, there can be money created by the market, because people and companies can borrow money while using the value of the assets they own as collateral. This borrowing does cause new money to appear from thin air, which means that the market is a source of money, not a sink. As this borrowed money increases the money supply just like physical money-printing would, the price of assets tends to rise along with it, as much of that borrowed money gets put towards buying those assets, increasing the number of buyers, and someone has to be convinced to sell.
This creates an unstable feedback loop of rising borrowing against rising asset prices causing higher asset prices, and it can of course operate in the reverse mode as well, where falling asset prices result in loans being called in, causing the money supply to shrink, pushing asset prices down even further.
(This crash is not a necessary outcome; if the assets correspond to productive investments and real growth, this results in abundance which can in various ways allow those debts to be held or paid off without falling asset prices.)
You would have to look at that graph starting before 1971 when Nixon took us off the gold standard. when he did that it allowed the US to boroow more money based on nothing. The myth is that "More money has been invested in the market over time", when in fact more debt has been invested in the market.
The US was borrowing based on nothing and eventually people figured that out and wanted to trade the nothing for gold which prompted the US to "fix the glitch" and stop gold redemption.
It's not like leaving the gold standard caused us to borrow based on nothing; we already decided to do that.
Somewhat misleading to use a percentage in the article headline when only the absolute amount reached an all-time high.
While the absolute dollar value of margin debt is at an all time high, margin debt as a percent of total stock market value is still significantly below historic levels.
As an absolute number, yes. Remember though that a lot of money was printed in the last few years. Comparing against GDP[1] or Currency in Circulation[2] the levels are still elevated but not at records, yet.
We are having an emperor's clothes moment with regards to the value of the dollar. Not that fiat money is arbitrary and therefore without value (I think this is a bad argument), but because the US government is not paying its debts in real terms. It always pays in nominal terms (and probably always will), but it doesn't pay in real terms. Dollar holders cover the gap.
If the dollar inflates away, then you need to grow just to break even. And it's advantageous to have debt denominated in a devaluing thing (in this case dollars).
Now every retail investor, and really everyone with an internet connection knows what's going on and are trying to take action accordingly.
Inflation is felt immediately as change in price of things that one frequently buys. Everyone can empirically determine if they are experiencing inflation without consulting the news or any authority. And the basket that an authority uses to determine the "official" inflation numbers is less representative of its impact on an individual than their personal basket.
Then there is the outlook on inflation, which most lay people were not thinking about until recently. Most people think of longer term inflation as "economy good" or "economy bad", and often falsify their true outlook, instead signaling a political allegiance. In 2025, Trump is in office, so Democrats might signal "inflation go up, economy bad", and they would have signaled "inflation go down, economy good" when Biden was in Office a year ago. The reverse is true of Republicans.
Now, everyone expects inflation to continue and even accelerate in the long term. And people are worried enough to take action in the form of more loans, more investments on margin, holding less dollars, etc. And now everyone knows that everyone else is doing this, which is the "emperors clothes moment".
People are much less likely to be taken seriously if they express that inflation will mostly be a function of who is in office, rather than an inevitability of the American political system. If someone you cared about expected there to be no inflation, you might become concerned for their ability to financially plan.
So now we all know, and we know that everyone else knows, and we aren't trying to hide our outlook on inflation in conversation because it's now worse to look stupid on this topic than miss a signalling opportunity.
TLDR: what was once a low consequence signalling opportunity, is now part of serious financial planning.
Many people (including Michael Burry) have had this feeling over and over since 2008, and were basically always wrong! Markets are tricky beasts to predict.
To plagiarize Howard Marks, when you try to time the market, you have to be right twice: both on when to get out and when to get back in. Even being right once is incredibly hard.
Or, to quote Peter Lynch: "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves."
Ya I listen to this space a lot. 2015, 2016, 2018 and 2020 were a blur of “I’m cashing out and moving my 401k to money market” on several podcasts because of impending doom
I always wonder if they somewhat right. Using the chart from the article we have large spikes in margin debt at a bunch of years that initially were followed by a crash but now are possibly followed by money printing preventing the crash. So although Burry has the right idea the rules/market has changed and his analysis no longer holds.
That said, I think 2025 is too early for the AI bubble to pop. Even Burry was buying CDS in 2005 [1] so if you're seeing something your convinced is a crack right now it's going to take a few years to actually fracture.
- 2000 -- Followed by a crash
- 2007 -- Followed by a crash
- 2011 -- (ish) USG added a bunch of money into the system
- 2015 -- Counter example?
- 2018 -- Counter example?
- 2021 -- Large crash, USG added a bunch of money into the system
It is not that the markets are tricky. Predicting what the Fed will do with interest rates is tricky. By lowering rates they feed more money into the market. Take a look at the last 15 years and you will realize the only thing that gave us a minor recession was COVID, adn that was becasue intrest rates were zero.
I am all in cash outside of startup shares. I think it makes sense to be in the market, but compared to 2008, there is way more government fiscal issues, way more concentration of profit growth (e.g. only the top 10 companies have had profit growth in the last 3 years). Way more risk is in the system.
The question is how deep will the crash be. If the S&P goes up those 500 points and then crashes by 300 you are better off staying in. OTOH, if the S&P goes up those 500 points and then crashes by 5000 (I didn't bother looking up the value, so I don't know if that is possible) you are not out much by getting out today.
A risk free rate of 4% really isn't that bad for cash (which is why there are trillions sitting in money market funds right now). If you have Tbills with a bit of duration you're also long economic weakness due to having locked in yields, which offsets the inflation spike risk to some degree (or more than compensates for it from another perspective).
At IB you can get margin interest rates of like 6% I think? SP500 total return is like 9.5% already this year, 25 and 26% in 2024/2023. You get paid to borrow like crazy. Exactly why Dave Ramsey is the worst financial youtuber of the 10s: When rates are close to 0, you only need a 1% return to pay the carry. You should be borrowing like crazy.
Yeah back when margin rates were close to 1% it made a ton of sense to use margin. I was pretty cautious with it but bought a bunch of blue chip dividend stocks- altria, vz, etc at 1% rates and collected 5% dividends. For awhile I could even deduct the margin interest from my income.
At a 6% rate though, this is very risky. Your hurdle rate is just below the average market return rate. There are better ways to gamble on the market if that's what you want to do-UPRO and TQQQ come to mind, as well as options.
And if it doesn't pop? I mean I don't even disagree with there being massive bubble risks, but like my comment was more aimed at the fact that high margin debt doesn't mean anything without knowing the return of the asset you buy with debt and the debt cost.
