Hussman Weekly Market Comment: The Endgame is Forced Liquidation
While
the attention of investors is focused on the short-run market outlook in what
is already a mature bull market advance, it’s crucial to understand the endgame
to this overvalued, overbought, overbullish, overleveraged episode of market
history. That endgame will be forced liquidation, as declining prices force
leveraged investors to sell – voluntarily or otherwise. I noted back in January
that margin debt had surged above 2% of GDP for the fourth time in history (the
other three being 2000, 2007, and February 2011 - less severe, but still
followed by an 18% market correction). In February, NYSE margin debt (the
amount that investors have borrowed to purchase NYSE-traded stocks on margin)
reached $366 billion, and there’s a fair chance that given the continuation of
that advance in the subsequent weeks, more recent margin debt will have
accumulated to a total that eclipses the July 2007 record of $381 billion.
