Bubbles and Margin

There is a lot of talk about bubbles in the stock market. Robert Shiller used to think there was a bubble, and continues to believe the market correction is coming soon. Paul Krugman is less sanguine, attributing the stock market boom to a global phenomenon and foreseeing economic strength in the future. Given his exhaustive analysis of the Great Recession and the aftermath, I would not expect him to miss an opportunity to warn about another bubble bursting. I more or less agree with Krugman, and I think market participants agree too.

Take a look at the dramatic increase in margin debt relative to credit balances in margin accounts in the NYSE:

Clearly, the greatest risk takers (those trading on margins) are holding lots of long positions, while keeping short positions more or less constant. There has been a build up of credit in cash accounts, but it seems to be following the general upward trends of stock market participation. What I would be interested to know is whether the additional margin debt is due to new participants trading, or seasoned participants foreseeing long-term growth. If it is new participants, then there almost surely is a bubble. However, seasoned professionals would presumably be taking more short positions if the expected a coming crash. Should global stocks tank in the near future, it should be a big surprise.