With every major news media outlet predicting the downfall of the American economy it is no wonder the stock market has fallen off a cliff.
The question is: is all this real or is it
simply a bad case of the old times, THE SKY IS FALLING aided by very
sophisticated game playing.
One thing is for sure. If you watch the news or
any of the awful cable networks you could easily begin to believe that
everything you buy is going to be sky high-priced, your 401K is going to look
like a black hole, everything from the hot dog stand on the corner to the
bastions of manufacturing and retailing are simply going to crumble.
And they would have you believe that Donald
Trump is solely responsible for all that is about to happen.
Ever since President Trump began announcing
tariffs and adjusting them on the fly the stock market has been through a
roller coaster of difficulties using the application and management of the
tariffs as the excuse for the volatility.
The fact is that a lot of people in hedge funds,
and the big investors have made a lot of money off the roller coaster ride of
the stock market.
Impact of High Leverage on Market
Volatility in Q1 2025
Research provided by ChatGPT
High Leverage and Volatility in Q1
2025
During Q1 2025 financial markets were unusually
sensitive to even modest news or rumors. In many cases hedge funds and other
institutional investors had carried high net leverage (often 40–60% or more),
so small shifts triggered cascade effects. For example, growing “tariff war”
fears around March caused a sharp selloff: U.S. stocks plunged on March 10 as
“relentless tariff wrangling” and government shutdown worries raised recession
risksreuters.com. The tech-heavy Nasdaq fell ~4%,
its worst day since 2022reuters.comreuters.com. In that selloff high-profile
stocks tumbled (Tesla –15.4%, crypto-related Coinbase –17.6%)reuters.com, reflecting how crowded long bets
were being unwound. In short, even speculation about trade policy or other
“bad” news led leveraged funds to de-risk aggressively, amplifying the moves.
- Trade-policy shocks and margin calls. U.S. tariff announcements
(and related rumors) drove one of the Q1’s biggest jolts. In early April,
President Trump abruptly unveiled broad new tariffs, and global markets
“plummeted” over three daysreuters.com. Volatility-targeting funds
alone reportedly had $25–30 billion of equities to sell, plus another
$23 billion from leveraged ETFsreuters.com. Brokers issued massive
margin calls: OSTTRA data showed derivative-related calls nearly tripled
after the tariff newsreuters.com. Variation margin alone
jumped ~35% (extra collateral needed), implying hundreds of millions in
new cash demands per fundreuters.comreuters.com. A Bank of America note
likened the vicious selling to a “feedback loop” – even safe-haven assets
like gold fell as leveraged funds scrambled for cashreuters.comreuters.com. In Asia, Chinese stocks
fell sharply (Hong Kong tech index was off ~27% in one monthreuters.com) and outstanding margin
loans in China stayed very high (¥1.9 trillion)reuters.com. South Korea’s market also
saw a spike in forced sales: in two days after lifting a short-selling
ban, about ₩28 billion of stock sales were triggered by margin calls
(versus ₩11.5 billion for all of March)reuters.com.
- Sectoral squeezes. Leveraged hedge funds tend to crowd into “hot”
sectors, so when prices turned, the selling pressure was extreme. For
instance, technology and consumer names – where many funds were heavily
long – bore the brunt. Goldman Sachs noted that a tech-driven selloff on
March 6–7 wiped out roughly half of many funds’ 2025 gainsreuters.comreuters.com. On that day the Nasdaq
plunged 4% (its largest drop since 2022), and growth stock indexes fell
~3.8%reuters.com. Major tech issues and
related stocks crashed: Tesla plunged 15.4%, its biggest 1‑day fall since
2020reuters.com, and crypto plays like
Coinbase and MicroStrategy dropped ~17% eachreuters.com. Reuters reported that hedge
funds had been “mostly long” these sectors and got caught in the selloffreuters.com. Consumer discretionary was
another crowded long, and funds dumped those stocks heavily, anticipating
a downturnreuters.comreuters.com. Conversely, when any
positive spin emerged (e.g., post-election in Germany), even defensive or
small-cap stocks rallied. After Germany’s Feb 23 election, for example,
domestically-focused mid-cap stocks jumped ~1.5% on hopes of a pro-growth
governmentreuters.com.
- European political shifts. Policy news in Europe also fueled volatility.
In particular, Germany’s snap election (Feb 23) and talk of changing the
constitutional “debt brake” kept markets on edge. Polls leading up to the
vote repeatedly warned that a blocking minority of fringe parties (AfD and
new left party) could “unsettle markets” by preventing fiscal reformreuters.com. Reuters noted that Europe’s
largest economy could see “months of uncertainty” and that elections were
a key focus for tradersreuters.comreuters.com. In practice, investors bid
up German stocks when a business-friendly outcome looked likely (DAX +0.6%
on Feb 24reuters.com), but even then “some
uncertainty lingered” – the AfD and Left secured enough seats to block
changes to the debt brakereuters.com. More broadly in Europe,
hedge funds sold record amounts of stocks through March and April. A
Goldman report found March–April selling was at a 10-year high, driven by
U.S. tariff fears and a strengthening euro hurting exportsreuters.comreuters.com. Hedge funds especially
unloaded single stocks in tariff-sensitive sectors (autos, luxury goods)reuters.com and kept heavy short bets on
pharma until late Aprilreuters.com.
