Market house of cards based on debt

[WendyBG]

https://www.wsj.com/finance/stocks/the-trillion-dollar-borrowing-binge-lifting-the-stock-market-to-risky-heights-8d0377f9?mod=hp_lead_pos3

The Trillion-Dollar Borrowing Binge Lifting the Stock Market to Risky Heights

Leveraged funds and margin debt have grown to unprecedented levels this year

By Jack Pitcher, The Wall Street Journal, June 28, 2026

U.S. margin debt rose 54% to a record $1.4 trillion in May, signaling potential trouble amid surging leveraged ETF assets.

Leveraged funds bought $300 billion in derivatives since March, spurring demand for shares, but risk heavy losses if stocks fall.

South Korean stocks gyrated, triggering circuit-breakers, while Charles Schwab tightened margin requirements for clients.

…
U.S. margin debt, or what investors borrow from their brokerages to buy securities, rose 54% to a record $1.4 trillion in May from a year earlier, according to Finra data. Meanwhile, high-risk leveraged exchange-traded funds that produce double or triple the daily move of underlying stocks are growing rapidly, as is trading in options tied to them…

The risks of buying leveraged funds are well-advertised: a 30% drawdown in the underlying stock can turn into a 90% wipeout for the fund. But Wall Street sees a broader problem emerging: These funds, along with other forms of leverage, can also affect how the individual stocks behave…

In a bid to keep pace with the flow of new money, leveraged funds have bought some $300 billion in derivatives linked to single stocks and indexes since the end of March, Barclays analysts estimate.

Those purchases have in turn spurred demand for underlying shares from market makers, which buy stocks to hedge their exposure to the derivative contracts they write.

That’s almost certainly contributed to the sharp gains in corners of the stock market this year. But when stocks fall, leveraged funds lose assets. That forces them to reduce exposure to the shares they track, which in turn threatens to pull down stock prices even more. There is a danger, market analysts said, that this cycle can quickly spiral into heavy losses. … [end quote]

I read this excellent book a couple of months ago and recommend it to all METARs:

“1929: Inside the Greatest Crash in Wall Street History—and How It Shattered a Nation,” by Andrew Ross Sorkin is a narrative history of the 1929 stock market crash, focusing on the human drama, greed, and policy failures that led to the event and its aftermath, drawing parallels to modern financial markets. Published in 2025, the book uses extensive archival research, including newly accessed Federal Reserve minutes, to create an immersive, character-driven account of the era’s euphoria, speculation, and eventual ruin, highlighting themes like the “democratization of finance” and the risks of unchecked optimism.

The parallels between 1929 and 2026 are very clear. Also very scary.

The growth in margin is very scary. I shook my head in amazement when margin debt passed $1 Trillion last June. But now, only a year later, margin debt has increased by more than half again!

Margin Statistics

Look at how margin drives the S&P500.
https://en.macromicro.me/charts/415/us-margin-debt

But leveraged ETFs are even more dangerous. At least margin is backed by collateral – assets held in a brokerage. The broker will call the margin if the bet goes south but at least that’s as far as it will go. Leveraged ETFs are total gambles. With leverage, a speculator can lose far more than his original stake - not to mention the margin he might have borrowed to buy it in the first place.

To provide a 2x or 3x daily return, a leveraged ETF can’t just buy and hold stocks. They use derivatives (mostly total return swaps). Because of how options and swaps work, the investment banks writing these contracts (the market makers) have to dynamically hedge their risk.

This creates a mandatory, programmatic cycle at the end of every single trading day:

• On a green day: The leveraged ETF gains value. To maintain their target leverage ratio for the next day, the fund must buy more underlying derivatives. The market makers, in turn, are forced to buy massive amounts of the actual underlying shares to stay hedged. This pushes the market even higher right before the closing bell.

• On a red day: The exact opposite happens. If the market drops, the ETF must shed exposure. They sell derivatives, forcing market makers to aggressively dump underlying stocks into the close to protect themselves.

This means billions of dollars are programmatically forced to buy high and sell low every day. When the market is marching steadily upward, it acts as a massive tailwind. But the moment a genuine panic hits, this mechanism flips into a violent accelerator.

The “collateral” behind these massive derivative positions held by leveraged ETFs consists of the very stocks that are flying high.

