The Marriner S. Eccles Federal Reserve building stands in Washington, D.C., U.S., on Tuesday, Aug. 18, 2020.
Erin Scott | Bloomberg via Getty Images
Many of the indicators of stock market euphoria are flashing bright red signals as the market barrels ahead to uncharted new heights.
There are many tools in the financial toolbox to evaluate stock market euphoria, and here is one that is as frightening as any.
The chart below measures margin debt as a percentage of GDP.
As of December 30, 2020, margin debt in the U.S. was a staggering $778 billion, 34% higher than the $679 million amount a year earlier.
Measured as a percentage, margin debt is now 3.6% of GDP, a figure that can be added to the list of frightening statistics of current market exuberance.
Note that we have now surpassed the peaks of 2000 and 2008 in terms of margin debt as a percentage of GDP. Both of those periods were followed by major stock market declines.
Given today’s comparable state of euphoria, it seems strange that the Federal Reserve is not using one of its tools that might dampen the excessive market speculation.
The Fed has the power to regulate brokers’ margin rates under Regulation T, but it hasn’t used that power since 1974 when the margin rate to borrow on stock purchases was set at 50%.
With a 50% margin rate, investors can borrow up to 50% of the amount of their qualified stock purchases. That means that an investor who wants to buy $10,000 worth of stock can buy $20,000 worth by just putting up $10,000 and borrowing the rest.
It is easy to see how this kind of buying power can add momentum to a speculative bull market.
Back in 1929, there was no Federal Reserve, but brokers lent speculators as much as 90% of the value of their stock purchases, adding fuel to the fire of soaring stock prices.
As we all know, this was followed by the Crash of 1929, and the beginning of the Great Depression.
As can be seen from the chart below, prior to 1974, the Fed paid a great deal of attention to margin rates and changed the rate many times as it viewed market conditions and other factors at the time.
Regulation T initial margin requirement
Yet, as we pointed out, the Fed stopped using this tool in 1974. Maybe now would be a good time to revisit this policy.
—Peter J. Tanous is chairman of Lynx Investment Advisory in Washington, D.C.
For more insight from CNBC contributors, follow @CNBCopinion on Twitter.
U.S. will defend troops after rocket attack in Iraq, Lloyd Austin says
U.S. Defense Secretary Lloyd Austin speaks to Defense Department personnel during a visit by U.S. President Joe Biden at the Pentagon in Arlington, Virginia, February 10, 2021.
Carlos Barria | Reuters
WASHINGTON – Secretary of Defense Lloyd Austin warned those responsible for carrying out last week’s rocket attack against an Iraqi base that hosts American troops will be held to account.
“The message to those that would carry out such an attack is that expect us to do what is necessary to defend ourselves,” Austin said in an interview with ABC that aired on Sunday.
“We’ll strike if that’s what we think we need to do at a time and place of our own choosing. We demand the right to protect our troops,” he said, adding that the U.S. is still assessing intelligence with its Iraqi partners.
Defense officials have previously said the attack had typical hallmarks of a strike by Iran-backed groups. Iran has denied involvement.
When asked if Iran would view a potential U.S. response as an escalation of tensions, the new Pentagon chief and retired Army four-star reiterated that Washington would do whatever is necessary to protect Americans and U.S. interests in the region.
“What they [Iranians] should draw from this, again, is that we’re going to defend our troops and our response will be thoughtful. It will be appropriate,” Austin said. “We would hope that they would choose to do the right things,” he added.
On Sunday, the U.S. military’s Central Command, which oversees the wars in the Middle East, flew its fourth bomber deployment to the region.
The show of force mission included two B-52H Stratofortress bombers alongside aircraft from Israel, Saudi Arabia, and Qatar at different points to “deter aggression and reassure partners and allies of the U.S. military’s commitment to security in the region.”
