Death by Leverage

Leverage kills! It forces investors to make moves they would otherwise not want. That is exactly what happened when the investment world was surprised by the magnitude and extent of the tariff regime announced by President Trump. Once selling began, it was accelerated by the need to cover borrowings before equity was wiped out. (Remember, borrowing money to buy stocks or bonds implies that their value is the collateral. Once that collateral falls, then the borrower needs to put up more money to support the loan or quickly sell the security to pay back what is owed.)

Hedge funds have used a huge amount of margin loans in their strategies. Public margin debt has also been at record levels. This is why when market values came down, they were accelerated by forced selling. The good aspect of this is that much debt and leverage have been flushed out of the system very hastily. The quicker this happens, the sooner markets can rebuild. Lower prices do eventually attract other investors.

A large amount of debt has also been used in some fixed income strategies. This is also being liquidated, thus exacerbating volatility in these instruments. It is a broad-based storm. The great deleveraging is taking place before our eyes every day. Soon, this will be over! However, it may take time to rebuild. Greed will return. In the meantime, keep your head while others are losing theirs. For the long-term investor, opportunity is popping up everywhere. Stay steady my friends. It will soon be time to grasp some of these.

-The Lonely Bull