lev·er·age

noun

1. Why the vast majority of my drinks were free in the four-year period from 2008 to 2012.

Wait, that’s the wrong definition. Let me try again.

verb

1.  Use borrowed capital for (an investment), expecting the profits made to be greater than the interest payable.

That’s closer to where I was going with this.

Tuesday was one of those days: A day when a geopolitical black swan demanded any and all space above the digital fold, thereby rendering every other story temporarily irrelevant. December 3, 2024, will go down as the day South Korea very nearly succumbed to a military junta, imperiling four decades of successful democracy.

I’ve been doing this a long time, and I know from experience that on days like these, there’s little use in floating long-winded macro analysis. It hasn’t a hope of capturing many eyes or ears amid a blinding, deafening cacophony.

But just as obese Americans always have room for pecan pie despite having foie gras’d (gavage’d) themselves nearly to death at Thanksgiving feasts across the country, financial news junkies always have room for a short “article” with the word “leverage” in the title, particularly if there’s a “mountain” chart involved. Feast your eyes:

On the left, you’re looking at fresh records for leveraged ETF AUM up near $120 billion. On the right, you can see one reason why that matters: The bar chart shows you the EOD rebalancing impact of those products.

As Nomura’s Charlie McElligott reminded investors, those rebalancing flows have a negative gamma-like effect on the market. “Fresh all-time highs in AUMs within the leveraged ETF universe [are] largely a function of spot, but also too indicative of speculative fervor,” he wrote.

With that in mind, have a look at the figures below, from SocGen’s Andrew Lapthorne.

The chart on the left shows you the breakdown of leveraged product exposure by asset class. (Yes, Andrew’s total for equity product AUM is larger than the $119 billion figure cited above. No, I don’t know why. The point is that AUM’s swelling). The figure on the right is a proxy for the cost of that leverage.

“There has been a surge in demand for levered ETF products,” Lapthorne wrote. That demand, he said, “appears to be adding to the strain on the financial system’s ability to provide them.”

Food for thought, on the off chance you have room.