The number of millionaire households – those with a net worth of $1 million up to $5 million – rose from 8.6 million in 2011 to 8.99 million at the end of last year.
The above data seemed an informative way to open my writing today because of how all those new millionaires came into being.
- The increase in wealthy U.S. households is attributed primarily to a large exposure to equities and, to a lesser extent, improvements in the real estate market.
Although most of us are not millionaires, using that data is a specific way to demonstrate the market has been and still is an opportunity to make money. Even though there are fewer doomsayers getting a platform in these heady days of new market highs, they are still out there. And, even though they are reaching further to find reasons for the coming collapse, they are still finding them.
- Economist Steve Keen has his eye on margin debt. This is the money people borrow from their stockbrokers to expand their holdings of shares. Keen says the ratio is now 70%, meaning $300,000 can get you $1 million worth of shares. Here’s where it gets interesting. Keen has found a relationship between the change in margin debt and the level of asset prices. Even more importantly, he points to a correlation between the acceleration in margin debt and the rise in asset prices.
In everyday language, Keen is suggesting that brokers are allowing traders to borrow more money for trading, and because of that, a market collapse is coming. He arrives at this conclusion based on the following correlation.
- Keen says margin debt levels in the U.S. now are similar to where they were in 2000 and 2007.
The world is full of data and when compiled into a narrow format, one can make the data point to almost any conclusion. Market analysts do it all the time. The problem with this approach to predictive analysis is that the analysts always leave the context on the desk back at the office. This is the reason a barrage of plausible and contradictory market predictions come at us market watchers every day. Most market predictors neglect the context that surrounds their “theory,” thus, they can draw a conclusion that fits the data in isolation. For example, let’s put economist Steve Keen’s theory in context.
In both 2000 and 2007, the US and Japan, the number one and two economies then, were in serious economic trouble. In 2007, Japan still suffered from the deflationary spiral that had gripped it since the early 1990’s. In 2000, the US exploded from a tech-boom market bubble of epic proportions while heading into recession and in 2007, a housing bubble collapse and a recession coincided with the worst financial crisis in US history.
Given this, is it any wonder Keen’s correlative-based conclusion seems plausible; yet, consider the larger context and then reconsider his conclusion – today we are on the tail end of the 2007 economic collapse. The US economy is nowhere near recession and it is growing, as is the global economy, which includes Japan, a country finally making strides against that decade long deflationary spiral. As well, a mending economy is slowly healing the financial industry.
Granted, more leveraging in the market is not a good thing, and there may be a price to pay if a large correction occurs, but to draw an apocalyptic conclusion based on a comparison to then and now is a reach at best.
- He sees what he believes is a stock market bubble bursting in the U.S. the way Japan’s did in the 1990s. “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 predicts.
Time will tell if Keen is right, but consider the reality of today’s market. It wants to go up not because of a tulip-like hysteria; it wants to go up because the economic and earnings fundamentals warrant the rise. Yes, we have headwinds, and there are big issues that need to get resolved in order to the keep the market going, but for now, let’s stick with the fundamentals when making decisions. Oh, and let’s not forget the contrary environment in which the market exits, as hefty predictions go both ways.
- Hedge-fund manager David Tepper remains bullish on the U.S. stock market, and predicts the S&P 500 could rise 20 percent or more through the course of this year.
Trade in the day; Invest in your life …
