Transcription
The stock in your portfolio didn't get dumber this week. Somebody else's leverage did. By the end of this video, you're going to understand why the sell off in some of your favorite growth stocks has almost nothing to do with earnings and everything to do with borrowed money and what that means for your account right now as we speak.
I grabbed some coffee downstairs in my building the other day and the TV bolted to the wall had the same crawl that seemed to be running the day before. Chip stocks in the red, AI names in the red. And the gal behind the counter asked me if the bubble was finally popping. Ouch. That's the story that everyone is telling themselves right now, that this is just investors finally waking up and realizing that AI stocks got just a little too expensive.
Well, here's the myth in its full form. The NASDAQ 100 has slid close to 10% from its record high set in June. That's officially a technical correction. Names like SanDisk and Intel are down 53% and 39% from their peaks in June. The headlines call it AI fatigue. They call it a valuation reset. They make it sound like investors simply just got smarter overnight.
Make it worse, this is happening in the middle of the biggest earnings week of the year. Microsoft, Meta, Amazon, and Apple are all reporting within days of each other. Every one of them under pressure, under a microscope to justify how much they're spending on artificial intelligence, in case you haven't noticed. So, the easy story kind of writes itself. The market's getting nervous about AI spending right before the companies spending the most have to show their homework.
That's not what's actually happening, my friends. What's actually happening is a margin call. Let me give you that number that nobody at the deli or the coffee shop is talking about. Today, US stock market margin debt, money investors borrow against their own portfolio to buy more stock, hit an all-time record high of $1.53 trillion in June. That's the third straight month of record highs, up nearly 8% in a single month and up more than 50% from a year ago.
Think of margin debt like a home equity loan against your stock portfolio instead of your house. It feels free on the way up and it's never free on the way down. Look, before I get deeper into this, if you like this type of content, please click like and don't forget to subscribe. It's important to be in the know and this, my friends, is how you do it. Now, let's get deeper as promised.
Okay, here's your shadow data. Let's start with that. You know, I love the shadow data. That's the mechanism that actually connects all of this together. The 10-year Treasury yield touched 4.69% last week. It's the highest level in months and it's still sitting near 4.63% as of earlier this week. With some analysts flagging 5% as the next test. So, it can go higher from here.
Here's why that number matters more than any earnings report in this week. When bond yields rise, the discount rate rises with them. The discount rate is just the math Wall Street uses to figure out what a dollar of profit 5 years from now is worth today. And higher discount rate makes future profit worth less right now. And it hits growth stocks the hardest because growth stock companies promise you most of their profit years down the road. Clearly not today. So the yield spike hit growth and AI stocks prices first just because that's how they operate.
And here is where the margin debt turns from a statistic into an actual forced seller. When your portfolio is bought with borrowed money and the value of that portfolio drops, your broker doesn't ask you nicely to sell. The broker issues a margin call, a demand for more collateral right now. And if you don't have it, the broker, well, the broker sells your stock for you and whatever price the market's offering in that moment. That's not investor psychology. That's a math problem with a deadline.
Wall Street banks are already doing exactly this. Major prime brokers are issuing margin calls to hedge funds right now as AI stock positions lose value, demanding more collateral to back the same leverage bets that look brilliant just 3 months ago. One investment research desk called this setup bluntly probably the mother of all margin call events. And we've already seen the preview of what this looks like when it accelerates. In South Korea, where retail investors piled into chip stocks on borrowed money, margin debt there has already fallen 13% from its June peak as Samsung and SKHX got crushed earlier in the week. That's not a coincidence. That's the same mechanism running one step ahead of us here in the US.
Now, here is the part that should actually worry you. This is not a new pattern either. Margin debt hit similar record peaks relative to the size of the market right before the dot crash in 2000, right before the 2007 financial crisis. And again in 2021 before the year's growth stock unwind. Every single time the record high in borrowed money was not the sign of a healthy market. It was the fuel sitting next to the match.
And all this is happening on the exact same day that the Fed chair Kevin Walsh and the rest of the FOMC meet and announce their rate decisions. If the Fed holds rates steady or signals rates stay higher for longer, bond yields have no reason to come back down anytime soon. And if yields stay up here for near 4.7%, right here near 4.7% is where they were. The discount rate math keeps pressuring the same leverage growth trades that are already getting margin called today.
Think about why that matters for how this week's earnings actually land. If Microsoft or Meta or Amazon report perfectly fine numbers this week and the stock still gets sold, do not assume the market is telling you the business is broken. It might just be telling you a leveraged account somewhere got a phone call from its prime broker that morning. Those are two completely different problems and the headlines will blur them into one.
So what do you actually do with all this information? First, stop treating every red day in the AI stock as a referendum on the technology itself. Much of this move is mechanical force selling by leverage accounts, not a collective decision that the technology is worthless. Second, if you're holding anything on margin yourself right now, well, this is the week to know your own maintenance requirement cold because you don't want to find out where your own line is from a forced sale notice. Third, watch the 10-year yield more closely than you watch any single stock this week. It is the dial that is actually turning everything else. And fourth, remember that force sellers do not negotiate on price. That means the bottom of a margin-driven sell-off can overshoot the actual bad news by a pretty wide margin in either direction. Which is exactly why these episodes create both the sharpest losses and some of the best entry points for investors who are not themselves leveraged.
Guys, there's no free launch on borrowed money. Leverage makes your gains bigger on the way up and it makes somebody else's for sale your problem on the way down. Even if you never borrowed a dollar yourself because their forelling sets the price that you see on your screen right now. So, your truth bomb for today is this. This week's AI selloff is not a verdict on the technology. It's a record $1.5 trillion pile of borrowed money meeting a market that finally said no. And that same mechanism that inflated this rally is now the mechanism tearing it down.
Join me every day for Wall Street Truth Bombs, where I drop them right here before the market figures them out. [music]