Mini Bubbles

I realize the title is an oxymoron. When we look at the market we try to pinpoint risks to our client portfolios but also risks to the overall stability of the "system". 

Where’s the next bubble? Look, the term “bubble” is used way too often by the financial media and by advisers. Instead of the term bubble I like the term “indicator”. Josh Brown has pointed out two debt related indicators over the past month and we are taking notice along with him. We do not believe a 2008 type situation is looming by any stretch of the imagination. Remember, much of the early 2000’s was driven by real estate appreciation, loose lending and subsequent massive home equity spending. But, like they always do, consumers look for places to access money to spend. What assets have appreciated significantly since 2008? Certainly not your home. The answer: Brokerage accounts. 

Margin lending and securities based lending are two ways investors can leverage their existing account to buy more “stuff”. When buying on margin you are buying stocks and when doing securities based lending you are essentially taking out a home equity line of credit but using your brokerage account as the collateral. You can buy whatever you want. Both have risks and these risks can be significant. 

It seems these “portfolio loans” are on the rise amongst some of the big banks. In some situations utilizing this strategy can make sense but there is a difference between utilizing a strategy and being sold a strategy. this type of lending is not leading to any major economic downturn on its own. Most of these loans are to wealthy investors. But, as Josh Brown points out in his follow up piece, banks should not be incentivizing such products.

Incentives in our industry is a recipe for disaster. Inevitably a product will be misused and over sold. Someone will sue and then the media will proclaim the product is bad for everyone. The advisors who used the product appropriately will pay the cost of higher scrutiny and more regulation. It's the typical cycle in the financial world.

Margin lending is another beast altogether and may be a stronger indicator of market risk. 

Margin levels can be an indicator that the party’s gone on too long or has gotten way to aggressive

Ara actually brought this up to me several months ago and Josh wrote about it recently. There is not much to say about it other than I hope everyone at the party sober's up soon. Or, at least, takes off their beer goggles.