Leverage Alert! This "frenzy indicator" in the US stock market has already surpassed that of 1999 and 2007

A key leverage indicator measuring the frenzy in the U.S. stock market has surged to levels exceeding those seen during the 1999 internet bubble and the eve of the 2007 financial crisis, signaling a significant warning for risk assets.

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

Deutsche Bank strategists emphasize that these historical points have all been "bad entry points" for investing in risk assets. More concerning is that the current leverage is accelerating from an already high base—margin debt as a percentage of U.S. nominal GDP is nearing the historical peak reached in the third quarter of 2021.

Leverage Surge: Rare Speed and Scale

Deutsche Bank believes that market sentiment has shifted from healthy bullishness to irrational exuberance. 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 re-leveraging by investors to purchase U.S. stocks... its speed has surpassed the re-leveraging seen during 1999, 2007, and 2021. The only periods faster than the current growth rate occurred between January and March 2000 and during the rebound after the COVID-19 stimulus in 2020.

Even more concerning is that this rapid increase in leverage is built on an already high base. The current total margin debt as a percentage of U.S. nominal GDP is approaching the historical peak set in the third quarter of 2021. The report warns that historical experience indicates that the current juncture is a poor tactical entry point for risk assets.

This Time, No Safety Net

Historical data shows that when year-on-year margin debt growth exceeds 40%, there is a significant risk that high-yield bond ($HY) spreads will widen in the next 6 to 12 months. While some may cite the market resilience of 2020-2021 as a counterexample, Deutsche Bank emphasizes that there is a fundamental difference between then and now:

The relative stability of 2020-2021 was largely due to historic fiscal and monetary easing... Fast forward to today, the fiscal and monetary conditions are completely different... Negative fiscal impulses and continuously declining bank reserves mean we will not replicate the market resilience seen during 2020-2021.

In short, Deutsche Bank believes that in the absence of massive liquidity support, the risks implied by such extreme levels of leverage may be far more severe than the market generally perceives. History does not simply repeat itself, but this time's frenzy indicators undoubtedly sound the alarm