Tags: Keen | margin | debt | market

Economist Steve Keen: Margin Debt Will Torpedo the Stock Market

Friday, 15 Mar 2013 09:41 AM

By John Morgan

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The stock market is a giant bubble being inflated by margin debt, according to economist Steven Keen, author of “Debunking Economics.”

When the level of margin debt begins to fall, the bubble will deflate and investors will be punished, Keen told Yahoo.

“In 500 years’ time people will look back and see this as the biggest debt-financed bubble in human history and ask, ‘why didn’t we realize it,’” Keen said. “But we think it’s normal.”

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

According to his analysis, there is a relationship between the change in margin debt and the level of asset prices. More specifically, there is a correlation between margin debt acceleration and rising asset prices, Keen said.

Margin debt-to-gross domestic product (GDP) ratios are now 70 percent, meaning a qualified investor with $300,000 can borrow $1 million worth of shares from a broker.

Those levels are close to where they were in 2000 and 2007, Keen said, both of which were followed by serious stock market downturns.

“Nothing can accelerate forever. At some point the acceleration stops, and when it does the market breaks,” Keen told Yahoo.

Keen predicted the U.S. stock market would deflate similar to the way Japan’s did starting in 1989. Japan’s Nikkei averages did not stop falling until 2003.

“I think we’re in a long slow bleed, much longer and slower than the Japanese stock market crash, but there’s similar dynamics,” he said.

Writing in The New York Times, economist Paul Krugman had a simpler interpretation of why the stock market has been rising.

“Stocks are high, in part, because bond yields are so low, and investors have to put their money somewhere,” he said.

James Glassman, an author and commentator whose book “Dow 36,000” famously — and incorrectly — predicted the Dow would hit that level when it was published in 1999, was back this week with a fresh update in a guest Bloomberg column.

According to Glassman, Dow 36,000 is still attainable.

“One way stocks could jump to 36,000 quickly would be for fears to subside and P/E [price-earnings] ratios to rise. Assume that earnings yields fall to 5 percent. That would mean P/E ratios would go to 20, a boost of 50 percent in stock prices, assuming constant earnings,” Glassman wrote.

“How fast can the U.S. grow? Four percent is attainable, but I’d settle for 3 percent. Get there quickly, and we’ll get to Dow 36,000 quickly, too,” he said.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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