Let's not even get into the fact that in jurisdictions with wealth taxes and interest deductions from income levering up actually "cuts" your tax bill.
The best investment advice that I believe I ever had is to take a basket of goods and rebalance them. My father uses a collection of bonds and stocks and if the valuation shifts he sells high and buys low once a quarter to rebalance the percentage risk he wants in the overall market.
Ideally the best markets to get into now are probably healthcare which is about to have a raft of medicines, energy which is going to be the shovels that everyone needs to power the AI. Transportation is always a good bet and shorting palantir to go long Exxon might be worthwhile so long as you don't do so on margin.
Margin is generally bad. Having a basket of commodities tided inversley to margin would probably be a good idea. Buying currencies and holding as an inverse proportion of the margin in their stock markets?
There's a reason someone wants the Fed to drop rates: we're now in the stage where the only way the rich stay rich is if we just pile more cheap debt on top of the debt we already have.
A lot of margin is people borrowing against holdings instead of selling to generate cash (and tax liability). These Securities-backed lines of credit appear as margin on these kinds of reports...
> Might be a good thing to do in the next recession...
The magic money we sent out is the cause of a lot of the problem we're facing now though, it's not like you can print magic money every 5-10 years to extinguish systemic problems
The banks and corporations have been getting the "magic money" since 1971. The moment we give it directly to the people evryone is concerned about inflation. This mindset is sad.
Do you know that banks in the last 15 years have been getting free money and then lending to people at rates from 5 to 29%? Does that not make you mad?
The first thing to understand is that middle-lower and lower class people don't matter much to the economy, but they make up a large contingent of the population, so they matter a lot to media orgs. They love news stories about their struggle and the media is happy to oblige them with ad-ridden news stories. Hence the endless pandemic economic doomerism and "I lost my cashier job" stories.
Who does matter are the white collar upper-middle, upper class people. They generate the most value and spend the most money. These advanced sectors are the american economy. And what happened to them during the pandemic? They just stayed home and kept working, thanks modern tech.
However the government responded like it was still 2005, where there was no tech to keep things moving, and created an incredibly stimulative environment for an economy that was largely still doing fine. By the end of 2020 GDP had recovered.
Despite this we still got:
- 0% interest rates, this is the crack-cocaine of the upper class, especially when the actual economy was doing fine.
- Pause on student loan payments, this was massive, most of these people were employed making more money than ever
- Pause on rent, another massive boon, again people who didn't lose their job now are not paying loans or rent
- PPP loans, pretty much a straight handout to business owners, who again, were still in business anyway.
- Child tax credit, the child tax credit was almost doubled for anyone who had a kid(s).
- Unemployment benefits, this is getting away from upper class territory, but lots of lower class workers were getting 2x pay while not paying rent or working, which they took right to spending.
- Stimulus checks, the most visible but least impactful, everyone got a few thousand dollars.
For some people the pandemic was very traumatic and resulted in a severe loss of income (eg. worst case scenario, a theatrical performer) but for other people, (eg. tech workers) they experienced the opposite, an increased demand for their services alongside a reduction in their costs (nil commute). The latter was the greater amount of people and so you had a lot of people with increased disposable income, alongside ultra low interest rates, and that caused the economy to surge as people spent money, took on debt and acquired assets.
Covid cheques which in some countries only went to persons in the former niche category I think had less remarkable impact than the broader factors.
What was the margin debt that cause black Tuesday and was the genesis to the great depression? It was at record highs as well, 10% of the total market cap of all stocks.
>Honestly, if you don't cash in right now, you are playing with fire. We are on our way for a big correction.
Says everyone always. I've watched my cash savings inflate away like crazy over the last few years. Basically anyone who doesn't hold real assets is screwed at this point.
Cash parked in money markets (which is just a click away) hasn't done that badly. Getting 4-5% has kept pace with inflation for the most part. Especially now, with economic risks to the downside/slower growth arguably growing, cash doesn't look that bad (until rates are lowered, which will put investors in a pickle, and probably force them modestly out the bond duration curve). Obviously inflation (or more specifically stagflation) risks are clear grey swans as well though, so some exposure to gold (or CTA trend following, which performs well in stagflation) is probably a prudent addition to a diversified asset mix looking to protect against the known risks. And as a benefit, gold and CTA are fairly decent black swan hedges as well (but it's a bit pointless to try and protect against black swans, which are unpredictable by definition).
I'm sure trading on margin is for some reason actually a positive concept for the economy at large for reasons I can't understand, but god damn does it feel like a bad idea to see huge spikes of debt to prop up what already feels like an absurdly out of balance market.
I don't know how to actually tell if the market is overvalued, but man when I see Palantir has a PE of like 500, Tesla almost 200, and Apple is like 35, I can't help but think there too much hype.
But I have literally no idea. Macroeconomics is way out of my wheelhouse, and I'm usually wrong.
Here's to an index fund...
The thing is, you can simultaneously be completely correct about the market being insane, while also entirely wrong in expecting it to behave in a sane way.
Cue the famous quote: “The market can remain irrational longer than you can remain solvent.”
I have a vague theory that as the amount of wealth inequality increases in a system along with “money printing” (lending, hypothecation, etc where the wealthy are permitted privileged leverage and risk), the more detached markets become from reality in general. In such a case, an increasing majority of the money circulating has no need to be grounded in anything close to the common basic needs and values that most normal people have to live with.
Instead, most important to such wealth is to tap into the source of inflation to be on the winning side of that. This becomes a game of its own, where an investment’s connection to reality or fundamental value is mostly irrelevant compared to how it leverages or monopolizes the state-created and privately created instruments of “money printing” (sketchy lending, rehypothecation, etc.) and other such “games” that only the wealthy are allowed in on.
> Cue the famous quote: “The market can remain irrational longer than you can remain solvent.”
It's not necessarily about things being (ir)rational, but about 'psychology' and the multi-player system that is The Market™. Because it's all very well and good to buy and sell individual products (securities) on their merits, but one also has to take into account what other people's ideas on them is as well (as you are buying/selling from them).
This factor has been known about for almost a century:
> A Keynesian beauty contest is a beauty contest in which judges are rewarded for selecting the most popular faces among all judges, rather than those they may personally find the most attractive. This idea is often applied in financial markets, whereby investors could profit more by buying whichever stocks they think other investors will buy, rather than the stocks that have fundamentally the best value, because when other people buy a stock, they bid up the price, allowing an earlier investor to cash out with a profit, regardless of whether the price increases are supported by its fundamentals and theoretical arguments.
