Hey, I Just Met You, And This Is Crazy…

“…so here’s my number, (margin) call me maybe!” That would be the song Carly Rae Jepsen would be singing if her 2012 single were released today. If you’re not worried about a margin call because you yourself did not borrow on margin to invest in the stock market, you probably aren’t worried about it. But you should be, because too many people invested in the market have borrowed on margin with no way to pay it back – ever. Plus the interest rates are going up and it has less to do with housing that people need to live in this time. Now the people facing a crisis in housing are mostly investors and developers. The people who couldn’t afford homes to live in didn’t buy them, and they aren’t moving to rent elsewhere.

Class Is In Recession

The US economy entered a declared (as of Summer 2020) recession (that began in February 2020) and the stock-market responded by selling off once it was thought to be over. That sent mega-cap stocks tailspinning, and has thrust the global economy into a complete question mark about what the future holds for investments in any business.

Yet there is also a sentiment mixed in with that, which feels like complete resolve. Calm. A sort of eye in the middle of a storm type of energy often immediately precedes or proceeds what otherwise sound like alarms of panic being rung loudly. Those alarms are quickly muted, or downplayed. Explained away, or questioned until no certainty remains.

During a time that Jim Cramer called the “most oversold” in history, what exactly would the inevitable correction for that be? The “most sold” condition in history? That would be what you might call an equal & opposite reaction in accordance with the natural, physical world.

Betting The Farm Is Coming Home To Roost

But when it comes to money, and gambling in the public markets, especially with printed money and margin loans, something awful happens. Not only is the amount that was gambled lost, but more money is demanded to pay back. 10% for the margin loan. An inflation bump of 8% or so. Not to mention, the gains displayed from that which was produced by these margin loans was used by many as collateral for mortgages. That exponentially inflates the problem in a very dangerous way.

Why do you think the housing market is so funny right now? Let’s recap: everybody knows we’re in a recession, and that it will continue to be in recession into 2023. But if you actually look backwards in time a few years, we have been in a recession since at least February 2020. That would project a total economic downturn of approximately 4 years, not 2 months’ as the previous declaration had stated which is definitely a depression. The Great Depression (1929-1939) was also caused by margin loans.

Money Printing Caused Inflation, Margin Lending Caused Depression

In our modern case, in 2020-2022, money got printed to prop up the stock market directly, and flushed itself out within less time than originally predicted by the geniuses who executed that operation. So much of the other “relief” money that was administered also got pumped into the stock market. That is something a lot of people think is their own personal little secret. But that little secret was shared with tens of millions of people to induce suckers into retail stock market investing which is more like the casino than anything else. Actually, it would have been better if stock brokers were literally just at games of chance. That would be at least some version of fairness compared to what we’re dealing with now.

Now those people who are holding cash are sitting on the sidelines, not pumping the market back up to the previous fictitious level it was at when we started the recession in 2020. They are thankful to have avoided catastrophe, even though they still need to figure things out because there is not yet a future in any public market that displays a vision as grandiose as the one which inflated things since Obama’s first term. That means in order to get this fraudulent economy back to 0 you might think you would need, for example, the Dow to go up to its previous peak, which was around 36,000. But technically, with inflation, that would put you more at -8% if you invested recently. Most of the dumb money in here had to be done on margin, because there was no common sense argument as to why anything should go up exponentially, if not for the promise that more margin borrowing would be possible.

Printing money nobody wanted or needed helped incentivize more margin loans too.

Yes, that money got shoved into our faces without asking for it. But no, you did not have to put it in the stock market. That money was meant for people who were put out of work, or whose businesses collapsed as a result of government overreach. In fact, most of the money delivered for economic support loans due to “COVID-19” damage, did not allow investment in stocks. It was meant to recover from damage and if a person was not damaged, they were expected to use the money appropriately.

Expect The Bottom To Hit Between 2009-2016 Lows (The Dow @ ~13,500, Nasdaq @ 3,750, and S&P @ 1,925)

There is no way to estimate exactly how much will shed off of the major indexes when the margin calls begin, but there is a guarantee that a lot of bearish people will make tremendous gains as a result. It is going to happen eventually because it has to happen eventually. The game becomes kind of like duck duck goose. Slick runners will often say “duck” 100 times to fatigue the chasers. But you have to say “goose” and let the chase occur, no matter what. It is a matter of when, and who gets called first.

Modern monetary theory suggests that you can keep printing money infinitely with no consequences. I am not here to argue with those people. What I’m here to do is put forth a Modern Margin Call Theory which suggests that if modern monetary theory is enacted, margin calls are a trigger to correct the overabundance of supply. I do not have a model of exactly what contagion would look like for this.

The Flow Of Margin Borrowing Is Like Playing Hot Potato

There is only a bottom result Google ad for the keyword phrase “margin loan,” from Stone Creek Margin Lending, which tells you this is not a competitive category. The organic winners of this phrase are: Fidelity, Schwab, and Sofi. Banks that are going to be in that game are also Merrill Lynch, Wells Fargo, and even Lending Tree. Vanguard is a player, too. There is a very cyclical nature to this I’m sure. Brokers and money managers borrow on margin from banks, to lend to clients borrowing on margin.

You can extrapolate for yourself how far out this might go. It will touch almost every American who is invested in the market directly, indirectly, and for those companies who do business with any public stock. The vulnerability and volatility in the market hasn’t even begun yet. This second wave recession has been staved off in 2022 mostly by keeping the words “margin call” off the lips of every person alive. So everybody can blame me for triggering this event, but I didn’t cause this at all.

Godspeed. Good luck. Borrow with more integrity next time, folks.