Leverage on leverage is big danger for investors and their lenders

BloombergOpinion/Paul J. Davies/11-25-2021

“This seems remarkable to me: A very big pension plan [CALPERS], which invests in lots of different funds, including many that use leverage to boost returns, is now going to start using its own leverage on top to try to boost its returns. It highlights how investors of all kinds are having to take more risk to make any money.”

USAGOLD note:  Davies also brings attention to the rapid growth of investor margin debt “breaking new records almost every month.” When the stock market tanked last Friday, the Wall Street Journal blamed the rapid unwinding of margin debt among small investors as contributing to the sharp sell-off – offering a glimpse of the vulnerability leverage brings to the table and a warning of things to come.

Margin accounts with securities brokers and dealers
(1970 to November 2021)

bar chart showing growth of margin debt with brokers
Sources: St. Louis Federal Reserve, Board of Governors of the Federal Reserve System

 

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