* https://en.wikipedia.org/wiki/Keynesian_beauty_contest
Of course other people know about this factor, so folks are judging others based on how they are judging others.
(Personally I'm just going with index finds (VEQT/XEQT/VBAL up here in Canada).)
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> I have a vague theory that as the amount of wealth inequality in increases in a system along with excess money printing (lending, hypothecation, etc where the wealthy are permitted privileged leverage and risk), the more detached markets become from reality in general.
If you want to make it less vague, you can read Keynes.
It's inequality that is the important one, money printing doesn't impact it (except for it impacting inequality). In simple language, people don't want to spend all their money on consumption (the "demand is infinite" you see on econ101 is an approximation), and so when only two dozen people have all the money there aren't many things you can sell and turn a profit. But those people still want to invest all the money they aren't using, there is just nothing to invest into.
At the turn of the 19th to the 20th century, explaining this was a huge open problem in economics.
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Yeah its important to decompose those two sources (among others) of "money printing". The obvious one people think most about is when our federal government does it. But a more concerning one is: Enforced banking reserve ratios. If a bank holds a trillion dollars in assets and is allowed to hold a reserve ratio of 10%, they can print $10T out of thin air, because they're allowed to issue debt up to that amount.
As far as I'm aware, in 2020 the reserve requirement in the US was set to 0%, and it has not been changed since then.
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Notably, very little of the US economy is plausibly basic needs (a roof over ones head, basic nutrition, actual basic medical care, etc.). The vast, vast majority is essentially luxury goods and services, but Americans have been conditioned to think what the rest of the world considers luxury is actually basics.
If Americans actually cut back to actual basics (a fixer upper small house in a less desirable area), shared a older used car instead of buying several new ones (or a big truck!), made homecooked stews and beans and rice instead of eating out all the time or prepackaged food, stopped buying the latest fancy phones, took care of their health instead of gastric bypasses, dialysis, etc.
Hell, even if the average American stopped taking expensive vacations!
The world economy would likely collapse overnight, no joke. And it would likely be uglier than the Great Depression domestically.
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> I have a vague theory that as the amount of wealth inequality in increases in a system along with excess money printing (lending, hypothecation, etc where the wealthy are permitted privileged leverage and risk), the more detached markets become from reality in general.
Except that the Gilded Age, which had some of the highest levels of wealth concentration and inequality, was during the period of the Gold Standard where money could not be 'printed excessively'. And this was true not just in the US but most of the major countries in the world.
Further, while wealth inequality has risen in the US under the non-gold fiat system (to levels similar to the Gilded Age), other countries do not have as much wealth inequality even though they are also non-gold fiat.
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If the very most you need to live on is 10 million. You can gamble the rest. Buy apartments, jack up the rents like crazy worst thing to happen to you is that people may move out. Buy stocks on margin, win some loose some. The real economy your play toy.
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>I have a vague theory that as the amount of wealth inequality increases in a system along with “money printing”...
This is well understood by some schools of economics. It's called The Cantillion Effect.
https://mises.org/mises-wire/cantillon-effects-why-inflation...
This is a very sad yet resoundingly plausible take. Scary.
I’ve seen nobody talking about this, so it’s probably wrong, but I can’t shake the feeling that a lot of the seemingly-nuts things we’ve seen the last 20ish years, from house prices going to the moon to LOLWTF P/E ratios sustained for years on end, and even the magnitude of VC activity, are an outcome of having way too large a proportion of our money in capital, desperately seeking investments to buy, with an underlying economy (ignore stock prices and net-drag economic activity like over-paying for healthcare, I mean actual productivity) that hasn’t grown anywhere near fast enough to give that money anything useful to do.
Every independent economist has been saying this for the last 10 years- see for example "Capital in the Twenty-First Century", a book written by French economist Thomas Piketty.
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I've had the exact same thoughts, so if you're wrong you aren't alone. I personally believe this is due to the imbalance of wealth. Where money isn't circulating properly and we end up with these massive funds that move from one investment type to another destroying everything in their wake
Haven't we been talking about that for a long time? Even the whole "go to college to make more money" was premised on the idea of people leveraging college research facilities to create new opportunities for money in recognition of the walls closing in. The game of telephone saw that turn into "go to college to get a job" with few compelling creations to come from it and, thus, stagnant incomes, but you can only lead the horse to water...
I know we are at ground zero here on HN, and ironically HN is pretty good evidence of this, but
The pros of software are so OP that it hard to justify investing in anything else. Software has incredibly low cap-ex and incredibly high margins. Five humans with five laptops can create a lawn maintenance app worth tens of millions.
To get that same value from, say, building lawn mowers, you need a factory...annnd already the value prop is "nope".
Take note that there is no hardware version of Hackernews. There is no hardware/manufacturing VC scene. Hell even the hardware that is produced today is just a vessel to sell a $19.99/mo software subscription to use the product. Look at what Tesla did, they are getting a reality check on their cars, but Ah!, Tesla is now a software company developing a software package that turns hardware (their cars) into reoccurring profit machines!
Software has eaten the first world, and this is what is looks like. A hyper inflated tech scene where all innovation is happening, and a totally anemic everything-else scene (except finance, that's huge too).
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It seems like this would be a pretty good argument for increasing taxes on the high end and having large public works projects to drive forward particular useful goals on a national level (ignoring whether or not a particular governmental organization is currently capable of this, more just focusing on that as a backstop that allows prioritization of economic goals).
I think you're on the right track there. Stock markets used to be a place for developers of Things (initially, railways) to acquire money for investments too large and/or too risky for a single bank, for companies to acquire money for growth, and for farmers / their customers to get reasonable pricing for their goods.
The problem is, once the gold standard fell and the rise of fiat money began, the financial markets became self-serving, with hordes of middlemen extracting the tiniest amounts of profits along the path, speculative trading driving up food prices, and people's care in old age no longer backed by the government in the form of a "societal contract" but by, essentially, betting on the economy ever growing and growing.
The gamble went on decent for a few decades, partially powered by ruthless exploitation of natural resources, but in the end the fundamental and long ignored issue of infinite growth being impossible (as anyone who ever played Paperclip should know) is now coming home to roost. The domestic resources of many countries are effectively exhausted (coal, gas and oil in Western Europe), leading to unhealthy dependencies on those countries that still do have these resources, and the consumer markets are either already saturated with cheap foreign-made goods or simply don't have enough money any more because rents are extracting too much money out of the people.
