Investors with trillions at stake are ‚gorging like pigs at the trough’ — and the smallest misstep could make a painful crash even worse

Investors with trillions at stake are ‚gorging like pigs at the trough’ — and the smallest misstep could make a painful crash even worse


pigs swine trough
Pigs
line up to eat at a trough at a farm on May 1, 2009 in
Yogyakarta, Indonesia.

Ulet
Ifansasti/Getty


  • As US borrowing costs rise, it will be more important
    to track debt levels and how easily people are able to repay
    their obligations. 
  • Investors in the stock market are borrowing at record
    levels to buy, and also using their portfolios as collateral
    for other lines of credit.
  • A market drop, which may require them to meet margin
    calls by selling stocks and reducing their overall levels of
    debt, could have a snowballing effect on the next bear market,
    according to Brad Lamensdorf, a portfolio manager at
    Ranger Alternative Management and an outspoken market
    bear. 

Several years of very low interest rates have achieved the
desired effect of encouraging Americans to borrow, spend, and
boost the economy. 

But as borrowing costs rise, it is increasingly important to
track how easily people are able to finance new debt or
repay old obligations
. Among those with the most at
stake are the top one percenters, who’ve borrowed to buy
stocks and used their portfolios as collateral for other lines of
credit, according to Brad Lamensdorf, a portfolio manager at
Ranger Alternative Management and an outspoken market
bear

„Failure to act on warning signs could be the difference between
a comfortable retirement or years of slaving away at work,” he
said in the monthly Lamensdorf Market Timing Report. 

One key amber sign is that borrowing to buy stocks is at historic
levels. „Investors as a whole are gorging like pigs at the
trough,” Lamensdorf said. It’s a trend that even Berkshire
Hathaway Chairman Warren Buffett warned about in his most recent
shareholder letter, saying it was a way for
investors trying to get rich quickly
.

Lamensdorf observed that negative credit balances in margin
accounts, offered by brokerages so investors can borrow to buy
stocks, are near the lowest levels going back to at least the
1980s, according to data from the Financial Industry Regulatory
Authority. 



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Lamensdorf Monthly Timing
Report


So-called securities-based loans allow investors to use their
portfolios as collateral for credit lines that can be used for
just about anything except buying more stocks. The interest rates
for these loans are typically benchmarked against the London
Interbank Offered Rate, or LIBOR,
which banks use to borrow dollars from one another. It’s
set to be replaced
following a massive rigging scandal,
although that’s not until 2021.

Meanwhile, it’s rising. On a three-month basis and in dollar
terms, it was near 2.32% on Friday, the highest level since
September 2008 according to Bloomberg data.

„Nearly every day it is getting more and more expensive to
maintain these lines of credit that wealthy investors have been
using,” Lamensdorf said. 

„As interest rates creep up and more portfolios have been used to
finance asset purchases, a huge storm can be created if stocks
and bonds take even a minor dip,” he added.

That’s because if stock prices fall, brokers may call upon
investors who’ve borrowed for their portfolios to raise cash by
selling. Indeed, some strategists cited
margin calls
as one reason for the depth of the
stock market’s 10%+ correction
in February. 

„What should be down 10% in normal markets might be down 30% in a
highly levered market,” Lamensdorf said. „With trillions out
there, things could get nasty. What’s the tipping point? It’s
hard to say but rates have really shot higher in the last year or
two and things are getting dicey.”

What’s also worrying, according to Lamensdorf, is that the
borrowing binge has been accompanied by a decline in savings. Net
national savings as a percentage of economic output, which
tallies savings for consumers, companies, and the US government,
recovered from the recession but peaked in 2014 and is on the
decline again. 

„Investors with sizable portfolios have the most to lose,”
Lamensdorf said. „But, they also have the most to gain if they
can navigate the market unemotionally and be greedy when others
are fearful as the next bear market unfolds.”



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Lamensdorf Market Timing
Report

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