The pure level of margin debt is the highest in history. Margin debt as a percentage of GDP has reached the level achieved in March 2000. The two previous peaks in margin debt over the last fourteen years were March 2000 and October 2007. Do you know what happened next? The S&P 500 declined by over 50%. The NASDAQ declined by 80% from the 2000 peak.

For those who don’t understand how margin debt works, you borrow against the balance of your existing stock portfolio in order to buy more stock. It really juices your ROI in a rising stock market. Not so much in a declining stock market. With valuations at all-time highs, profits peetering out, bullishness off the charts, tapering under way, and margin debt at record highs, everything is in place for an epic fall.

When the market starts to fall rapidly, the value behind the margin borrowing declines. The brokers then call the margin borrowers and tell them they need more collateral. The only way for these dumbasses to get more collateral is to sell their stock. The margin calls exacerbate the decline with more selling. It’s a beautiful thing to witness the pure and utter panic among the lemmings. Coming to a theater near you shortly.

Via John Hussman