Nvidia has current market cap equivalent to ~8 times ExxonMobil. If tomorrow ExxonMobil disappears from existence, you'd get half of the world paralysed. If Nvidia tomorrow gets replaced by a massive hole in the ground, you'd just shrug, go down the road a bit and buy AMD. Sure, they can't make cards as fast as Nvidia does, but they still work, the old cards won't suddenly stop working, and they don't even manufacture their own hardware.
The AI stocks nowadays are pumped up by pure hype, and it's inevitable that the market will recalibrate sooner or later
I'm not sure that's a fair comparison. The difference in the product lifecycle is too big. A GPU has a 3 year depreciation cycle and continues working for well over a decade after that, if I buy gas today I need new gas tomorrow. The market can react in the timespan of years, it can't react in the timespan of weeks, and having a product that isn't used up makes timelines more elastic.
If we eliminate both factors by imagining a world where GPUs just stop working every three years and where AMD doesn't have time to ramp up production we'd be pretty screwed without Nvidia, and everything depending on GPUs would quickly grind to a halt. AMD sells a tiny number of dedicated GPUs compared to Nvidia, and right now they have no spare capacity
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I think you're missing part of the story with stocks like NVDA. The value of a stock is also based on expectations, so it could be that all of NVDA's growth for the next decade has already been frontrun by the market, and it's essentially partly a prediction market on how valuable the infrastructure will be for AI, given that the chip requirements will only increase as AI systems are implemented in more and more hardware (robots / appliances / transportation / medicine, etc.). While the growth potential of carbon fuels really remains as it is with modest growths aligned with demand/population, but tempered by alternate energy taking greater and greater marketshare.
So it could simultaneously be hype (very optimistic predictions) and yet still valued appropriatey by the market with future expectations priced in, just with some additional premium due to that demand/hype.
> Nvidia has current market cap equivalent to ~8 times ExxonMobil.
$XOM's current revenues are known and no one will suddenly be throwing billions at them for CapEx purposes. People are throwing billions at the general direction of $NVDA. That's the difference: which company has a better change of (growing) more revenues and profits in the future?
> The AI stocks nowadays are pumped up by pure hype, and it's inevitable that the market will recalibrate sooner or later
And until that recalibration happens you can buy now and see your holdings go up; then, once you're happy with the ROI (10%? 20%? More?), you can sell and realize your capital gains and have a large number in your account. Or you can not buy now and potentially miss the ride up.
Just because The Market™ is (allegedly) irrational does not preclude the possibility you can make money.
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> If tomorrow ExxonMobil disappears from existence, you'd get half of the world paralysed. If Nvidia tomorrow gets replaced by a massive hole in the ground, you'd just shrug, go down the road a bit and buy AMD.
That's the wrong way to think about it, because the stock price is about all future profit over time, not the current moment. Over the next 50 years, which one do you think will have made more profit?
Imagine you're in the year 1900, and you're comparing a light bulb company with a steam engine company. Industry needs steam engines, you say! Half the world would paralyze if they stopped working! Meanwhile, who cares about a light bulb company?
But you can understand why light bulbs actually turned out to make much more money moving forwards.
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You should probably think of it with a different perspective. The long term outlook for oil majors is stagnating at best. They provide great logistics for fuel globally but haven't expanded past that.
If we continue to go to electricity and go via solar, energy storage, wind and nuclear - you end up in a spot where oil and gas are limited.
NVIDIA has blue sky ahead of it -- are valuations totally out of line? Most likely. That said it has a highly desirable product globally. Oil is a valuable commodity but there are many other providers that could snatch up exxonmobil share.
Also if you want a better example -- good look at any critical supplier in the food space. Thats way more important - we lose that we get in a world of hurt.
All you're really highlighting is the difference (from an economic perspective) between needs and wants. The world needs petroleum. But once that need is met, extra petroleum production is pointless.
Whereas the world (or, perhaps, a specific class of investors within a specific segment of the world) WANTS generative AI. The amount someone wants something (and, by extension, is willing to pay for it) is potentially unbounded, and can even be uncorrelated with real utility. (See: gemstones, trading cards, cryptocurrency...)
I wouldn't be so quick to pick on AI hype. Investors are always desperately looking for where to put their money. That it is AI suggests, perhaps, that all the alternatives look less promising right now? (And that is a bit tragic.)
That's because businesses are valued by how much money they make, not how essential they are.
ExxonMobil has a market cap essentially infinitely larger than my local water supply and the farms that grow my food.
you're right, but it brings up an even bigger question in my mind -
If farms where wiped out we a huge percentage of the population would no longer exist, yet they 100% are a commodity with low margins.
We don't value things based on long term risk/need
I hope this doesn't come across as pedantic and negative, but there is a good reason Why a resource extraction company in a market that topped out a few years ago has got a lower than average PE ratio.
On the other hand, Nvidia is a result of the AI bubble. Oddly, though, there's a case to be made that Nvidia could come out of this, even after a correction, looking pretty good.
But what I really can't grok is how Tesla keeps an insane P/E ratio after several consecutive quarters of bad news. Or how Grok gets a high valuation without even anything close to OpenAI's money-losing revenue levels, while swallowing a decrepit old social media site. Or how that big rocket can keep blowing up without dinging the valuation.
> Sure, they can't make cards as fast as Nvidia does
They both use TSMC. If Nvidia disappeared, TSMC would have more capacity available.
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Data shows that retail participation has been near all-time highs, which does tend to correlate with bubbly market activity.
The market in general is fairly highly valued when looking at the standard valuation metrics, but corporate earnings have been strong as well. That said, the most obvious grey swan would be the market concentration in the top names, which market cap weighted index funds do not avoid and indeed contribute to on a mechanical level. That said, the names will eventually swap around within the index, and as long as capital flows to US financial markets don't reverse (see the back to back 7% down days for market cap weighted indexes during the tariff scare) these rotations won't ultimately be a problem.
Beyond that though, it's not as bad as it looks at first glance. Other areas of the market have pretty large pockets of value, or at least more average valuations. Some names in consumer discretionary are still at the bombed out post tariff scare valuations (ex: LULU which is a good example of a name that had optimism and now has extreme pessimism and low valuation, ANF which has good earnings despite tariffs and is cranking buybacks sub-10 PE) and sectors like healthcare (you have to be a real contrarian to get in here, but when Buffett is buying the value proposition is usually pretty extreme), and energy (quality energy names like FANG trading near single digit PE with management that is showing extreme capital restraint in the face of uncertainty, for once). Smallcaps in general aren't that expensive, since they are on the back-end of the huge, crowded long/short trade (that has been unwinding for a few days now).
