“Even the most circumspect friend of the market would concede that the volume of brokers’ loans—of loans collateraled by the securities purchased on margin—is a good index of the volume of speculation.” -John Kenneth Galbraith, The Great Crash 1929 

There are all sorts of signals pointing to rampant speculation in the stock market today. And if we are to measure it by way of margin debt (normalized by the size of the economy), then what we are witnessing is, in fact, a level of speculation that dwarfs anything seen in modern times.

Not only is the overall level of margin debt hitting new highs, the 9-month increase in the total amount of margin debt also just soared to a new record. It’s hard to believe that both of these could be possible simultaneously, that off of such a massive base the amount of debt used to speculate could increase so rapidly, but there you have it.

Close observers of the chart above will notice two things: first, when margin debt has soared in the past like it just did, it almost always coincides with a major stock market peak (see: 1972, 2000 and 2007 – 1983 was the exception and when you consider that valuations were extremely cheap at the time and margin debt was coming off relatively miniscule base it’s not hard to see why the correction following that increase was relatively muted.)

Second, the bear markets following these surges in margin debt were, to some extent, driven by a natural deleveraging process that took the 9-month change deep into negative territory. In other words, the boom sows the seeds of its own bust.

If you’ve been following the news, you are probably aware that there are a few stocks right now– most notably GameStop (GME), that have soared to incredible heights in a matter of days, thanks to a zealous group of individual investors on reddit and TikTok.

These aren’t titans of finance; they’re a bunch of little guys, many of whom are also frustrated by the rigged financial system.

A bit of background– GameStop is a company that sells video games. And, for years, almost all of their sales have been from their 5500+ stores around the world.

That business model worked really well… in 2005.

Today, most users download video games online directly from the publishers, or they stream games from Google, Amazon, Apple, or Steam. Going into a store and buying a DVD is a thing of the past, and GameStop’s sales have suffered as a result of this trend.

A handful of hedge funds have been betting that GameStop will go out of business soon, or at least that the stock price will continue to decline.

So these funds shorted the stock in a huge (and dubious) way, selling more shares of the company than were actually in existence.

And a number of small investors saw these questionable short positions and said, ‘Enough is enough. We’re tired of hedge funds exploiting the market.’ So they’ve banded together and bid up the price of GameStop’s stock to absolutely epic levels.

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