Record-high margin debt signals potential stock-market crash

The Economic Collapse blog notes that similar spikes occurred in 1929 and 2000

What do 1929, 2000 and 2007 all have in common? Those were all years in which we saw a dramatic spike in margin debt. In all three instances, investors became highly leveraged in order to "take advantage" of a soaring stock market. But of course we all know what happened each time.?

The spike in margin debt was rapidly followed by a horrifying stock market crash. Well, guess what? It is happening again. In April (the last month we have a number for), margin debt rose to an all-time high of more than $384 billion. The previous high was $381 billion, which occurred back in July 2007. Margin debt is about 29 percent higher than it was a year ago, and the S&P 500 has risen by more than 20 percent since last fall. The stock market just continues to rise even though the underlying economic fundamentals continue to get worse. So should we be alarmed? Is the stock market bubble going to burst at some point? Well, if history is any indication, we are in big trouble. In the past, whenever margin debt has gone over 2.25% of GDP, the stock market has crashed. That certainly does not mean that the market is going to crash this week, but it is a major red flag.

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