This Event Preceded Market Crashes in 2000 and 2007 and Is Happing Again Now

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Margin debt has increased 50 percent in the past 8 months as investors look to increase positions in equities.

Margin debt has increased 50 percent in the past 8 months as investors look to increase positions in equities.

Increases in margin debt also happened in the years 2000 and 2007 as shown below. This trend is interesting and frightening since these runups in margin debt preceded major market sell-offs that temporarily eliminated billions of dollars in market capitalization.

As you can see in the image, the massive drop correlates with the sell-off in equities as many investors got hit with margin calls and attempted to sell off their positions. However, as a percentage of market capitalization margin debt is still significantly lower than levels from 2000 and 2007.

Another interesting note is that high margin tends to lead to decreased liquidity which has preceded all major market crashes. Although, this trend is not uncommon in bull markets since brokers tend to extend more capital during these times.

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Economics, Finance and Investing

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