Spectre of 1929 crash looms over FTSE 100 as traders take on record debts

Margin debt at record high


The spectre of the 1929 stock market crash looms large for UK investors as traders borrow record amounts to invest in rising stock markets

Nothing has been learnt from the madness of the 1929 stock market crash as once again traders reach for record amounts of debt to pile into rising share prices.

The level of margin debt that traders are using to buy shares in the stock market reached the highest levels on record, according the latest data from the New York stock exchange.

US traders borrowed $460bn from banks and financial institutions to back shares, and once cash and credit balances held in margin accounts of $278bn is subtracted this left net margin debt of $182bn in July

Traders are now more exposed to a fall in share prices than at the height of the dot-com bubble at the turn of the century, and just before the financial crisis during the 2007 peak.

In the 1920’s many in the stock markets bought on margin, confident that they would gain from the rising market and get out before everyone else started selling.

In today’s stock market the only modification to buying on margin is that the US Federal Reserve currently has an initial margin requirement set at 50pc. The margin debt must remain below specified amounts on each account and not all shares can be bought on margin.

The market participants using debt to invest has also changed, gone are the days of retail investors using margin to boost returns, it is now largely the preserve of professional investors such as hedge funds.

More and more shares have become available to buy on margin as the perceived level of risk within markets has steadily decilined.

A key indicator of risk the Chicago Board Options Exchange Volatility Index, or VIX often known as the investor fear gauge, closed last week at 12.05 points, only three points from a record low.

In the UK the FTSE 100 hasn’t climbed as high as the US stock markets. The Footsie closed last week at 6,820, still some way short of the record 6,951 reached on December 30, 1999.

As we approach those levels it is worth keeping in mind how far we could fall.

When the dot-com bubble burst at the start of the new millenium the FTSE 100 slumped 48pc to fall below the 3,500 level. As the 2008 financial crisis unfolded the FTSE 100 index dropped 41pc from its peak in 2007 and once again dipped below the 3,500 level.

As the traders and investors return from their summer break it looks likely to be a lively autumn.

Full article: Spectre of 1929 crash looms over FTSE 100 as traders take on record debts (The Telegraph)

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