Stocks Don’t Need More Alarm Bells, They’re Already Clanging and Jangling All Over the Place. But Here we Are: Leverage, by Wolf Richter

Leverage—borrowed money—amplifies both gains and losses. From Wolf Richter at wolfstreet.com:

Stock market leverage, the big accelerator on the way up, and on the way down.

Increasing leverage – borrowing money to buy stocks – puts buying pressure on the stock market up. Declining leverage – selling stocks to reduce leverage – puts selling pressure on the market. Stock market leverage has ballooned over the past 20 months by historic proportions, which has contributed to the historic surge in stock prices. So we’ll keep an eye on leverage.

The tip of the iceberg of stock-market leverage that we can actually see is margin debt, which is reported on a monthly basis by FINRA, based on data reported by its member brokers.

Other forms of stock-market leverage occur in the shadows, such as Securities Based Lending (SBA) that isn’t tracked and reported in a centralized manner, though some banks choose to disclose it quarterly or annually.

There is leverage associated with options and other equities-based derivatives. Then there is leverage at the institutional level such as with hedge funds, which doesn’t show up until a fund implodes, such as Archegos, and everyone gets to pick through the debris.

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