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The Latest Margin Debt

The Latest Margin Debt

June 03, 2016

Asset Protection 101: Liquidity squeeze. When the tide goes out how much ripetide can your assets handle?

Margin debt grew at a rate comparable to the market from 1995 to late summer of 2000 before soaring into amazing levels.  After the market low of 2009, margin debt again went on a tear until the contraction in late spring of 2010.

The key question, of course, is whether the April 2015 credit balance record high was Fed-induced and the precursor to a another major market decline like in 2000 and 2008.  Think about this: what does loan to equity, price to earnings, and payment coverage ratio all have in common?  You know if you have applied for a car or home loan.  They all require the ability to hold the asset and support payments when investments or income decline.  All investments have cycles: everything from art to cars to real estate to currencies, commodities, and stocks and bonds. When challenges happen and financial stress occurs (they always do) asset values drop.  When the tide goes out, liquidity is squeezed, and the question of whether there is enough capital to keep the quality investments for a certain time period is an important one.

Governments around the world have supported many asset types with easy and cheap money for years, but how long can they last with their own balance sheets or meet loan coverage ratios?  The world is full of opportunities in different asset classes; knowing when and how to weight your investment allocations is key.  DOW AND S&P 500 REMAIN IN SIDEWAYS PATTERN AFTER PASSING ONE-YEAR ANNIVERSARY OF MAY 2015 TOP

Underwater Car Loans: As another warning, there are a growing number of people who owe more on their car than it's actually worth. Thanks to ultra-low interest rates, car-buyers have in recent years been able to afford the kind of prestige models they'd once only dreamed of.  New car sales rose to a record in the U.S. last year and average transaction prices also hit a high.  Payoff exceeds the actual cash value.  Long-term loans--classified as loans that are 72 months and longer--account for 33.1 percent of new-vehicle retail sales in February 2014, according to data gathered by the Power Information Network® (PIN) from J.D. Power. If that pace continues, February will set a new record for long-term loans as a percentage of new-vehicle retail transactions in a single month. The current record was set in September 2012, when 30.6 percent of new-vehicle sales were loans of 72 months or longer. - See more at:

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This is just for educational purposes, and I am not making any specific recommendations. This is simply a guide to assist you in thinking about your own personal position, how much risk you are willing to take, and what your expectations are.