Massive De-Leveraging of the Markets Threatens the ‘All-Everything Bubble’

One of the key components of the “all-everything” bubble is the highly leveraged U.S. stock market – and deleveraging is on. The fall of the stock market is very similar to that of 2007, when it slid week after week, and month after month, before abruptly collapsing around the Lehman insolvency crisis. As for today, the Dow Jones just closed its seventh week in a row with losses both at opening and at closure. The May 14 Wall Street Journal acknowledged that stocks, although strongly deleveraged, are still overvalued.

Parallel to this, the U.S. housing market and associated mortgage-backed instruments are running into a serious crisis. Jeremy Grantham, the British fund manager and oligarch who forecast the imminent collapse of the financial bubble on Jan. 20 (cf. SAS 5/22), now believes the real estate bubble is ripe to explode. In his view, the system could survive a U.S. stock market collapse but not a real estate one. He pointed to the fact that interest rates on 30-year house mortgage loans rose to 5.27% last week, and will continue rising as the Fed raises rates.

The U.S. physical economy is contracting which, beyond any specific financial market, threatens the “all everything” bubble globally. This is reflected in the falling level of margin debt. Margin debt occurs as an investor who owns stocks pledges a portion of the stocks as collateral to get a loan from a broker or financial institution to buy even more stock. The stock that is pledged as collateral has to maintain a certain value; failing that, the investor will get a margin call from his broker to put up more stock collateral for the loan. The level of U.S. investors’ margin debt peaked at $936 billion in October of last year, sending the stock market upward. But since then, it has fallen $163 billion, or 17%, to $733 billion, as brokers demand more collateral or call in the loans. This accelerates a stock sell-off. Since the October start of the decline in margin-debt, the highly leveraged NASDAQ average, which represents “high-tech” stocks, has fallen by 27%.

Analyst Wolf Richter reports in a May 13 column, “Massive Stock Market Leverage Unwinds amid Brutal Bloodletting” that dozens upon dozens of high-flying firms are having their stocks lose 70% to 95% of their value. The percentages of falls, from their highs through May 13, for some companies are:

• Carvana, the fastest-growing U.S. online car-seller, −90%;
• Zoom, one of the world’s largest online teleconferencing companies, −79%;
• Coinbase, operator of one of the largest crypto-currency exchange platforms, −83%;
• Lyft, the second largest car-hailing services in America after Uber, −77%;
• Redfin, one of America’s largest real estate brokers, −88%.

and the list goes on. Thus, the environment ripens for a spike in failures.