Last month, Iran rejected an invitation from global powers who signed the 2015 nuclear deal to discuss the regime’s potential return to the negotiating table, a significant setback in the Biden administration’s efforts to revive the Joint Comprehensive Plan of Action, or JCPOA.
The White House said that the Biden administration was disappointed with Iran’s decision to skip the informal meeting but would “reengage in meaningful diplomacy to achieve a mutual return to compliance with JCPOA commitments.”
President of Iran, Hassan Rouhani speaks during the National Combat Board Meeting with Coronavirus (Covid-19) in Tehran, Iran on Nov. 21, 2020.
Iranian Presidency Handout | Anadolu Agency | Getty Images
The Biden administration has previously said that it wants to revive the nuclear deal but won’t suspend sanctions until Tehran comes back into compliance. Tehran has refused to negotiate while U.S. sanctions remain in place.
The 2015 JCPOA, brokered by the Obama administration, lifted sanctions on Iran that had crippled its economy and cut its oil exports roughly in half. In exchange for billions of dollars in sanctions relief, Iran agreed to dismantle some of its nuclear program and open its facilities to more extensive international inspections.
The U.S. and its European allies believe Iran has ambitions to develop a nuclear bomb. Tehran has denied that allegation.
In 2018, then-President Donald Trump kept a campaign promise and withdrew the United States from the JCPOA calling it the “worst deal ever.” Following Washington’s exit from the landmark nuclear deal, other signatories of the pact have tried to keep the agreement alive.
Washington’s tense relationship with Tehran took several turns for the worse under the Trump administration.
President Donald Trump speaks during a briefing on Hurricane Michael in the Oval Office of the White House in Washington, DC, October 10, 2018.
Saul Loeb | AFP | Getty Images
People gather to protest the US air strike in Iraq that killed Iranian commander Qasem Soleimani, who headed Iran’s Revolutionary Guards’ elite Quds force in Sanaa, Yemen on January 6, 2020.
Mohammed Hamoud | Andalou Agency | Getty Images
Soleimani’s death led the regime to further scale back compliance with the international nuclear pact. In January 2020, Iran said it would no longer limit its uranium enrichment capacity or nuclear research.
In October, the United States unilaterally re-imposed U.N. sanctions on Tehran through a snapback process, which other U.N. Security Council members have previously said Washington does not have the authority to execute because it withdrew from the nuclear deal in 2018.
A month later, a top Iranian nuclear scientist was assassinated near Tehran, which led Iran’s government to allege that Israel was behind the attack with U.S. backing.
A view shows the scene of the attack that killed Prominent Iranian scientist Mohsen Fakhrizadeh, outside Tehran, Iran, November 27, 2020.
WANA via Reuters
During the summer of 2019, a string of attacks in the Persian Gulf set the U.S. and Iran on a path toward greater confrontation.
In June 2019, U.S. officials said an Iranian surface-to-air missile shot down an American military surveillance drone over the Strait of Hormuz. Iran said the aircraft was over its territory. That strike came a week after the U.S. blamed Iran for attacks on two oil tankers in the Persian Gulf region and after four tankers were attacked in May.
The U.S. that June slapped new sanctions on Iranian military leaders blamed for shooting down the drone. The measures also aimed to block financial resources for Iran’s Supreme Leader Ayatollah Khamenei.
Tensions soared again in September of 2019 when the U.S. blamed Iran for strikes in Saudi Arabia on the world’s largest crude processing plant and oil field. The strikes forced the kingdom to shut down half of its production operations.
The event triggered the largest spike in crude prices in decades and renewed concerns of a budding conflict in the Middle East.
The Pentagon described the strikes on the Saudi Arabian oil facilities as “sophisticated” and represented a “dramatic escalation” in tensions within the region.
All the while, Iran maintains that it was not behind the attacks.
Chinese foreign minister calls for ‘non-interference’ between China, U.S.