Even in megacaps it isn't all bubbly. Google has a lot of pessimism and isn't that expensive, which may or may not be warranted but it is a counterexample. The ridiculous valuations are quite concentrated in the AI related space, specifically in specific names which retail is obsessed with (ex: PLTR( or hedge funds are obsessed with (ex: GEV).
When you say retail participation being at a high correlates with bubbly market activity, is that based on recent data? I'm concerned it doesn't take into account the increase in access to the market app based trading has proliferated.
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> as long as capital flows to US financial markets don't reverse
A rather large and probably counterfactual assumption, if the US continues, or even looks like it might continue, on the path it's been on.
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If a company has strong growth in real dollars or inflation is high then a higher P/E is approximately valuation neutral. P/E ratios don't exist in a vacuum and low isn't always better. The price-to-sales ratio is often more indicative of whether something is overvalued than P/E in high-growth cases because earnings are used to finance growth.
P/E ratios tend to be small only if revenue growth in nominal dollars is flat, which tacitly treats the stock more like a bond.
I do trade using margin account, but I don't borrow. The primary reason I use margin account is to be able to trade with unsettled funds. Probably don't need it now that the settlement times are T+1, but when it was T+2, it was kinda annoying.
Stop worrying about P/E.
If you had only invested in companies with sane P/E in the 2010s you would have probably missed some of the biggest runs for companies that today are some of the most valued in the world.
Worrying about P/E is more for really big institutional sized investors who are very conservative because the loss of principal is far more difficult to recover for even small % of loss.
You are an individual investor who can probably recover losses with a year or two of salary.
These high PE's imply an expectation of further profit growth - by rational investors. There's a strong element of less rational investors with FOMO jumping on as well.
Index funds offer some defense against crazy PE's through diversification, but keep in mind that when an asset bubbles, it also takes up a greater percentage of the index fund. The big tech stocks make up a significant % of the SP500.
> Macroeconomics is way out of my wheelhouse
Many of us consider macroeconomics to be out of humanity's wheelhouse. The divide between micro and macro economics is where the real science ends and the bullshit starts. Many of the findings in macroeconomics are politically motivated, tenuous, and haven't reproduced well, just like in the other social "sciences".
The index fund itself is mostly Tesla, FB, Google etc..at this point. 35% +/- in my quick check
I assume you mean an S&P500 tied index fund?
I asked "a friend":
• Meta (META) ~3.1 %
• Alphabet (GOOGL + GOOG) ~3.8 %
• Tesla (TSLA) ~1.6 %
So just under 9%. Significant, I suppose, for just 3 of 500 stocks.
EDIT: since "etc." was mentioned, I thought I'd toss in some of the other top stocks in the S&P500:
• Apple Inc. (AAPL) ~6.7 %
• Microsoft Corp. (MSFT). ~6.6 %
• NVIDIA Corp. (NVDA) ~6.0 %
Amazon.com Inc. (AMZN) ~3.8 %
Another 20% or so. So the above seven stocks comprise about 30% of the S&P500 (Apple, Microsoft and NVIDIA are the "Big 3" at about 20% when combined).
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It's crazy to me that these companies are essentially holding up the stock market, but are hemorrhaging money on buying GPUs. The magnificent 7 have spent $560 billion of capital expenditures between 2024 and 2025 leading to $35 billion of revenue, and zero profit. It feels like a complete house of cards to me. No one has made any profit on AI.
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There can be a lot of mundane reasons to use margin. Making purchases while cash is in movement as an example. This type of debt is one of the safest as you are borrowing against assets with an up to date valuation.
Disclaimer that if you own any of the popular market-cap-weighted index funds (VOO, VGT, VTI) you are exposed to this risk and, conversely, have benefited from this ballooning in valuations.
NVDA, AAPL, TSLA and PLTR are together ~16% of VOO at the moment. NVDA alone is ~8%. Berkshire Hathaway is about the same % as TSLA, 1.61%.
One of the two major worldviews (ideologies) says the market is fully valued. One says it's severely undervalued. Nobody is capable of considering that their world view is wrong and they're living in a fantasy. The next 12 months will be fascinating and (for some) extremely satisfying.
High amounts of margin debt indicate that a crash is coming. When a lot of the investments fail, the whole house of cards unwinds: A lot of the debts go bad, and then there isn't enough lending to create investments which are then used to create jobs.
Also margin calls will force selling of equities, driving the prices down.
> I'm sure trading on margin is for some reason actually a positive concept for the economy at large for reasons I can't understand.
Don't underestimate yourself! A lot of times when something seems stupid and socially corrosive, it is. I don't think there is any reason for margin trading other than it makes a few people a lot of money.
With margin trading you don't need to worry about your cash balance. It can be in something like COST or TLT and you can still trade.
when people are botroing like crazy, it means that interest rates are too low.
Palantir is closer to an East India Company
Perhaps there is a different valuation metric relevant for a nearly sovereign entity. Nobody is buying shares for "money returned to shareholders", because nobody is using shares as a conduit, the corporation relies on a low-float to pump their own stocks and delete the shares in buybacks that squeeze the price.
> "money returned to shareholders"
> buybacks
I'm not sure you understand what a buyback is, and given that display of ignorance, I don't see why anyone would care about your (entirely unrelated) observation about Palantir.
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> On the flip side, trading with margin debt can also exacerbate losses because if a stock's value were to depreciate, the investor may face a margin call and would need to come up with additional cash to reach the minimum requirement.
That's just the flip side for individual investor. There is also collective risk.
The worst comes when there are too many investors with margin debt and they start to get margin calls at the same time. This causes prices to drop and it triggers even more margin calls, starting an avalanche where stock prices drop just from forced sells.
The main issue are not household investors, the main systemic risks are in overleveraged hedge funds and banks (and a completely corrupted SEC and FINRA, with essentially 0 policing).
See Archegos Capital, Evergrande in China, 2008 financial crisis, Citadel (the hedge fund) with assets almost equal to "securities sold not yet purchased", etc.
Then there's just tons of crime like JP Morgan making 10 billy by spoofing gold prices and then paying a 1 billion fee to pay off the complicit regulator and be able to "keep playing".
It'll pop, the question of course is when? Ponzi's can go on for decades before something breaks.
Hedge Fund net exposure readings are available in Prime Broker reports. Currently, institutional net exposure isn't that high on a historical lookback. They've essentially been forced to chase since April (the market movement since then has essentially been a large front-run until recently). They are at high gross exposures though, so their contribution to the risk landscape has been, well, what we've seen in the past few days with a huge rotation/unwind under the hood, with mild net selling but large amounts of reshuffling.
