Quote:
Originally Posted by JPhillips
The underlying problem is how leveraged the market is. Here are a couple of data points I saw.
The cash positions in mutual funds stand at 3.8%, slightly below the 3.9% low established in 1972.
Margin debt as a percentage of the S&P market cap has climbed to 2.4%, an all-time high. The previous peak? Early 2000, at the height of the Internet bubble.
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I think the data points you have seen are just an indicator of the increasing spread of previously successful investment strategies. Everybody chases performance (even the professional money managers).
The current use of leverage isn't specific to any particular market or strategy. A decade or so ago, it became apparent hedge funds were successful using borrowed money to amplify their returns. Copy cats emerged and now many investors use this same strategy (which is what I think the data point illustrates as the average investor can now buy mutual fund shares that use leverage to amplify returns). Works great in a strong, rising market. Not so great in a weak, falling market as it tends to compound itself as the underlying investments the borrowed funds purchased lose value.