I don't understand what you are saying....are you saying there is a level when margin debt is excessive?...if so, what level is that?....does it change in a bull or a bear market?.
I'd say that any time the Fed has to step in and force money center banks to bail out a mammoth hedge fund, then I would say there is too much leverage in the market.
We have seen the broader market PULVERIZED (71% of all NYSE stocks are below their 200 DMA) in order to meet the margin calls against short sellers, or liquidated in favor of the nifty-fifty of the S&P or the 4 horsemen of the Nasdaq, in addition to a select bundle of choice stocks who are suddenly assigned extraordinary valuations far in excess of their revenues or earnings.
I don't know how you expect me to say it any clearer. I, in no way stated that using margin was bad or should be eliminated. What I am stating is that anything taken to excess creates additional risk and thus, a special responsibility among banks/brokerages to manage that risk prudently.
If people want to drive a stock up to 1,000 times earnings, that's fine with me. They should just not be permitted to borrow money against that same stock in order to buy more on margin.
If you want to margin one of your low P/E bank or manufacturing stocks to obtain capital to buy a high-flying net stock, again that is your business. At least the stock you are margining has relatively less risk of suddenly collapsing in on itself.
And when the general level of margin debt becomes excessive (in the eyes of the Fed and financial regulators), or the overall stock market appear to be in particular risk of "irrational exhuberance", they should look to hike margin rates instead of hiking the overall interest rate.
Btw, I don't think free markets work. And neither does anyone else. Otherwise, there would be NO REGULATION or law to govern it.
The key, however, is to find the most efficient balance between freedom and order, just as it is thus with everything in our lives. When freedom is permitted to reign without regard for good sense, or the repercussions of its excess, chaos reigns.
Regards,
Ron |