Bank balance sheets are conservative currently.
>It'll pop, the question of course is when? Ponzi's can go on for decades before something breaks.
Tautological. Broken clock right twice a day, etc etc. We had a massive collapse in March 2020, and in 2022 when the banking system was pseudo-nationalized/backstopped. If you're still waiting for "the collapse", it begs the question about how one was positioned for those events. Frankly, I saw many people cruise right through 2022 without ever switching to bullish, even when Meta was single digit forward PE and such. As someone who was managing a portfolio that heavily deployed after the Fed backstopped the banking system, I clearly remember that this moment (which was one of the best moments to buy in the last decade, and offered a long list of ludicrously low valuations, especially on the fringes ex: I was buying Chinese companies for less than half of the valuation of the cash on their balance sheet, with the actual business with PE under 5 included for free), retail and institutional sentiment readings were the most pessimistic since the Great Depression. Likewise, stepping away from the AI bubble there is a long list of extremely low valuations in the current market (companies with PE under 8, buying back 15% of its shares every year, for example, or energy companies sub-10 PE with conservative balance sheet management, which has been a huge positive shift in the industry, yet everyone wants AI stocks at 300x forward earnings).
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>The worst comes when there are too many investors with margin debt and they start to get margin calls at the same time. This causes prices to drop and it triggers even more margin calls, starting an avalanche where stock prices drop just from forced sells.
Yep, liquidity matters so much in the short run, and people getting margin calls will get disproportionately hurt. It's the same reason why GME shot up in price even though it was just marginally profitable, all the liquidity dried up, and there was still pressure on the buy side. I'm a big fan of Taleb when it comes to finance: the #1 rule should always be "don't blow up." Trading on margin is a good way of allowing that to be a possibility.
This article is from a month ago and based on June numbers. July numbers are now available from FINRA. Total margin debt continued to increase from June to July, but by a much smaller percentage than the May to June:
https://www.finra.org/rules-guidance/key-topics/margin-accou...
The lines on the graph seem to be too close in lockstep for me to see anything causal or predictive in them.
The graph simply says to me: "More money has been invested in the market over time, the market has generally been worth more over time."
Money doesn't get invested in the market; when you put money into the market, someone else takes it out, because you're trading assets. What can happen is that the price of those assets goes up when more people have money that they want to invest, because the price has to rise to the point where there are as many sellers as buyers. So the market price can grow up, but there's no vault of money tied up in the market.
However, there can be money created by the market, because people and companies can borrow money while using the value of the assets they own as collateral. This borrowing does cause new money to appear from thin air, which means that the market is a source of money, not a sink. As this borrowed money increases the money supply just like physical money-printing would, the price of assets tends to rise along with it, as much of that borrowed money gets put towards buying those assets, increasing the number of buyers, and someone has to be convinced to sell.
This creates an unstable feedback loop of rising borrowing against rising asset prices causing higher asset prices, and it can of course operate in the reverse mode as well, where falling asset prices result in loans being called in, causing the money supply to shrink, pushing asset prices down even further.
(This crash is not a necessary outcome; if the assets correspond to productive investments and real growth, this results in abundance which can in various ways allow those debts to be held or paid off without falling asset prices.)
You described velocity of money https://en.m.wikipedia.org/wiki/Velocity_of_money
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You would have to look at that graph starting before 1971 when Nixon took us off the gold standard. when he did that it allowed the US to boroow more money based on nothing. The myth is that "More money has been invested in the market over time", when in fact more debt has been invested in the market.
I'm not sure that's exactly accurate.
The US was borrowing based on nothing and eventually people figured that out and wanted to trade the nothing for gold which prompted the US to "fix the glitch" and stop gold redemption.
It's not like leaving the gold standard caused us to borrow based on nothing; we already decided to do that.
Debt is money. Literally - the same contract that's a debt to one party is an asset to the other. And money is just any sufficiently liquid asset.
Somewhat misleading to use a percentage in the article headline when only the absolute amount reached an all-time high.
While the absolute dollar value of margin debt is at an all time high, margin debt as a percent of total stock market value is still significantly below historic levels.
I had the same thought, with what looks like a ZIRP bump pre-2021 finally normalizing to where it tracks the stock market much more closely.
As an absolute number, yes. Remember though that a lot of money was printed in the last few years. Comparing against GDP[1] or Currency in Circulation[2] the levels are still elevated but not at records, yet.
[1]: https://www.gurufocus.com/economic_indicators/4266/finra-inv... [2]: https://en.macromicro.me/collections/34/us-stock-relative/89...
We are having an emperor's clothes moment with regards to the value of the dollar. Not that fiat money is arbitrary and therefore without value (I think this is a bad argument), but because the US government is not paying its debts in real terms. It always pays in nominal terms (and probably always will), but it doesn't pay in real terms. Dollar holders cover the gap.
If the dollar inflates away, then you need to grow just to break even. And it's advantageous to have debt denominated in a devaluing thing (in this case dollars).
Now every retail investor, and really everyone with an internet connection knows what's going on and are trying to take action accordingly.
How is inflation an emperor's clothes moment?
Inflation is felt immediately as change in price of things that one frequently buys. Everyone can empirically determine if they are experiencing inflation without consulting the news or any authority. And the basket that an authority uses to determine the "official" inflation numbers is less representative of its impact on an individual than their personal basket.
Then there is the outlook on inflation, which most lay people were not thinking about until recently. Most people think of longer term inflation as "economy good" or "economy bad", and often falsify their true outlook, instead signaling a political allegiance. In 2025, Trump is in office, so Democrats might signal "inflation go up, economy bad", and they would have signaled "inflation go down, economy good" when Biden was in Office a year ago. The reverse is true of Republicans.
Now, everyone expects inflation to continue and even accelerate in the long term. And people are worried enough to take action in the form of more loans, more investments on margin, holding less dollars, etc. And now everyone knows that everyone else is doing this, which is the "emperors clothes moment".
People are much less likely to be taken seriously if they express that inflation will mostly be a function of who is in office, rather than an inevitability of the American political system. If someone you cared about expected there to be no inflation, you might become concerned for their ability to financially plan.
So now we all know, and we know that everyone else knows, and we aren't trying to hide our outlook on inflation in conversation because it's now worse to look stupid on this topic than miss a signalling opportunity.
TLDR: what was once a low consequence signalling opportunity, is now part of serious financial planning.
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My Michael Burry senses are 'go to cash and don't come back' at this point.