The flags of China, U.S. and the Chinese Communist Party are displayed in a flag stall at the Yiwu Wholesale Market in Yiwu, Zhejiang province, China, May 10, 2019.
Aly Song | Reuters
BEIJING — Chinese Foreign Minister Wang Yi said Sunday that the U.S. needs to remove “unreasonable restrictions” for the two countries’ relationship to move forward under President Joe Biden‘s administration.
Wang’s remarks come as tensions between the U.S. and China have escalated in the last few years under former President Donald Trump, whose term ended in January. So far, the Biden administration has maintained a tough position on China — calling the country a more assertive “competitor” — and raised concerns about Beijing’s stance around Taiwan, Hong Kong, Xinjiang and Tibet.
China’s central government considers those issues part of its domestic matters.
“Speaking of China-U.S. relations, I believe first of all both sides need to abide by the principle of non-interference in each others’ internal affairs,” Wang said. That’s according to an official English translation of his Mandarin-language remarks at a press conference held alongside the “Two Sessions” annual parliamentary meeting in Beijing, the country’s biggest political event of the year.
Biden had raised “fundamental concerns” about Beijing’s actions on issues such as Hong Kong in a two-hour phone call with Chinese President Xi Jinping in February ahead of the Lunar New Year holiday, according to the White House. At the time, the two leaders also discussed how to counter the coronavirus pandemic, working together on climate change and preventing weapons proliferation.
Wang said Sunday the two countries could also cooperate on the economic recovery from the pandemic, and pointed to the phone call as a positive basis for rebuilding the bilateral relationship.
“We’re ready to work with the United States to follow through on the outcome of this important phone call and set China-U.S. relations on a new path of healthy and steady growth,” he said.
Biden and Xi offer dueling worldviews on how to shape the globe
Chinese President Xi Jinping shakes hands with U.S. Vice President Joe Biden (L) inside the Great Hall of the People in Beijing December 4, 2013.
Lintao Zhang | Reuters
Who is going to organize the world? And what forces and whose interests will shape the global future?
Those were the underlying questions behind two events this past week, one in Washington and the other in Beijing, that set the stage for the geopolitical contest of our times.
The DC piece was President Joe Biden’s release of the “Interim National Security Strategic Guidance,” unprecedented at this stage in a new administration. Biden’s purpose was to provide early clarity about how he intends to set and execute priorities in a fast-changing world.
Secretary of State Antony Blinken laid out the thinking behind the guidance in his first major speech since entering office. It was a compelling one, underscoring the urgent need to shore up U.S. democracy and revitalize America’s alliances and partnerships.
“Whether we like it or not, the world doesn’t organize itself,” Blinken said. “When the U.S. pulls back, one of two things is likely to happen: either another country tries to take our place, but not in a way that advances our interests and values; or maybe just as bad, no one steps up, and then we get chaos and all the dangers it creates. Either way, that’s not good for America.”
Relations with China, which Blinken called “the biggest geopolitical test of the 21st century,” are the wrench in this organizational thinking.
Said Blinken: “China is the only country with the economic, diplomatic, military and technological power to seriously challenge the stable and open international system – all the rules, values and relationships that make the world work the way we want it to, because it ultimately serves the interests and reflects the values of the American people.”
Biden’s biggest departure from the Trump approach to China is the emphasis on working with partners and allies. This week’s move by the U.S. and European Union to ease trade tensions, suspending a long list of tariffs and the Airbus-Boeing dispute of government subsidies, underscores President Biden’s seriousness of purpose.
Unsurprisingly, Beijing is offering up a different of view of the future around the second key event this past week, the National People’s Congress that convened Friday and will continue this coming week.
President Xi sees the momentum on Beijing’s side in a world where “the East is rising, and the West is declining.” His argument is that China offers order in contrast to the United States’ chaos, and effective governance in contrast to Washington’s ineffectiveness, demonstrated by how much better it has handled the pathogen it unleashed.
