Leverage is the Name Of The Game

Over the last two weeks, financial markets have grappled with the fallout from Archegos Capital, the over-levered family office which managed to lose a reported $8 billion in ten days.

New data from FINRA, the regulatory body which manages markets, illustrates just how pervasive the use of leverage is in today’s market. As of late February, investors had borrowed a record $814 billion against their portfolios.

Risk On

That staggering sum includes leverage from both large players on Wall Street to teenagers trading on margin in their Robinhood app. While $814 billion is clearly a large number, it looks even larger when put into context:

• Investor leverage is up 49% since last February, the fastest increase since 2007 (also known as the eve of the Great Financial Crisis).
• Before that, the last time investor leverage had grown at this pace was during the dot-com bubble of 1999.

What Does It Mean? Good question.

Some caution the data isn’t perfect because it doesn’t isolate borrowing made for the purpose of buying stocks. In defense of the current market levels in the stock market, some say leverage hasn’t played an outsized role with the market instead being driven by a strong economic recovery and dovish policies from the Fed.

On the other hand, other analysts are sounding the alarm. Edward Yardeni, president of consulting firm Yardeni Research, told the WSJ, “It fuels bull markets and it exacerbates bear markets and to a certain extent you put it on the list of irrational exuberance.”

And on Tuesday the CFTC sent a notice to investors saying, “Speculative short-term trading is always risky, but mixing it with unfamiliar products and markets, leverage, and advice from anonymous individuals is a recipe for disaster.”

the takeaway

Buckle Up.