1) People who use leverage always
insist that it is perfectly safe "if you know what you are doing," and love to assert that they are actually reducing
risk by using it.
2) The longer a bull market continues, the safer and more predictable assets look. Leverage works by exploiting advantages that can be gained by successfully predicting how assets behave. The more predictable things look, the more attractive leverage looks. And, of course, the cheaper it is to borrow money, the more attractive leverage looks.
3) Nicholas Nassim Taleb testified
Leverage is a direct result of underestimation of the risks of extreme events--and the illusion that these risks are measurable.
I can't find the exact quote, but he has said that academics and economists always favor leverage because if
you believe your models are correct, they lead to improvements in efficiency-and they don't perceive the increase in fragility.
4) Charles P. Kindleberger wrote:
Speculative manias gather speed through an expansion of money and credit or perhaps, in some cases, get started because of an initial expansion of money and credit.
All leverage does not in itself cause manias, panics, and crashes, but manias, panics, and crashes are always associated with expansion of leverage. Kindleberger notes that it's hard for a government to control this because
The problem is that “money” is an elusive construct, difficult to pin down and to fix in some desired quantity for the economy... My contention is that the process is endless: fix any M1 and the market will create new forms of money in periods of boom to get around the limit...
(Quotes lifted from a web search that turned up this article
5) I'm not going to pile on NTSX except as one of many indicators of a trend. The 50% leverage in NTSX, when used incorrectly
simply as a way to make more money, isn't very extreme and probably isn't going to ruin anybody. Measured by standard deviation, the ARK Innovation fund has been twice as risky as NTSX.
Triple leveraged is a lot riskier than 50% leveraged. Leveraged 100% stocks
is risker than leveraged 60/40.
I think the proposed UPAR ("RPAR Ultra Risk Parity ETF")
ETF is scarier, because it takes a financial engineering "risk parity" confection that already uses leverage and applies 160% leverage on top of that
. I'm not sure if this is literally
"leveraged leverage" but it sounds like it.
6) It's just a symptom. More indicative than either, in terms of the spirit of the age, is the attempt by Direxion to launch a leveraged bitcoin ETF in 2018. And more indicative than that is the 2010 suggestion by two professors that leveraged mutual funds ought to be offered in 401(k) plans.
7) Indeed, one of the things that has bothered me all along about leveraged ETFS is it was leverage that gave investment companies a bad reputation in the 1930s, and strict limitation of leverage
was supposed to be one of the protections of the Investment Company Act of 1940. It is supposed to be limited to 33.3%. But where there is a will to avoid regulation, there is a way. The act only restricts mutual funds and ETFs from literally borrowing money. Achieving something similar through the use of derivatives has allowed to mutual funds and ETFs to circumvent the restriction.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.