4 ms·

So I read somewhere that 40+% of all investors are currently leveraged, which seems like an insane figure given the recent influx of "Robinhood investors" into

by skohan 6y ago

So I read somewhere that 40+% of all investors are currently leveraged, which seems like an insane figure given the recent influx of "Robinhood investors" into the market. It makes me wonder: who's on the hook if all these unsophisticated investors get wiped out? For a lot of these investors, it will be catastrophic to their personal finances, and this might have knock-on effects on landlords for example when these people can't make rent. Presumably this would also result in a lot of bankruptcies, and if that is the case who is on the hook for all that debt? Probably credit card companies, mortgage lenders, but what I don't know is who is the owner of the debt for leveraged trading? Is that the brokerage themselves? Is it banks? Someone else?

dmurray 6y ago
> 40+% of all investors are currently leveraged, which seems like an insane figure This does sound insanely high given how many investors have passive portfolios. I'm guessing "leveraged" means something closer to "owns at least one option" than "would be wiped out in a 25% market correction". As for people not being able to make rent if their investments go bad, there aren't many people who are paying their rent out of their personal savings and relying on their investments. Most people work, pay rent out of their earnings, and if they're lucky put some of the excess into savings or brokerage accounts. People with larger savings are likely to own their own home. Of course, if there's a market downturn this will lead to bankruptcies, rent defaults and a knock on effect on landlords, lenders, etc. But the main causal method there is people losing their jobs, not their savings.
- skohan 6y ago
  > I'm guessing "leveraged" means something closer to "owns at least one option" than "would be wiped out in a 25% market correction". I hope so, but do we know this? My understanding is that apps like Robinhood make it very easy to do options trading, and there's a whole online subculture around this type of trading. Can we actually rule out the possibility that a non-trivial percentage of the recent run-up of the stock market is based on "dumb money" from unsophisticated investors, much of which they may not actually have? edit: Also I just searched Robin-hood options trading on youtube and this video was the second result: https://youtu.be/EQRLRYvRYOM?t=568 https://youtu.be/EQRLRYvRYOM?t=568 I find the UI effect when he finishes the option buy to be very telling, and it's interesting to think about who the intended audience of this content is.
  - edoceo 6y ago
    Bloomberg thinks 20% of the market is retail https://www.bloomberg.com/news/articles/2020-09-15/big-investors-are-dying-to-know-what-the-little-guys-are-doing https://www.bloomberg.com/news/articles/2020-09-15/big-inves... I don't think we can rule out dumb money. But also, it's not just retail who's dumb.
quickthrowman 6y ago
> It makes me wonder: who's on the hook if all these unsophisticated investors get wiped out? If they’re borrowing on margin, a correction happens, and they get a margin call they can’t pay and end up negative, they owe the money to the brokerage. It’s like any other debt that can be bought or sold, I assume.
- AYBABTME 6y ago
  What happens when too many people that owe money to the brokerage go bankrupt?
  - mcguire 6y ago
    They have insurance. What happens if the insurance system goes bankrupt?
    - parsimo2010 6y ago
      No they don't. The average person's insurance doesn't cover bad stock performance, the only insurance against bad trades is adjusting the beta of your portfolio. What happens when a main street investor gets hit by a crash, depending on how bad the crash is, is that they lose their savings. If they actually end up with debt that they can't repay, they may lose their house (if they own one), declare bankruptcy, and have their credit ruined for several years.
  - quickthrowman 6y ago
    Well, hopefully the brokerage’s risk department prevents that! If too many people went bankrupt and owed margin debt and the brokerage went under, the government would step in and take custody of securities and cash and get them back to the holders, (at some point) who may or may not take a loss if they’re over SIPCs coverage limits of 250,000 cash and 500,000 of securities.
    - skohan 6y ago
      > Well, hopefully the brokerage’s risk department prevents that! Blind-spots do exist, as we have seen in 2008. I'm not saying that I know better, but we can't take it for granted that these organizations have an accurate assessment of all the risks, especially when they are making record profits.
gruez 6y ago
They won't get wiped out because the Fed's going to prop up the stock market at any sign of trouble.
- freehunter 6y ago
  I live in a Northern US state and we have a saying about four-wheel drive in the snow and ice: your car won’t slide as often, but when it does it will be disastrous. Every winter you see the ditch filled with pickup trucks and SUVs who have four or all wheel drive. Usually so deep in the ditch that they need a tow truck. Most of the two-wheel drive vehicles get stuck on the shoulder, where a simple shovel could easily free them. The Fed can keep the market from going down, and they can keep it afloat for a long time. But all that energy builds up like a rubber band, until it snaps. The stock market is going up even though it has no reason to be going up. Which means valuations are higher than they would normally be, and keep going up even though they should be flat or going down. Usually this would be fixed through minor “corrections” like maybe a quarter or two of sliding prices and then quickly back to stability and growth again. But the longer we refuse to let nature find its equilibrium, the more catastrophic the eventual reset will be.
  - MiroF 6y ago
    > But the longer we refuse to let nature find its equilibrium, the more catastrophic the eventual reset will be. What is this "equilibrium"? Why does the Fed taking a super contractionary policy stance seem better to you? Expenditures are rebounding and personal income is at an all time high - both of which seem like pretty obvious reasons why stock prices are not crashing.
    - skohan 6y ago
      > personal income is at an all time high What's this figure? Mean income? Median? Inflation adjusted? Is investment income included in that figure? Not all the indicators are rosy right? I mean unemployment, and failure to make rent payments are both still abnormally high as far as I understand.
MiroF 6y ago
> 40+% of all investors Nope, no remote way that's true. 40% of all retail investors that were surveyed by a poll that probably misses out on people with retirement accounts, etc. self-reported being "leveraged." I'm not 100% confident that the general American public would be able to identify what leverage is/if they are actually leveraged.
- mxschumacher 6y ago
  Agree, in addition it is helpful to observe relative weightings. A retail investor with 50k and 2x leverage has less impact than one 100bn+ fund that isn't borrowing

