When I mentioned that Greenspan’s market has persisted long after his words fell from memory, that extended to overextended stock investors as well. By almost any measure, Ben Bernanke has outdone the “record” of his predecessor, yet he has so few quotable lines outside of those really bad predictions during the runup to the 2008 panic. Greenspan will be forever linked to “irrational exuberance”, but Chairman Bernanke has pushed the envelope in many respects far beyond even what we saw more than a decade ago.

Margin debt balances at NYSE clearing firms hit a new record high in April, as you would expect given recent market behavior, but growth over March was minimal. It was not so much that investors added to their debt balances, but that they spent down cash at a rapid rate.

ABOOK May 2013 NYSE Margin

Total net worth (free credit cash accounts plus credit balances in margin accounts minus outstanding margin debt) has only been lower at the height of the dot-com bubble. Both indications, margin debt and net worth, are at extreme levels far above what excited Dr. Greenspan in 1996.

Adding in the FINRA data, for a more complete data set, still shows extreme levels of “complacency” above even 2007.

ABOOK May 2013 FINRA Margin & FC

Since the end of November 2012, total margin has grown by $54 billion, but free cash and credit have fallen by a historically large $32.7 billion. That means, as a whole, stock investors have sourced $86.7 billion in stock purchases in 2013 alone. For the most part, cash balances have tended to closely match debt balances with only three exceptions: mid-2007; the first half of 2011; and 2013.

ABOOK May 2013 FINRA Margin & FC Recovery

These divergences are not likely random occurrences. The changes in net worth track very closely to, as you would expect, monetary interventions.

ABOOK May 2013 FINRA Net Worth QEs

Absent the direct presence of QE, net worth has tended to rise as stock investors are far less complacent and appear more cognizant of their ability to absorb margin calls. That was true throughout Operation Twist as well; stock account net worth was largely stagnant until QE 4.

What this suggests is new highs in stocks were the result of investors buying through any and all means available. Outside of the drastic margin calls in the panic of 2008, the $86 billion decline in net worth is by far the largest of any four month period. At peak complacency in June 2007, net worth fell by $34 billion. Even during the dot-com bubble, the sharpest four-month move into stocks was a $59 billion decrease in net worth to February 2000.

This means that complacency isn’t just at record levels, it has taken the least amount of time to get there. With that in mind, complacency is probably the wrong word to use.

The data for May should be very interesting.

 

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