To All, 1929 leverage vs. 1999 leverage. Many people will claim that we are less leveraged today due to higher margin requirements in the stock market. That is total nonsense and here is why:
1. There were no credit cards in 1929. Count all the folks you know who do not have credit cards. Then count all the ones who do not have such cards maxxed out.
2. Mortgages required one third as a down payment and there were no govt. agencies lending for no reason. Today, the borrower often gets a down payment equal to 25% of equity when he takes down a mortgage.
3. If people borrow to buy cars or houses instead of save to buy those things, and then buy stocks with their temporarily free cash flow, that is the same thing as borrowing to buy stocks.
4. Many more people are in stocks today and the % margined produces a # much higher than the %age in population increase. So, the crash will impact more folks directly.
5. The margin rules we talk about only apply to stocks. Bonds, derivatives, currencies, futures, etc., all of which are used at maximum proportions by our financial institutions, have much lower or even zero margins.
Conclusion: As a nation, we are much more margined and vulnerable to a market downturn than we were in 1929. |
