Parting Shot continued from page 60

Historic Margin Debt as a Percent of GDP 3.5 3.0 2.5 2.0 1.5

‘ 99 ‘ 01 ‘ 03 ‘ 05 ‘ 07 ‘ 09 ‘ 10 ‘ 13 ‘ 15 ‘ 17 ‘ 19 ‘ 21 sources : the financial industry regulatory Authority and the u . s . Bureau of economic Analysis

One of the concerns economists should have about high leverage is the amount of “ hot money ” in the market — money that will be quick to move out if widespread investor sentiment changes . Money from the home market tends to be stable , while investments from foreign sources are not . Put another way , hot money is not going to stay around to provide liquidity when those with leverage are in forced-selling mode .

So to get a broader picture of leverage-related risk , we turn to the liquidity supply side . One way to measure that is inflows from foreigners , shown in the chart below as a one-year moving average . Like the margin measures , growth in new foreign

equity purchases is at an extreme , the highest in two decades . Granted , the inflows are accentuated by the higher value of the U . S . equity market , but the level of net inflows is at a record high nonetheless .

Historic inflows From Foreign Sources ( one-year moving Average )

30 20 10 0 -10 -20 -30

2000 2005 2010 2015 2020 source : u . s . treasury

This not only suggests less liquidity supply to meet leverage-based demand , it also suggests that any price effect from leverage will extend beyond the U . S . That is , there is a ready pathway for contagion .

Rick BookStaBeR is the founder and head of risk at fabric rQ . He previously held chief risk officer roles at morgan stanley , salomon Brothers , Bridgewater Associates and the university of california , and he served at the u . s . treasury in the aftermath of the 2008 crisis . He is the author of The End of Theory ( Princeton university , 2017 ) and A Demon of Our Own Design .

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