If a major index drops 10% in a couple of days, a 3x leveraged ETF loses 30% of its asset base instantly. The forced unwinding of that position means market makers must dump hundreds of billions in shares into a falling market where liquidity is already drying up. It triggers a cascade—the exact kind of systemic “forced selling” that turned a sharp correction into an outright collapse in October 1929, back when call loans fueled the fire.

This is truly a house of cards which is getting shakier every day.

Wendy

[captainccs]

@WendyBG

Leveraged funds and margin debt have grown to unprecedented levels this year

Does that include 1929?

GoogleAI responds:

Yes, the unprecedented levels of margin debt do include 1929. In nominal dollar terms, the record-shattering margin debt seen this year (surging to over $1.4 trillion) vastly exceeds the raw figures of any prior period in history, including the 1920s boom. [1, 2, 3]

While the absolute numbers are far higher, comparing the risk of today’s leverage to 1929 requires looking at the broader economic context: [1, 2]

• As a Percentage of GDP: In 1929, brokers’ loans peaked at roughly $10 billion, which represented about 9% to 10% of the U.S. GDP. In comparison, traditional margin debt is currently around 3.5% to 3.6% of GDP. [1, 2, 3, 4]
• Inflation Adjustment: On an inflation-adjusted basis, current margin debt levels are roughly 6.7 times higher than at their 1929 peak. [1]
• Modern Leverage Channels: The nature of leverage has changed fundamentally. Modern markets include complex financial products that did not exist in 1929. Adding the hidden leverage embedded in derivatives, options contracts, and high-risk leveraged ETFs to traditional margin debt pushes total leveraged financial instruments to an estimated 20% of U.S. GDP—more than double the relative exposure at the peak in 1929. [1, 2, 3, 4]
• Stricter Regulations: Following the crash of 1929, the creation of the SEC in 1934 and Regulation T introduced much stricter margin requirements and oversight designed to prevent the unchecked, low-down-payment lending that triggered the historic “Great Crash” avalanche.

BTW, the FINRA Margin Debt chart is a LINEAR CHART. A semi-log chart would a lot less scary.

GoogleAI responds:

You are spot on. Because raw FINRA Margin Statistics are plotted linearly, exponential growth during bull markets makes the charts look incredibly alarming. [1]

On a linear scale, nominal records—such as the recent surge to $1.42 trillion—look like a vertical cliff. By switching to a logarithmic scale, you can visualize the percentage growth rather than just absolute dollar volume, making the visual acceleration much more measured and comparable to historic market cycles. [1, 2, 3]

However, even when adjusting for scale, the current leverage picture shows extreme speculative participation. Consider these contextual factors that many analysts highlight: [1]

• Real Margin Debt: Even adjusting for inflation, real margin debt has grown significantly, and the market’s reliance on borrowed capital is at historic extremes. [1]
• Investor Net Credit Balance: Cash held in investor accounts minus margin debt reached a massive deficit (near negative $1 trillion), which shows that the typical retail or leveraged investor has depleted their cash reserves. [1, 2]
• Normalization Methods: Analysts often suggest normalizing the raw linear data by measuring it against GDP or total market capitalization to get a clearer picture. For instance, despite the nominal highs, some normalized indicators show that debt-to-market-cap remains close to or slightly below its long-term average, rather than at an extreme.

PS: NASDAQ and S&P-500 40 year (semi-log) charts don’t look all that scary

The Captain

[XMFBigFrog]

When I started investing in options, I got really lucky, really early. Indeed, I more or less doubled my starting options capital in a year, thanks to the inherent leverage built into options.

Then, my luck turned negative, and I was faced with both the huge tax bill from those early gains and an account balance that was suddenly much smaller than it had recently been. That kicked off things like margin calls due to the short sold puts in my account. Fun times.

The big lesson I learned from that experience is that leverage is a very sharp knife that cuts both ways. It’s a key reason why I paired my bond ladder in the same account as my options investing.

Now, when the options throw off big gains, I use those gains to extend the bond ladder. When the options turn against me, the bonds both provide portfolio ballast and throw off cash from interest and maturing bonds. It’s not a foolproof system, but it has made the volatility much more straightforward to manage.

The total returns on the combined account are far below where they were that first year of pure luck. But the account itself has been much more maintainable, since the total volatility is lower and the cash generation of the bonds has helped buffer the downswings.