Xi’s most comprehensive swipe at how China would organize the world came in late January at this year’s virtually convened World Economic Forum. The speech’s title underscored its all-embracing ambition: “Let the Torch of Multilateralism Light up Humanity’s Way Forward.”
If the Biden vision is for the U.S. to create a band of reinvigorated democratic sisters and brothers, inspired by a revitalized United States, Xi’s vision is for a world where everyone’s political system, culture and society are its own business.
In this world, America’s value judgments are passé.
The subtext for Xi is simple. How countries organize themselves internally, along with whatever authoritarian strictures and human rights violations that includes —whether it be against the Uighur minority in Xinjiang province, democracy activists in Hong Kong, or perhaps even ultimately concerning Taiwan’s independence —just is not Washington’s business.
“Each country is unique with its own history, culture and social system, and none is superior to the other,” Xi told the virtual Davos crowd. “The best criteria are whether a country’s history, culture and social system fit its particular situation, enjoy people’s support, serve to deliver political stability …” Xi made clear this approach is meant to “avoid meddling in other countries’ internal affairs.”
By contrast, President Biden wrote, in a letter that accompanied the strategic guidance this week, “I firmly believe that democracy holds the key to freedom, prosperity, peace and dignity … We must provide that our model isn’t a relic of history; it’s the single best way to realize the promise of our future. And if we work together with our democratic partners, with strength and confidence, we will meet every challenge and outpace every challenger.”
The context for these competing visions was this week’s release of Freedom House’s annual survey that said, “less than 20 percent of the world’s population now lives in a Free country, the smallest proportion since 1995.”
In the study, called “Democracy Under Siege,” Sarah Repucci and Amy Slipowitz wrote, “as a lethal pandemic, economic and physical insecurity, and violent conflict ravaged the world in 2020, democracy’s defenders sustained heavy new losses in their struggle against authoritarian foes, shifting the international balance in favor of tyranny.”
It was the 15th successive year in which countries with declines in political rights and civil liberties outnumber those with gains. The report said that nearly 75% of the world’s population lived in a country that faced a deterioration of democratic freedoms last year.
It may seem this is absolutely the wrong time to expect the world’s democracies to rally to shape the global order. Yet just the opposite is true: at a time when democracy is being tested across the world, what better time to work together to address the challenges and ensure the global gains of freedom of the past 75 years don’t continue to erode.
Chastened by the global situation, the Biden administration knows its work must begin at home. Blinken also was modest in how the United States would go about advancing democracy.
“We will use the power of our example,” he said. “We will encourage others to make key reforms, overturn bad laws, fight corruption and stop unjust practices. We will incentivize democratic behavior.”
What the U.S. won’t do is promote democracy “through costly military interventions,” said Blinken, “or by attempting to overthrow authoritarian regimes by force. We have tried these tactics in the past. However well intentioned, they haven’t worked.”
In the end, the world is not going to be organized either by Chinese or American fiat, but rather by a concert of national interests, influenced by the trajectory of the world’s two leading powers.
Xi’s bet is that China’s momentum is unstoppable, that the world is sufficiently transactional, and that his economy has become indispensable to most U.S. allies. President Biden must not only shift that narrative but also work in common cause to reverse the reality of democratic weakening.
Frederick Kempe is a best-selling author, prize-winning journalist and president & CEO of the Atlantic Council, one of the United States’ most influential think tanks on global affairs. He worked at The Wall Street Journal for more than 25 years as a foreign correspondent, assistant managing editor and as the longest-serving editor of the paper’s European edition. His latest book – “Berlin 1961: Kennedy, Khrushchev, and the Most Dangerous Place on Earth” – was a New York Times best-seller and has been published in more than a dozen languages. Follow him on Twitter @FredKempe and subscribe here to Inflection Points, his look each Saturday at the past week’s top stories and trends.
For more insight from CNBC contributors, follow @CNBCopinion on Twitter.
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