by skohan 6y ago

dmurray 6y ago

> 40+% of all investors are currently leveraged, which seems like an insane figure This does sound insanely high given how many investors have passive portfolios. I'm guessing "leveraged" means something closer to "owns at least one option" than "would be wiped out in a 25% market correction". As for people not being able to make rent if their investments go bad, there aren't many people who are paying their rent out of their personal savings and relying on their investments. Most people work, pay rent out of their earnings, and if they're lucky put some of the excess into savings or brokerage accounts. People with larger savings are likely to own their own home. Of course, if there's a market downturn this will lead to bankruptcies, rent defaults and a knock on effect on landlords, lenders, etc. But the main causal method there is people losing their jobs, not their savings.

skohan 6y ago
> I'm guessing "leveraged" means something closer to "owns at least one option" than "would be wiped out in a 25% market correction". I hope so, but do we know this? My understanding is that apps like Robinhood make it very easy to do options trading, and there's a whole online subculture around this type of trading. Can we actually rule out the possibility that a non-trivial percentage of the recent run-up of the stock market is based on "dumb money" from unsophisticated investors, much of which they may not actually have? edit: Also I just searched Robin-hood options trading on youtube and this video was the second result: https://youtu.be/EQRLRYvRYOM?t=568 https://youtu.be/EQRLRYvRYOM?t=568 I find the UI effect when he finishes the option buy to be very telling, and it's interesting to think about who the intended audience of this content is.
- edoceo 6y ago
  Bloomberg thinks 20% of the market is retail https://www.bloomberg.com/news/articles/2020-09-15/big-investors-are-dying-to-know-what-the-little-guys-are-doing https://www.bloomberg.com/news/articles/2020-09-15/big-inves... I don't think we can rule out dumb money. But also, it's not just retail who's dumb.

quickthrowman 6y ago

> It makes me wonder: who's on the hook if all these unsophisticated investors get wiped out? If they’re borrowing on margin, a correction happens, and they get a margin call they can’t pay and end up negative, they owe the money to the brokerage. It’s like any other debt that can be bought or sold, I assume.

AYBABTME 6y ago
What happens when too many people that owe money to the brokerage go bankrupt?
- mcguire 6y ago
  They have insurance. What happens if the insurance system goes bankrupt?
  - parsimo2010 6y ago
    No they don't. The average person's insurance doesn't cover bad stock performance, the only insurance against bad trades is adjusting the beta of your portfolio. What happens when a main street investor gets hit by a crash, depending on how bad the crash is, is that they lose their savings. If they actually end up with debt that they can't repay, they may lose their house (if they own one), declare bankruptcy, and have their credit ruined for several years.
- quickthrowman 6y ago
  Well, hopefully the brokerage’s risk department prevents that! If too many people went bankrupt and owed margin debt and the brokerage went under, the government would step in and take custody of securities and cash and get them back to the holders, (at some point) who may or may not take a loss if they’re over SIPCs coverage limits of 250,000 cash and 500,000 of securities.
  - skohan 6y ago
    > Well, hopefully the brokerage’s risk department prevents that! Blind-spots do exist, as we have seen in 2008. I'm not saying that I know better, but we can't take it for granted that these organizations have an accurate assessment of all the risks, especially when they are making record profits.

gruez 6y ago

They won't get wiped out because the Fed's going to prop up the stock market at any sign of trouble.

freehunter 6y ago
I live in a Northern US state and we have a saying about four-wheel drive in the snow and ice: your car won’t slide as often, but when it does it will be disastrous. Every winter you see the ditch filled with pickup trucks and SUVs who have four or all wheel drive. Usually so deep in the ditch that they need a tow truck. Most of the two-wheel drive vehicles get stuck on the shoulder, where a simple shovel could easily free them. The Fed can keep the market from going down, and they can keep it afloat for a long time. But all that energy builds up like a rubber band, until it snaps. The stock market is going up even though it has no reason to be going up. Which means valuations are higher than they would normally be, and keep going up even though they should be flat or going down. Usually this would be fixed through minor “corrections” like maybe a quarter or two of sliding prices and then quickly back to stability and growth again. But the longer we refuse to let nature find its equilibrium, the more catastrophic the eventual reset will be.
- MiroF 6y ago
  > But the longer we refuse to let nature find its equilibrium, the more catastrophic the eventual reset will be. What is this "equilibrium"? Why does the Fed taking a super contractionary policy stance seem better to you? Expenditures are rebounding and personal income is at an all time high - both of which seem like pretty obvious reasons why stock prices are not crashing.
  - skohan 6y ago
    > personal income is at an all time high What's this figure? Mean income? Median? Inflation adjusted? Is investment income included in that figure? Not all the indicators are rosy right? I mean unemployment, and failure to make rent payments are both still abnormally high as far as I understand.

MiroF 6y ago

> 40+% of all investors Nope, no remote way that's true. 40% of all retail investors that were surveyed by a poll that probably misses out on people with retirement accounts, etc. self-reported being "leveraged." I'm not 100% confident that the general American public would be able to identify what leverage is/if they are actually leveraged.

mxschumacher 6y ago
Agree, in addition it is helpful to observe relative weightings. A retail investor with 50k and 2x leverage has less impact than one 100bn+ fund that isn't borrowing