No. of Recommendations: 7
For charts and links go to
https://discussion.fool.com/t/market-house-of-card...https://www.wsj.com/finance/stocks/the-trillion-do...
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
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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!
finra.org
Margin Statistics
Pursuant to FINRA Rule 4521, FINRA member firms carrying margin accounts for customers are required to submit the following customer information: the total of all debit balances in securities margin accounts; and, the total of all free credit...
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Look at how margin drives the S&P500.
https://en.macromicro.me/charts/415/us-margin-debtimage
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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
