The Hidden Margin Debt

 

The latest available data puts US margin debt at an all time high of $1.25 trillion (FINRA, Feb. 2026) - see chart below.  But is this all there is, or is there additional hidden leverage? And could the part that is hidden be concentrated amongst jew a few borrowers?

Margin Debt Reported By FINRA (chart by Yardeni Research)

It is no secret that major shareholders - particularly in the tech sector - do not sell their shares to raise money since they would have to pay capital gains tax.  Instead, they borrow against their shares in the form of securiries-based lending (SBL).  Such loans basically margin debt, but they do not appear in the FINRA data since they are mostly arranged directly with private banks, domestically and abroad, and are not subject to disclosure rules. 

Nobody really knows how much money is involved in SBLs but some estimates put it at $500 billion, and perhaps more.  Therefore, the actual leverage out there is significantly bigger than what is shown by FINRA numbers alone.  Furthermore, since the equity market is currently very, very narrow and just a handful of individuals own large swaths of stock in the few stocks that make up the US stockmarket, SBL debt must also be owed by very few people (I'm sure we can all name them, but Elon Musk is a prime example with his purchase of X with loans collateralized by Tesla stock).

The risk of leverage exacerbating a market correction is always present because a margin call affects all, no matter who you may be.  

High hidden leverage + very narrow market + few individuals participating + index ETFs = ???

PS For weeks now I have observed gyrations that can be explained as "support operations" in US equity markets. Add this to the mix above...

Inflation Or Deflation?

The Iran War is causing energy prices to spike world-wide.  Energy is the most important cost element in consumer price inflation, since it effects everything from transportation, heating/cooling, fertilizers, food, chemicals, to building materials and pharmaceuticals. 

Therefore, cost driven CPI will inevitably go higher if things do not normalize in the Persian Gulf in the immediate future.

• Inflation for Goods: A spike is to be expected in consumer good prices, particularly for staple necessities such as fuels, natural gas, food and housing costs.  Let's call these "inelastic" expenses, although consumer behavior may shift after a few months of prolonged high prices (this may happen faster than before because in the US, particularly, a very large portion of households live hand to mouth and will have to cut spending even for necessities (the K-economy).

But what about assets such as equities, real estate, private credit and equity, junk bonds, precious metals, cryptos, collectibles?  Prices for these depend on spending and saving patterns by the top 10% of US households who control 80% of wealth.  How will they react to a war that drags on?  I make the following assumptions:

1. Risk premiums will re-adjust across all markets.
2. Short term interest rates may go higher, putting downward pressure on equity and precious metal valuations, on top of risk premium adjustment.
3. A squeeze in disposable income will lower discretionary spending for luxury goods and services, including travel, vacation homes, collectibles. Valuation for their respective assets will be marked down.

• Deflation for Assets: As risk appetite recedes, asset prices will be marked down.  Coming into an already highly elevated market for all risk assets, markdowns may be very substantial.  

Therefore, Inflation for consumer goods and Deflation for risk assets (if the Gulf War drags on).

One final possibility: the US may have to rework its tax policy in order to raise revenue to support the "bottom" 80% part of the K-society.  I will not be surprised to see President Trump announce a "temporary, wartime" wealth tax.  After all, the war is already costing around $1 billion per day and the tariff window has been firmly shut by the Supreme Court. Mr. Trump may, in fact, be the only President who could propose and pass such a tax (he is a populist, after all).

 The negative effect of a wealth tax on all risk assets is easy to predict, while long Treasury bonds and the FX value of the dollar may benefit.

The Danger Of “Passive Investing”

Warren Buffet is unquestionably the greatest value investor of all time. Yet, he may have unwittingly recommended the worst investment strategy to individual investors: buy and hold index funds.

It was done with the best intentions, of course, since most active money managers routinely underperform broad indexes and charge high fees. 

His advice, among others, led to a massive influx in index funds which now amount to $14 trillion in US equities alone (ETFs plus index mutual funds). That’s 25% of the market capitalization of S&P 500. 

Combine this with algo trading and we now live in a world of “passive investing” - an obvious oxymoron and the very antithesis of Mr. Buffett’s own strategy. 

Index investors trust that markets will always perform as usual. They are akin to warriors who use “fire and forget” weapons, sure that their missiles will find the target no matter what. That’s a grave mistake at a time of global fundamental changes:

1. Geopolitical power is shifting East.
2. Climate change.
3. Energy transitioning from fossil fuels to renewables challenges the dollar’s supremacy.
4. Consumer spending, and therefore GDP growth, is limited by the K-economy.
5. The US may finally deal with its fiscal problems and raise taxes, particularly by imposing a wealth tax plus a VAT-type consumption tax.