Many people (including Michael Burry) have had this feeling over and over since 2008, and were basically always wrong! Markets are tricky beasts to predict.
To plagiarize Howard Marks, when you try to time the market, you have to be right twice: both on when to get out and when to get back in. Even being right once is incredibly hard.
Or, to quote Peter Lynch: "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves."
Ya I listen to this space a lot. 2015, 2016, 2018 and 2020 were a blur of “I’m cashing out and moving my 401k to money market” on several podcasts because of impending doom
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I always wonder if they somewhat right. Using the chart from the article we have large spikes in margin debt at a bunch of years that initially were followed by a crash but now are possibly followed by money printing preventing the crash. So although Burry has the right idea the rules/market has changed and his analysis no longer holds.
That said, I think 2025 is too early for the AI bubble to pop. Even Burry was buying CDS in 2005 [1] so if you're seeing something your convinced is a crack right now it's going to take a few years to actually fracture.
- 2000 -- Followed by a crash
- 2007 -- Followed by a crash
- 2011 -- (ish) USG added a bunch of money into the system
- 2015 -- Counter example?
- 2018 -- Counter example?
- 2021 -- Large crash, USG added a bunch of money into the system
- 2025q1 -- Tariff crash
- 2025q3 -- Too early to tell
[1]: https://en.wikipedia.org/wiki/Scion_Asset_Management
The problem is Tina!
There Is No Alternative
- Gold? Dead asset
- Cash? Good luck with inflation
- Bitcoin? My ass…
So what else can you do as a rational investor than to invest most of your cash into an S&P500 or World fund?
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It is not that the markets are tricky. Predicting what the Fed will do with interest rates is tricky. By lowering rates they feed more money into the market. Take a look at the last 15 years and you will realize the only thing that gave us a minor recession was COVID, adn that was becasue intrest rates were zero.
https://fred.stlouisfed.org/series/FEDFUNDS
But they can't do this for much longer, inflation is the first sign, which is why Trump is raising tariffs.
You can see Bond prices going up. Trumps tarrifs are aimed and lowering T Bill rates:
https://fred.stlouisfed.org/series/DGS10
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The market can be irrational longer then you can be solvent.
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> My Michael Burry senses are 'go to cash and don't come back' at this point.
And when do you get back in?
Sitting in cash, waiting for the dip, is a losing strategy (even if you knew when the dip will occur, which you don't):
* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
Simply put in a little from every pay cheque.
If you think things are too wild, invest in an ("all-in-one") asset allocation fund that is not 100% stocks (e.g., fixed 80/20, 60/40):
* https://investor.vanguard.com/investment-products/mutual-fun...
* https://www.ishares.com/us/products/239729/ishares-aggressiv...
* https://investor.vanguard.com/investment-products/mutual-fun...
* https://www.vanguardinvestor.co.uk/investments/vanguard-life...
* https://www.vanguard.ca/en/product/etf/asset-allocation/9579...
* https://www.blackrock.com/ca/investors/en/products/239447/is...
or a target date fund (which increases bonds as you approach your retirement date).
I am all in cash outside of startup shares. I think it makes sense to be in the market, but compared to 2008, there is way more government fiscal issues, way more concentration of profit growth (e.g. only the top 10 companies have had profit growth in the last 3 years). Way more risk is in the system.
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Michael Burry is selection bias. Everyone who predicted a massive crash when a crash didn't happen did not become famous.
Yeah, and it's the worst dealing with these people. My dad is like this, he's heavily in bonds because "a recession is coming" for the last 5 years.
When it does happen, he will be "right" even though the opportunity cost for holding this belief is huge.
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But according to the chart there could be 500 or more S&P points before the top. you're leaving money on the table!
The question is how deep will the crash be. If the S&P goes up those 500 points and then crashes by 300 you are better off staying in. OTOH, if the S&P goes up those 500 points and then crashes by 5000 (I didn't bother looking up the value, so I don't know if that is possible) you are not out much by getting out today.
Or the old adage "If your grandma is asking how to setup a margin account, you've already missed the bubble, get out".
Grandma wants AI stocks, taxi drivers rave about crypto, and Warren Buffett has been selling more than ever.
But “this time it’s different” because… AGI…?
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What in particular about margin makes you want to go into cash?
Thank god there is no inflation or, you know, your cash would start to wither as well.
Perhaps investments in undeveloped real estate....
A risk free rate of 4% really isn't that bad for cash (which is why there are trillions sitting in money market funds right now). If you have Tbills with a bit of duration you're also long economic weakness due to having locked in yields, which offsets the inflation spike risk to some degree (or more than compensates for it from another perspective).
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Though maybe avoid USD or USD bonds while the gov is trying to get rid of Fed independence.
At this point I have no idea what would be proper hedge bet... Certainly not crypto. Maybe gold is least insane, but I somewhat doubt even that.
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At IB you can get margin interest rates of like 6% I think? SP500 total return is like 9.5% already this year, 25 and 26% in 2024/2023. You get paid to borrow like crazy. Exactly why Dave Ramsey is the worst financial youtuber of the 10s: When rates are close to 0, you only need a 1% return to pay the carry. You should be borrowing like crazy.
Yeah back when margin rates were close to 1% it made a ton of sense to use margin. I was pretty cautious with it but bought a bunch of blue chip dividend stocks- altria, vz, etc at 1% rates and collected 5% dividends. For awhile I could even deduct the margin interest from my income.
At a 6% rate though, this is very risky. Your hurdle rate is just below the average market return rate. There are better ways to gamble on the market if that's what you want to do-UPRO and TQQQ come to mind, as well as options.
>You should be borrowing like crazy.
Right up until the moment you shouldn't. And for utlra-wealthy people, corporations, and VC firms they can weather that storm. You can't.
Have fun when the AI bubble pops and SP500 has a negative 20% return and you are `borrowing like crazy' at 6% interest if you dont get margin called.
And if it doesn't pop? I mean I don't even disagree with there being massive bubble risks, but like my comment was more aimed at the fact that high margin debt doesn't mean anything without knowing the return of the asset you buy with debt and the debt cost.
Let's not even get into the fact that in jurisdictions with wealth taxes and interest deductions from income levering up actually "cuts" your tax bill.
The best investment advice that I believe I ever had is to take a basket of goods and rebalance them. My father uses a collection of bonds and stocks and if the valuation shifts he sells high and buys low once a quarter to rebalance the percentage risk he wants in the overall market.
Ideally the best markets to get into now are probably healthcare which is about to have a raft of medicines, energy which is going to be the shovels that everyone needs to power the AI. Transportation is always a good bet and shorting palantir to go long Exxon might be worthwhile so long as you don't do so on margin.