Regards,

-Chuck

[captainccs]

@XMFBigFrog

Now, when the options throw off big gains, I use those gains to extend the bond ladder. When the options turn against me, the bonds both provide portfolio ballast and throw off cash from interest and maturing bonds. It’s not a foolproof system, but it has made the volatility much more straightforward to manage.

Sounds like a good match that lowers the risk of margin calls which can be real killers. I no longer buy bonds and limit margin to 10% of the portfolio and usually keep it under 5%. When I get extra cash I buy more shares for covered calls. What I discovered in the current down draft is to be more careful with rolling down & out, the capital loss risk outmatches the premiums collected.

@XMFBigFrog

Then, my luck turned negative, and I was faced with both the huge tax bill from those early gains and an account balance that was suddenly much smaller than it had recently been. That kicked off things like margin calls due to the short sold puts in my account. Fun times.

This is exactly why I avoid selling puts like the plague. When calls are assigned they give you money. When puts are assigned they take your money. BIG difference! Dangerous difference!

The Captain

[tjscott0]

@WendyBG

Leveraged funds and margin debt have grown to unprecedented levels this year

@WendyBG

I read this excellent book a couple of months ago and recommend it to all METARs:

“1929: Inside the Greatest Crash in Wall Street History—and How It Shattered a Nation,” by Andrew Ross Sorkin is a narrative history of the 1929 stock market crash

@WendyBG

The parallels between 1929 and 2026 are very clear.

Yep just finished that book. Everyone in 1929 was invested in the stock market utilizing margin, including the shoeshine boy.
If I remember correctly the initial margin requirement was 10% in the 1920’s. Today it is 50% I believe.
https://www.investopedia.com/terms/i/initialmargin.asp

I personally eschew margin investing. YMMV

[DrBob2]

@tjscott0

Everyone in 1929 was invested in the stock market utilizing margin, including the shoeshine boy.

The percentage of people who owned stock in 1929 was relatively small, about 10%.

Sinking Deeper and Deeper: 1929-33 [ushistory.org]

…only 4 million Americans had money invested on Wall Street. 90% of American households owned precisely zero shares of stock.

Banks turned out to be the problem.
https://opened.cuny.edu/courseware/lesson/437/student/?section=3
While only 10 percent of households had investments, over 90 percent of all banks had invested in the stock market. Many banks failed due to their dwindling cash reserves.

DB2

[MarkR]

@captainccs

This is exactly why I avoid selling puts like the plague. When calls are assigned they give you money. When puts are assigned they take your money. BIG difference! Dangerous difference!

Doesn’t seem that different to me. Just with the covered calls, you GIVE them the money up-front, and with the naked puts, you may or may not have to give them the money sometime later on (usually at expiry).

For example, let’s say you decide to use TSLA as your vehicle for this trade. You have 2 choices:

1. Buy 100 shares of Tesla at $420, sell a July 420 call for $16 or so. This means you have to shell out $42,000 up front and you will receive $1600 from the option. Over the 3 weeks, you will earn $3.50 interest (at 3.7%).
2. Sell a July 420 put for about $15.50, you will receive $1550 up front and you will have to keep $42,000 in cash (full amount in cash for a retirement account, less in a regular brokerage account) in case you are assigned and have to buy 100 shares of Tesla. Over the 3 weeks, at 3.7%, you will earn $89 in interest on the $42,000 that you’ve retained in your account.

[tjscott0]

@DrBob2

@tjscott0

Everyone in 1929 was invested in the stock market utilizing margin, including the shoeshine boy.

The percentage of people who owned stock in 1929 was relatively small, about 10%.

@DrBob2

only 4 million Americans had money invested on Wall Street. 90% of American households owned precisely zero shares of stock.

The above differs from what Sorkin wrote in his book. American’s buying habits had changed. Buying on credit had become a thing. Americans could obtain the new fangle items-washing machines, vaccum cleaners, auto, radios, refrigerators, etc on time payments. That behavior spilled over on time stock speculation.

https://www.britannica.com/event/stock-market-crash-of-1929

first six months following President Herbert Hoover’s inauguration in January 1929. The prices of stocks soared to fantastic heights in the great “Hoover bull market,” and the public, from banking and industrial magnates to chauffeurs and cooks, rushed to brokers to invest their liquid assets or their savings in [securities](https://www.britannica.com/money/security-business-economics), which they could sell at a profit. Billions of dollars were drawn from the banks into Wall Street for brokers’ loans to carry margin accounts.

