Monday, December 02, 2024

Done In By Misusing Leverage

Two quick hits.

Posted to Bluesky by Sean Brodrick.


Part of the story obviously is that there are now dozens of leveraged ETF versus a handful the further you look on that chart from right to left. This is an indication of some form of excess even if we can't precisely nail it down. 

That people are speculating with leverage on 2X Microstrategy, Nvidia and Tesla ETFs won't be the thing that causes the music to stop but they will mark the era when and if things go bad with this. If you put 3% into Ariba Networks into a diversified portfolio in 2000 or bought a house you could comfortably afford in 2007 then you had a setback but weren't blown up. 


I posted the above joke on Bluesky a few days ago. This person will get blown up if anything bad ever happens, absolutely destroyed. We talk frequently about leveraging down or using leveraged funds to set cash aside which is a different thing than leveraging up. It's not the use of leverage that hurts people, it is the misuse of leverage that hurts people. 

Here's an email from a mutual fund company where the fund tries, and generally succeeds, to be a horizontal line that tilts upwards.


Here's the text of the email.


The name of the fund doesn't matter, so I removed it. The content is almost something I would write. The T Rowe Price Total Return a little less so but the chart makes a point I've been making for ages about bonds. I think the top line on the chart, the purple line, is what people think bonds do. The other lines show the reality of what bonds actually do. If the correlation to equities is currently in a state of flux, that is to say the relationship between the two has become far less reliable, then I don't know why someone would want bonds with duration like the typical core bond fund has.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

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