There Is No Leverage in the System

Stocks went down about 9%, and now they are back up to the highs in the span of about two weeks. No fun for me. But I think we learned something interesting from this scenario…

There is no leverage in the system.

I want to share with you a snippet of an email I got from a subscriber:

In my opinion, the equity market is not structurally levered. If anything, it is collectively long vol and running the world’s largest momentum factor strategy.

I think Micron’s chart perfectly explains this dynamic. Since the end of 2024, it is up 300%, while NVDA is up 29%—it was the most crowded long on a fundamental (DRAM prices up 7X) and technical basis. Momentum remained positive in 2026 (stock was up 45% in January) all the way to March 18 earnings. They raised Q3 Rev guide by 40%; it trades at 5X. The stock went from $460 to $311 by March 31 and is now back to $460 by April 14. Its price action literally stopped out all these strategies and even forced out retail longs.

But nobody was levered; there was no clearing event other than exiting longs and maybe hedge funds shorting. And now there are no sellers, but the models will buy it back. That, in a nutshell, is how to explain price action in equities. Until we get a real currency or sovereign debt crisis, equites are unlikely to crash due to a lack of leverage.

I have a saying about this: To err is equities, but to really screw things up takes fixed income.

Oh, there is leverage. There is plenty of leverage out there, but it is all in fixed income. It is all in private credit. And at some point, that will matter, but for the time being, it doesn’t. If you’re looking strictly at stocks, and you looked at a chart of margin usage, yes, it is going up over time; but in stocks, you can only get 2:1 leverage (outside of options and leveraged ETFs, which are growing but still not all that large). In the world of private credit, you’re getting leverage on top of leverage on top of leverage.

One of the things I was saying in The Daily Dirtnap (and I should have listened to myself) was that we were not going to get a bear market out of the Iran war. It would have to be something structural, like private credit, that would take us down. As we’re seeing, gas prices were pretty cheap to begin with, and believe it or not, they’re still not all that expensive in real terms, and the economy is adjusting to it just fine. I’ve never been someone that said that high oil prices were going to spark off raging inflation that would take down the economy. And the difference between 2026 and 1973, 1979, and 1990 is that the Western Hemisphere produces a lot more oil now, and we’re not as dependent on the stuff coming out of the Middle East. So, if you’re wondering why the market is unch after a month of fighting and oil prices $30 higher, that’s why, as incredible as it may seem. Of course, all of this is obvious in hindsight, but not so obvious when you’re going through it. And the worst may be yet to come with the war—you never know.

As bad as the dot-com bust was, if you were around during that time period, the VIX never got much above 40. There wasn’t really any panic selling, aside from a short period during July of 2002. But it was a brutal bear market, obviously, with the SPX down 50% from the highs and the NDX down 80% from the highs. It also lasted a long time, almost three years. And it was painful. But it wasn’t a deleveraging, like we had in the financial crisis; and if you recall, during the dot-com bust, we barely got a recession. There were wealth effects, but there was no real impact on the economy. Like I said, to err is equities, but to really screw things up takes fixed income.

So, I am kind of wondering if the Iran War was the warmup and that private credit will be the main event. You might be wondering how big of a problem private credit is. Well, it is about twice the size of the high-yield market. Big, but not as big as subprime in 2008. Anyway, not going to doomer this to death over private credit; I’ve talked about it before, and everyone knows the risks.

For perspective, 2018 was a time when there was some leverage in the stock market, and we had a 20% drawdown very quickly, and then we found a market-clearing price and stocks got back on the horse. But no, I’m not seeing a lot of leverage in stocks here. Nobody was getting margin calls at the bottom two weeks ago.

You all know about the money market fund balances, and people have been trained to buy the dip. All too predictable. They say that the definition of insanity is doing the same thing over and over again and expecting a different result.

SIC Is Around the Corner

Before I go, I should mention that we’re coming up on Mauldin Economics’ 22nd annual Strategic Investment Conference (SIC)—a five-day live‑streamed event (May 4, 6, 8, 11, and 13) that I’ll be participating in.

This year’s topic: a trader’s-eye view to a market being hit by war, inflation, liquidity shifts, and sharp moves in rates and commodities. I’m looking forward to reconnecting with Jeff deGraaf, a former Lehman colleague and overall great dude. We’ll be joining forces to break down what the market is really saying—and what you may be missing if you’re relying solely on the headlines floating around.

Pencil us in for Monday, May 11, at 4:05 pm Eastern. Be there or be square.

Oh, and for financial professionals, SIC 2026 has been approved for 24 CFP® Board and 24 IWI credits—the most ever offered.

I’ll see you there.

Jared Dillian, MFA