People sold their Liberty Bonds and mortgaged their homes to pour their cash into the stock market. In the midsummer of 1929 some 300 million shares of stock were being carried on margin, pushing the Dow Jones Industrial Average to a peak of 381 points in September.

4 million seems a rather puny number. But then the total dollar loss was just a few billion dollars those first few days was relatively puny then too. The population of the US was 120 million. ~60 million were women who largely stayed at home not working for pay. Families were larger then. So maybe 24 million families. So 1 in 6 of those families lost everything. Because once the stock margin was called. The families whose finances were based on time payments fell like a house of cards.
Those 4 million leveraged their speculation by a factor of ten. And they lost everything when they were called to pay up.
And the above meant a collapse in consumer demand which rippled throughout the business manufacturers ultimately to a deep 30+% GDP decline and a rapid rise in unemployment.

You are correct DB2 the collapse of the banks was a bigger deal as bankers played fast and loose with their own stock speculations.

[mostlylong]

@MarkR

2. Over the 3 weeks, at 3.7%, you will earn $89 in interest on the $42,000 that you’ve retained in your account.

This reminds me of two earlier discussions on how collateral for an option trade represents an accounting cash flow in an IRR calculation.

@mostlylong

@MarkR

This could be done, but it doesn’t really represent reality because those cash flows never happen. The money accounting for the liability (let’s say number of options times strike price) remains in the account throughout, and earns interest at the usual rate.

This is a very real liability that is a very real part of the economics of the trade. Because that liability is real, your broker will require you to post very real collateral. You can be sure that the broker is accounting for this liability.

@MarkR

@mostlylong

This collateral that supports the short put is a cash flow.

How exactly is it a cash flow? Where does it flow to and where does it flow from? When I look at my brokerage account, I see no cash whatsoever moving anywhere, it remains exactly where it was previously. And it earns exactly the same amount of interest as it did previously.

[captainccs]

@MarkR

Doesn’t seem that different to me. Just with the covered calls, you GIVE them the money up-front, and with the naked puts, you may or may not have to give them the money sometime later on (usually at expiry).

Yes, that’s the theory! The reality is that covered calls won’t trigger a cash drawdown but cash secured puts can and do at the worst possible moment that can cascade into a margin call. In other words, the difference is in the risk profile.

The Captain

[MarkR]

@mostlylong

This reminds me of two earlier discussions on how collateral for an option trade represents an accounting cash flow in an IRR calculation.

Indeed I remember! And since then I’ve updated my IRR tracking spreadsheet to account for that accounting cash flow. It seems to have ever so slightly raised the IRRs due to the small extra cash flow of the interest received.

The problem that still remains is that in a taxable brokerage account, the calculation of “margin” required (there is a relatively complicated way to calculate it based on price, strike, etc) is much lower than in a tax-advantaged account (the entire exercise price is required to remain in cash). It’s not a big problem and I’ve simply been using the latter method for taxable accounts as well.

@captainccs

The reality is that covered calls won’t trigger a cash drawdown but cash secured puts can and do at the worst possible moment that can cascade into a margin call. In other words, the difference is in the risk profile.

Nope. I don’t see it. Maybe you could illustrate it to use with some real numbers. Here’s the scenario - Joe has exactly $100,000 cash in his brokerage account, he’s new to the option game and wants to start trading slowly. His target stock right now is Tesla. Show the numbers each way (selling naked puts or buying stock and selling calls against it). You can apply the risk profile either way - let’s say a large decline in the stock price or a large increase in the stock price at the worst possible moment. I think you more or less know what the profile will look like, but it will be instructive to look at the actual numbers.

(Turns out there’s some long-winded academic theories about this whole thing, but that takes the fun out of discovering and running the numbers yourself! Put–call parity - Wikipedia)

[captainccs]

@MarkR

Nope. I don’t see it. Maybe you could illustrate it to use with some real numbers.

