Stocks on credit: Trigger for stock market crash?

From March 2020 to October 2021, leveraged stock speculation experienced another steep rise from an already very high level. High security loans act like a fire accelerator in times of falling share prices.

by Claus Vogt

Credit speculation increases in every stock market boom, and a very large and steep rise in securities credit is a typical feature of speculative bubbles. You can see that on the following chart. It shows you the course of the S&P 500 in red (right axis) and above it in blue the sum of US securities loans as a percentage of US gross domestic product (GDP, left axis).

From March 2020 to October 2021, leveraged stock speculation experienced another steep rise from an already very high level. This far exceeded both the highly speculative activity during the final phase of the technology bubble in 1999/2000 and what happened at the top of 2007.

US Treasury Loans as % of GDP (blue), S&P 500 (red), 1997 to 2022

Despite the recent decline, securities lending is still significantly higher than at the 2000 and 2007 tops. Source:;

Major bearish indicator has turned down

Usually, the reversal in securities lending occurs just before or just after the stock market peaks. This was the case for all post-war bull markets, including the two tops from 2000 and 2007 shown here (yellow ellipses).

As you can see, this important indicator has now clearly turned down. In doing so, he confirms my prediction that the stock markets are in the early stages of a bear market.

Speculating on credit even higher than in 2000

However, securities lending is still at a very high level – higher than the highs of 2000 and 2007. So there can be no talk of speculation returning to normal. This important indicator leaves plenty of room for the bear market to continue.

In times of falling share prices, high securities loans act like a fire accelerator, since the share portfolio serves as security for the loan. If the value of the collateral falls, the loan amount must be reduced by selling shares. So the more shares have to be sold, the more the prices fall. A vicious circle.

Secure yourself

The reversal in securities lending in 2000 was followed by a bear market during which the S&P 500 halved, while the DAX fell 73% and the NASDAQ 100 83%. After the trend reversal in 2007, the S&P 500 was down 58%; it was 56% for the DAX and 54% for the NASDAQ 100.

Due to the record fundamental overvaluation reached in the current cycle, you should prepare for similarly large price declines – and if there is a good risk/reward trade-off, we recommend going short. You can read concrete recommendations on this in the stock market letter Crisis-proof investing that I and Roland Leuschel published – test it now for 30 days free of charge.

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