Margin is generally bad. Having a basket of commodities tided inversley to margin would probably be a good idea. Buying currencies and holding as an inverse proportion of the margin in their stock markets?
The problem with your strategy is that alternatives are often very underperforming
So you manage your risk profile as a percentage of risk on and risk off more heavily in favor of risk. It's not that hard.
There's a reason someone wants the Fed to drop rates: we're now in the stage where the only way the rich stay rich is if we just pile more cheap debt on top of the debt we already have.
The fact that these logarithmic makes it hard to make meaningful comparisons to past cycles.
There's no question that economies are cyclical. The only question is where we are in the cycle.
Everyone is trying to be Huge Stinnes: https://www.wealthplaybook.ca/post/who-was-hugo-the-inflatio...
A lot of margin is people borrowing against holdings instead of selling to generate cash (and tax liability). These Securities-backed lines of credit appear as margin on these kinds of reports...
Is anyone here wondering like me why we did not have a recession in 2021?
Was it the COVID checks they sent out? Might be a good thing to do in the next recession...
But this current state of margin debt, I do not like at all. That with the reduction of new home construction.
> Might be a good thing to do in the next recession...
The magic money we sent out is the cause of a lot of the problem we're facing now though, it's not like you can print magic money every 5-10 years to extinguish systemic problems
> The magic money we sent out is the cause of a lot of the problem we're facing now though
So, inflation.
The banks and corporations have been getting the "magic money" since 1971. The moment we give it directly to the people evryone is concerned about inflation. This mindset is sad.
Do you know that banks in the last 15 years have been getting free money and then lending to people at rates from 5 to 29%? Does that not make you mad?
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The first thing to understand is that middle-lower and lower class people don't matter much to the economy, but they make up a large contingent of the population, so they matter a lot to media orgs. They love news stories about their struggle and the media is happy to oblige them with ad-ridden news stories. Hence the endless pandemic economic doomerism and "I lost my cashier job" stories.
Who does matter are the white collar upper-middle, upper class people. They generate the most value and spend the most money. These advanced sectors are the american economy. And what happened to them during the pandemic? They just stayed home and kept working, thanks modern tech.
However the government responded like it was still 2005, where there was no tech to keep things moving, and created an incredibly stimulative environment for an economy that was largely still doing fine. By the end of 2020 GDP had recovered.
Despite this we still got:
- 0% interest rates, this is the crack-cocaine of the upper class, especially when the actual economy was doing fine.
- Pause on student loan payments, this was massive, most of these people were employed making more money than ever
- Pause on rent, another massive boon, again people who didn't lose their job now are not paying loans or rent
- PPP loans, pretty much a straight handout to business owners, who again, were still in business anyway.
- Child tax credit, the child tax credit was almost doubled for anyone who had a kid(s).
- Unemployment benefits, this is getting away from upper class territory, but lots of lower class workers were getting 2x pay while not paying rent or working, which they took right to spending.
- Stimulus checks, the most visible but least impactful, everyone got a few thousand dollars.
You are completely incorrect. Middle and lower (economic) class people very much matter to the economy.
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For some people the pandemic was very traumatic and resulted in a severe loss of income (eg. worst case scenario, a theatrical performer) but for other people, (eg. tech workers) they experienced the opposite, an increased demand for their services alongside a reduction in their costs (nil commute). The latter was the greater amount of people and so you had a lot of people with increased disposable income, alongside ultra low interest rates, and that caused the economy to surge as people spent money, took on debt and acquired assets.
Covid cheques which in some countries only went to persons in the former niche category I think had less remarkable impact than the broader factors.
We have been kicking the can down the road since 2008, and made it worse with all those covid checks.
The irrational/solvent saying has never been more true, and it has been irrational for almost 20 years because we never paid the piper.
>Is anyone here wondering like me why we did not have a recession in 2021?
We didn't? '21-'23 was a bloodbath on the market. How that was spun as not being a recession is mind boggling to me.
There is a pretty concrete recession definition (two consecutive quarters of GDP contraction). Maybe we did?
https://www.dallasfed.org/research/economics/2022/0802
If we did, it was seemingly mild in hindsight.
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'22-'23 was a return to the norm from the overheating economy of the pandemic years.
What was the margin debt that cause black Tuesday and was the genesis to the great depression? It was at record highs as well, 10% of the total market cap of all stocks.
These raw numbers are meaningless to compare. If anything it should show margin debt as a fraction of total assets (or total market size as a proxy).
From our library - expressed as percentages of gdp or market cap: https://x.com/augurinfinity/status/1958564629040251267?s=46
The divergence is very interesting!
The other thing is that whenever I see graphs like that spanning decades but not using a logarithmic scale, I can't help but roll my eyes a bit.
We may well be approaching a dotcom moment, but this kind of graph automatically exaggerates what's happening more recently.
It would be interesting to see the portion on Nvidia. How many calls on next weeks earnings?
What an exceptionally well written/structured article.
I mean it looks bad™ but looking at graphs I can't divine a reliable signal
The only thing thats almost clear is that as you get closer to now, margin debt is more closely correlated to S&P growth.
In terms of lead/lag, its not that reliable.
Am I confused here? The implication of the headline is that the market is over-leveraged (and thus presumably unstable).
The numbers in the chart show the opposite: the debt-to-market-value ratio is very clearly below its long term trend.
I mean, yes, the debt is at a "record high". But so is the market's value!
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Honestly, if you don't cash in right now, you are playing with fire. We are on our way for a big correction.
>Honestly, if you don't cash in right now, you are playing with fire. We are on our way for a big correction.
Says everyone always. I've watched my cash savings inflate away like crazy over the last few years. Basically anyone who doesn't hold real assets is screwed at this point.
Cash parked in money markets (which is just a click away) hasn't done that badly. Getting 4-5% has kept pace with inflation for the most part. Especially now, with economic risks to the downside/slower growth arguably growing, cash doesn't look that bad (until rates are lowered, which will put investors in a pickle, and probably force them modestly out the bond duration curve). Obviously inflation (or more specifically stagflation) risks are clear grey swans as well though, so some exposure to gold (or CTA trend following, which performs well in stagflation) is probably a prudent addition to a diversified asset mix looking to protect against the known risks. And as a benefit, gold and CTA are fairly decent black swan hedges as well (but it's a bit pointless to try and protect against black swans, which are unpredictable by definition).
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As long as the government can infinitely print money with zero consequences stonks will perpetually go up.