- Leverage ratios and forced liquidation. All these swings were
amplified by leverage. Hedge funds often borrow cash or stock to boost
returns, so when markets tumble, they hit margin calls. Morgan Stanley
reported that U.S. long–short funds’ net leverage (net exposure as a % of
NAV) fell from just over 50% in January to only ~37% by early April –
“just shy of historical lows”reuters.com. This rapid deleveraging was
largely in response to margin calls. OSTTRA’s analysis showed a
hypothetical fund with 100 daily margin calls ($5M each) would normally
need ~$500M in collateral, but the tariff shock added roughly $900M more
per day, raising obligations to ~$1.4Breuters.com. In short, variation margin
requirements exploded. Prime brokers noted that even traditionally
defensive stocks were being liquidated – a classic sign of forced selling
under margin pressurereuters.com. One strategist quoted how
smaller funds are like “dinghies in the wake of a supertanker” – when big
multi-strategy funds dump positions, liquidity vanishes and weaker players
can “capsize”reuters.com. For example, a JPMorgan
note found hedge funds unwound single-stock bets on Friday March 7 to the
greatest extent in two years (comparable to March 2020)reuters.com. This synchronized selling
was exactly the “waterfall” effect driven by high leverage and margin
calls.
- Retail and ETF leverage. Elevated leverage wasn’t limited to hedge
funds. Retail investors flocked to leveraged ETFs after the selloff,
magnifying short-term moves. By late April leveraged equity ETFs had
record inflows (~$11 billion in April alone) as investors tried to “catch
the rebound” from the tariff-induced dropreuters.com. These products target
multiples of daily returns, and their rapid buying/selling can itself
deepen swings (and trigger margin call-style liquidations in the futures
markets underlying them)reuters.com.
In summary, the high leverage in hedge funds
and institutional portfolios meant that even modest news or rumors – from
tariff tweets to election polls – caused outsized market moves in Q1 2025.
Sectors with crowded, levered bets (notably big tech, consumer goods, Chinese tech,
and luxury names) saw the most violent swings. As reports noted, the “cavalry”
(Fed or Government action) was not coming to bail them out in the short runreuters.com, so declining collateral values
forced mass liquidations. Analysts emphasize that when leverage is high,
volatility begets more volatility: margin requirements and forced selling
created feedback loops that amplified every hiccup in the news cyclereuters.comreuters.com.
Sources: Contemporary market reports and
analyses (especially from Reuters) document these events and quantificationsreuters.comreuters.comreuters.comreuters.comreuters.com.
Let's look at this in comparison to sports betting or Sportsbooks
DFINITIONS:
Key
Characteristics:
- Types of sports covered:
Football, basketball, baseball, boxing, horse racing, soccer, and many
more.
- Betting options: Moneyline
(winner), point spread, over/under (totals), parlays, futures, and prop
bets.
- Formats:
- Physical locations: Often
found in casinos (especially in Las Vegas or regulated jurisdictions).
- Online sports books:
Accessible via websites or mobile apps in areas where sports betting is legal.
Let us rewrite this approach for the financial markets.
A MONEYBOOK
is a place or organization that places and accepts bets (buys and sells) on financial
instruments: based on, rumors, media opinions and events. These bets can be placed
on a wide variety of outcomes, such as which organization or company will gain
or lose, the total amount of money gained or lost, or specific company performances.
They can also be triggered by the financial condition of the holder of the
securities i.e.: leveraging.
Financial leverage is the strategy of using debt to acquire additional assets,
with the aim of amplifying returns to equity holders. The idea is to use
other people’s money to potentially
earn more than you would with only your own capital.
Key
Characteristics:
• Types of activity covered: Everything
that is publicly traded on the stock markets and the accompanying financial
instruments.
• Selling/Betting options: Market Order,
Limit, Long, Short, Day Trading, Swing Trading, Futures and custom methods.
• Formats:
o Physical locations: Often found on
Wall Street, primarily in the office of investment firms, hedge funds,
financial management firms, banks and computer programs that are programed to buy
or sell based on complex algorithms.
o Online MONEYBOOK: Accessible via
websites or mobile apps accessible everywhere.
So, if you look at this carefully you could conclude that the stock market these days is merely the millennials Sports Book. When The American stock market has become nothing more than people betting on speculation and rumors with your money but not facts.
It is time to look for a different economic measure for how we are
doing.
E-mail Doc at mail to: dr.gwebb@yahoo.com or send me a Facebook (E. Eugene Webb) Friend request. Like or share on Facebook, follow me on X at @DOC ON THE BAY.
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