On the Margin
When you hear the term “margin calls,” you cannot help but think of the classic movies depicting the 1929 stock market crash and seeing stockbrokers bombarded with telephone calls from angry investors telling them to sell and liquidate everything. For a lot of people, what they had was not enough, so they were looking at financial ruin. While the market crash of the last several trading sessions was not as tragic as Black Tuesday nearly a century ago, there was still a massive influx of margin calls.
This is typically how it works: When stocks plunge, brokers contact their clients and request more cash so debt to portfolio ratios do not break the rules, which usually results in forced selling. The spike in margin calls explains why gold prices cratered close to $100 in a single day as traders liquidated their metal holdings to cover other greenback losses.
Following these huge market events – the dot-com bubble burst and the financial crisis – margin debts plunged by about 50%. During the current boom phase of the business cycle, margin debt has skyrocketed to as high as $560 billion, according to the Financial Industry Regulatory Authority (FINRA). A key factor that exacerbated this week’s historic sell-off was margin debt as everybody tried to cram through the single exit door at the same time.
Because the intricacies of the stock exchange are readily available to more than just the big boys, you have inexperienced investors acquiring securities with debt. The margin strategy might lead to a massive payday after diving into a hot stock, but using debt as a perpetual mechanism to play the market may not be a wise long-term endeavor.
With the Federal Reserve widely anticipated to bring interest rates down to zero, credit markets will be flooded with easy money, causing another increase in margin debt.
Do You Even Price Gouge, Bro?
Many people are outraged again by the rampant cases of price gouging. It turns out that opportunistic consumers are stockpiling hand sanitizer, face masks (N-95s and others), and toilet paper and then selling at an inflated price. Amazon, Google, and other online juggernauts are cracking down on the practice, and it is only a matter of time until the government intervenes. As expected, price-gouging opponents are proving that the defense of the essential social function is unjustified because the well-known surge in demand for soap and Lysol wipes should lead to an automatic spike in supplies.
Joe Weisenthal, an editor at Bloomberg and television personality on the business news network, tweeted: “But without price gouging, how will the makers of Purell and N95 masks get the signal that there’s a lot of demand for their products?”
The important thing about price signals is that they inform the manufacturers just how immense the demand is. Are Clorox wipes selling for a $10 premium or a $30 markup? Are N-95 masks costing 10% more or 45%? Indeed, the higher the price, the more resources the producer will allocate to flooding the market with the product in question.
Robert Wenzel of Economic Policy also makes an excellent point about how price gouging will allow supplies to go to those who need it most.
“If someone wants to buy a mask to travel by subway to go to a movie and the mask is $200, the consumer might think twice and not buy the mask. Thus, leaving it for someone else. At the same time, a heart surgeon may want to buy a mask to travel the same subway to perform heart surgeries. He might be very willing to pay $200 for a mask.”
This is why the pricing system is so important, and why the authorities should not intervene. If the government somehow suppresses market prices, then the real signals will never get to the makers.
Democrats Get Their Wish
Well, Senator Bernie Sanders (I-VT) might see his wish fulfilled: Billionaires are shedding their net worth based on two key metrics. The Democrats are also seeing their desires realized: The stock market has erased its gains since President Donald Trump’s election.
According to the Bloomberg Billionaires Index, the world’s 500 richest people lost a collective $331 billion during the Thursday market crash. This is the largest one-day decline in the eight-year history of the index. Year-to-date, their losses are approaching $1 trillion, or 16% of their collective net worth. It is a remarkable turn of events when you consider that they had accumulated a record $6.1 trillion just two months ago.
The total market cap of U.S. companies measured by the Russell 3,000 – the index of small- and medium-cap firms – has collapsed $11.5 trillion, from $35 trillion (February 19) to $23.8 trillion (March 12). The $23.8 trillion market capitalization of American companies was the same it was on Election Day 2016, which means all the enormous gains under this president have been eliminated. Ouch.
The issue, however, is that they have not lost anything if they have not hit the sell button yet. Unless securities filings prove otherwise, it is highly unlikely that Jeff Bezos, whose net worth took an $8.1 billion ding, unleashed most of his holdings. Ditto for Luxury titan Bernard Arnault, chairman of LVMH, who lost $9.5 billion.
While it is possible that global financial markets have yet to hit bottom, you have not officially lost anything until you sell. For many billionaires, they do not sell on the dip – they only buy when the timing is right. That said, imagine being so rich that you could lose a few billion dollars in a couple of days, and you are still living well.
Read more from Andrew Moran.