Contraction Of Credit… Central Bankers Greatest Fear!

Posted at 2:58 PM (CST) by & filed under Bill Holter.

Dear CIGAs,

Just a short comment on a VERY BIG problem! The below chart shows “margin” balance on the NYSE with an inverted chart of the S+P 500 laid over it.


Please notice the amount of credit being used to carry stocks now is significantly larger than it was at previous market tops in 2000 and 2007. Also, the amount of credit has begun to contract, this is a classic margin call being met …so far. The danger of course is as it always has been when margin builds like this. As the equity market pulls back, margin calls are issued and in some cases “forced sales” are done. This can, has in the past and most likely will occur and morph into a virtual loop where forced sales weaken prices, creating new margin calls and more forced sales in a negative feedback loop…otherwise known as a market panic.

It does need to be pointed out, there will be no “white knight” this time around as there are none left. The Fed rode in and save the markets in late 2008. It was discovered after the fact they lent $16 trillion all over the world. They have blown their balance sheet from some $600 billion in 2007 to a current $4.5 trillion. The Treasury had about $9 trillion of on books debt with a $14 trillion economy. Now the Treasury owes $19 trillion (the real number is multiples of this) supported by a $17 trillion economy (this amount is questionable).

My point is this, in the past when margin debt got to outsized levels it created “bubbles” as it has now. Once the margin debt begins to contract, this is when the waterfall action begins and this is exactly where we are today! Margin debt is contracting with the background of a financial system that is having liquidity problems. Top this off with central banks already all in, and sovereign treasury balance sheets bloated with more debt than the size of their underlying economic output.

Please spend a couple minutes and study the above chart. Governments can and do lie. Brokers can and do lie. Hard and fast statistics and the following results do not. The contraction of margin debt has commenced and markets are following like clockwork. What follows this will be the greatest fear central bankers have always had, a general credit contraction. The problem of course is this credit contraction is coming during a time of unprecedented leverage in both gross and relative terms! The 1930’s saw much pain but neighbors helped neighbors in that episode. The morality and sense of union in the 1930’s is nearly gone, unfortunately almost extinct!

Standing watch,

Bill Holter
Holter-Sinclair collaboration
Comments welcome!