Sorry, that’s too much work. Let me try to explain. If you take the TSLA trade in isolation and it’s the only trade in the portfolio, calls vs. puts, there is no difference. But the portfolio has a bunch of other positions that affect the cash/margin position. If you manage to have enough cash to cover the put assignment there is no problem. The risk is that for whatever reason the cash position is too low caused by the other positions or causes. I had a weird case where my new broker (Bank of America) decided to close my account but would not - could not transfer the puts which were assigned sucking a lot of cash out of my account. It cost me quite a bit and I decided to play safe not selling puts any more. If I remember correctly it was around the time of the 2008 crash when Bank of America bought my low fee broker’s bank and changed the rules to suck more money from their new clients. I hope this explanation helps.

The Captain

[MarkR]

@captainccs

I had a weird case

Weird cases can cause all sorts of issues. But I’m discussing the usual cases. Selling a cash covered put is almost always functionally equivalent to buying stock and selling a call against it. It HAS TO be that way, because if the two ever get too far out of whack, you (someone) could take advantage of that fact and arbitrage it away for guaranteed profit.

Talking about a weird case, a few months ago I had a weird case in which I couldn’t roll covered calls and ended up being assigned and have to dispose of the stock. Wasn’t so terrible because I wasn’t too averse to disposing of it. This was shares of Astrazenica (AZN) and I had covered calls at 92.5, 95, and 97.5 strikes. Anyway, for some odd reason the company decided to reverse split the stock at 1 for 2, and they didn’t adjust the options, and instead issued new options at 2x price. So, I couldn’t roll unless I did it manually, and because these were VERY thinly traded options, I wasn’t willing to accept that risk. In the end, the 97.5s expired worthless, the 92.5s exercised and were assigned, and the 95s were exercised and assigned.

But you can’t invest for the weird cases. Especially if you want to do it every month.

[captainccs]

@MarkR

But I’m discussing the usual cases. Selling a cash covered put is almost always functionally equivalent to buying stock and selling a call against it.

I already agreed with that! What happed could not have happened with covered calls.
If they are functionally equivalent, why use the one that has the weird risk the other doesn’t?

@MarkR

But you can invest for the weird cases.

What does this mean? Sorry, I don’t follow.

The Captain

[MarkR]

@captainccs

What does this mean? Sorry, I don’t follow.

Meant “can’t” LOL! …

[captainccs]

@MarkR

Meant “can’t” LOL! …

back to you! Shift happens!

But seriously, if you have two otherwise identical options, why pick the one that could trigger a probrem when the other won’t? I’m not telling people not to do it, just that I wouldn’t.

The Captain

[MarkR]

@captainccs

why pick the one that could trigger a probrem when the other won’t?

I still disagree with this premise. I don’t see how a portfolio that can support first buying $40,000 (100 shares) of stock and selling a call for $1600 is any different than a portfolio that can support selling a put for $1550 and later buying stock for $40,000 is any different. In BOTH cases, if your margin level is too high at any point during the trade, your brokerage may, at its discretion, liquidate things that you may not want liquidated. And in BOTH cases, if your margin level is sufficient at all times, you will have essentially the same results.

I never used puts this way until after I read the piece by Buffett when he sold that huge S&P500 put a few decades ago. He said that he used that structure because both the capital and the consideration remains in HIS OWN hands for the duration. That means there is almost no risk of default from the other side. And it’s so true - when you use a covered call, the bulk of the capital remains in the “other person’s” hands, only the consideration for the call remains in your hands. And when you use a put, the entire capital remains in your hands, the $40,000 to eventually buy the stock, AND the $1550 that you received for the put (and meanwhile, you earn interest on the cash as usual). So that is a weird (rare) risk that goes the other way.

The actual quote is - “Berkshire therefore always holds the money, which leaves us assuming no meaningful counterparty risk.”

[captainccs]

@MarkR

I still disagree with this premise.

I guess we’ll just have to agree to disagree.

The Captain

[mostlylong]

@MarkR

until after I read the piece by Buffett when he sold that huge S&P500 put a few decades ago. He said that he used that structure because both the capital and the consideration remains in HIS OWN hands for the duration. That means there is almost no risk of default from the other side And it’s so true - when you use a covered call, the bulk of the capital remains in the “other person’s” hands, only the consideration for the call remains in your hands.

So what about risk of default?

What is your counterparty risk when you, as a retail investor, sell a listed call option?

Zero.