Debt-fuled Bubble?
If you have been living under a rock the past week then you probably have missed it, but the Dow Jones has had constant record highs over the past six days. Many different economists, financiers and scholars have different views for why this is happening, but no one can pin-point the driving force behind such high numbers of the DJI. I watched an interesting video on yahoo finance this morning by economist Steve Keen, the author of "Debunking Economics." Keen presented an interesting idea behind the rising Dow Jones numbers.
Keen attributed the record rise to Margin Debt. Margin debt is the money borrowed by people from their stock brokers to expand their holdings. Today, Keen says that ratio is at 70%, meaning with $300,000, you can borrow $1 Million worth of shares. He presented a correlation between the rising Dow Jones- Asset numbers and the rise in Margin Debt, pointing rapid asset acceleration to change in margin debt.
This type of growth cannot be sustained, and at some point this growth cannot continue. Keen has proposed the margin levels in the U.S. are very similar to where they were in 2000 & 2007, and believes the stock market is a debt bubble waiting to pop. If this was to happen, Keen believes we could see a "long bleed" like that in Japan's market during the 1990's.
I have never heard this point being argued before, but I can see the underlying premise behind his argument: the correlation does in fact exist, but is that the only force driving asset prices? I do not know. The apparent narrative being conveyed by most people though is that the market will "correct" itself within, I would say the next 24-months. There are many other global crises going on: North Korea abandoning its pack with S. Korea, China's Real Estate Bubble, sequestration, & cyber-attacks on national security. Something has to give, and if the market does not crash, it is safe to say something will.