Money that investors borrow to trade in the stock market is called margin debt. This debt is now above $1.5 trillion, 50% higher than a year ago. Could this spell trouble for the U.S. economy?
Transcript
LEILA FADEL, HOST:
The amount of money that investors are borrowing to make trades is at an all-time high – more than $1.5 trillion. And that’s more than the country’s total credit card debt. The Indicator’s Wailin Wong and Ricky Mulvey report.
WAILIN WONG, BYLINE: Let’s say you want to invest $100 in Apple stock but only have $50. You could do something called margin trading. That’s where you borrow money from a broker to buy more than you have in cash.
RICKY MULVEY, BYLINE: And making profits with other people’s money is great. The problem is when markets go down. You still have to cover that loan and the interest.
HEATHER TOOKES: You can either sell the stock to start to pay down that loan or post more margin to your account. That is, infuse more capital into your margin account.
MULVEY: That’s Heather Tookes, a finance professor at Yale.
WONG: In other words, Heather says, put up more cash or be forced to sell investments to cover the loan.
MULVEY: A similar phenomenon just happened in the South Korean stock market.
WONG: Right. Investors there are excited about two companies – SK Hynix and Samsung. They make memory chips for AI data centers. And, you know, as we’ve covered on the show, lots of demand for these chips right now.
MULVEY: SK Hynix and Samsung dominate South Korea’s stock market. The value of both companies skyrocketed as more investors got excited about their chips.
JURRIEN TIMMER: Semiconductor earnings have tripled in the last year. It’s crazy.
WONG: That’s Jurrien Timmer, director of global macro at Fidelity Investments.
TIMMER: Everything is sort of in fast-forward and is just multiple dimensions more of what we might typically see in a boom-bust cycle.
WONG: Earlier this year, South Korea legalized single-stock leveraged ETFs. These look just like a normal ETF on the outside, except there’s extra leverage, futures and various other financial tricks on the inside to multiply your returns. But they can also multiply your losses.
MULVEY: These ETFs became more popular in Korea as the value of those semiconductor companies grew, making up 20% of trading on the South Korean exchange on some days.
TIMMER: I call them weapons of self-destruction. I don’t know why regulators approve these things.
WONG: His pessimistic view seems to hold – in Korea, at least. The value of its stock market plummeted 40% at one point. The leveraged bets started to unwind, and margin traders had to sell their investments.
MULVEY: More than 3% of the South Korean adult population received a margin call – their broker saying, hey. You need to sell something or put up more cash to cover these loans.
WONG: Goldman Sachs estimated that about 360,000 brokerage accounts were forced to sell all of their investments to cover their debts. Now, is there a lesson for the United States? We’re seeing a record level of margin debt here.
MULVEY: And the Federal Reserve can do something about this, at least when it comes to margin debt. The bank has a little-known job. The bank essentially tells investors, how much money do you need in your pocket to borrow $1?
WONG: If you have 50 bucks to invest in Apple and you want to invest a hundred bucks total, the Fed could say, OK. We should be more cautious. Your brokerage firm can loan you, say, $25, not $50. So far, it hasn’t done this. Jurrien Timmer believes the Fed may not want to get involved with the margin trades for a simple reason.
TIMMER: The Fed generally does not get into the stock-market-slash-bubble business. Just remember, Greenspan called the Nasdaq a bubble in ’96, and it ran for four more years.
WONG: Spotting a bubble forming is easy. Timing the pop is much more difficult. You don’t want to shut down a party that could keep rocking for a while.
Wailin Wong.
MULVEY: Ricky Mulvey, NPR News.
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