Leverage alert! This "fever indicator" in the U.S. stock market has already surpassed 1999 and 2007.

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A key leverage indicator measuring the frenzy in the US stock market has surged to levels exceeding those seen before the internet bubble in 1999 and the financial crisis in 2007, flashing a significant warning signal for risk assets.

According to Chasing Wind Trading Desk, Deutsche Bank's data tracking NYSE margin debt shows that from the end of April to the end of September, investor leverage surged by 32.4% in five months, a pace surpassed only during the internet bubble peak in early 2000 and the post-pandemic stimulus period in August 2020.

Deutsche Bank strategists emphasize that historically, these moments were invariably “bad entry points” for investing in risk assets. What's more alarming is that the current leverage is accelerating from historically high levels—with margin debt as a percentage of nominal US GDP approaching the record high set in Q3 2021.

Leverage Soaring: Rare Speed and Scale

Deutsche Bank believes that market sentiment has shifted from healthy bullishness to irrational frenzy. The most critical evidence is the speed at which investors are borrowing to buy stocks.

In the past five months, we have seen a historic, rapid releveraging by investors to buy US stocks... The speed surpassed the periods of 1999, 2007, and 2021. The only times when the pace was faster were from January to March 2000 and during the rebound after the 2020 COVID stimulus.

More concerning is that this rapid increase in leverage is happening on top of an already high base. The current total margin debt as a percentage of US nominal GDP has almost reached the historical high set in Q3 2021. The report warns that, historically, the current point is a poor tactical entry point for risk assets.

This Time, No Safety Net

Historical data shows that when margin debt grows by more than 40% year-on-year, the spread on high-yield bonds ($HY) is at significant risk of widening in the next 6 to 12 months. Although some might cite the market resilience of 2020-2021 as a counterexample, Deutsche Bank emphasizes that there is a fundamental difference between now and then:

The relative stability of 2020-2021 was largely thanks to historically loose fiscal and monetary policies... Fast forward to today, fiscal and monetary conditions are completely different... negative fiscal impulse and declining bank reserves mean we will not see a repeat of the 2020-2021 market resilience.

In short, Deutsche Bank believes that without massive liquidity support, the risks implied by such extreme levels of leverage may be far greater than the market generally perceives. History does not simply repeat, but this time's frenzy indicator is undoubtedly a warning bell.

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The above excellent content comes from Chasing Wind Trading Desk.

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Risk Warning and DisclaimerThe market has risks, investment needs caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial condition, or needs of any particular user. Users should consider whether any opinions, views, or conclusions expressed herein are appropriate for their particular circumstances. Investment based on this is at your own risk. ```