I’ve been reading Andrew Ross Sorkin’s new book 1929. It follows some of the leading players on Wall Street and Washington during the 1920s bull market, the crash, and the subsequent economic and political fallout.
Markets are complex and there is seldom a single factor that leads to a crash. Yet Sorkin shows that the magnitude of the crash and resulting economic fallout largely resulted from investors using margin to buy shares.
Borrowing money to purchase shares was common practice for nearly every type of investor. The wealthy executives running Wall Street banks and investment companies used margin. The first-time investors who fueled the bubble used margin. The possibly fictional shoeshine boy who famously gave stock tips to Joseph Kennedy probably used margin.
In the 1920s banks only required investors to put up 10% of the purchase price of a share. That 90% loan amplified returns significantly – if the market went up. By 1929 10% to 12% of the total market value of New York Stock Exchange listed shares were made up of borrowed money.
There is a cascading effect in any significant bear market. A market drop causes other investors to sell, which induces more selling. In October 1929 margin lending acted as an accelerant to the cascading effect as investors were forced to either put in more capital or have the shares sold by their broker.
Margin lending gained a well-deserved black eye after the 1929 crash. In 2025 $16.7 billion of margin loans were outstanding in Australia which represent about 1% of the total value of local shares. But that doesn’t mean that investors can’t – and aren’t – gearing their investments.
Gearing in 2026
Investors have far more choice today when it comes to introducing gearing into a portfolio. Leveraged ETFs are growing in popularity with the largest being Betashares Geared Australian Equities Complex ETF which has $580 million in assets. Betashares alone has 13 geared ETFs.
There is Fundlater which allows investors to acquire one of four diversified portfolio choices by putting down 40% of the investment and borrowing the remainder. NAB Equity Builder provides loans for investing. Both products are different from traditional margin lending as they come with a set payment schedule made up of principal and interest.
There is debt recycling where investors borrow money against their home to invest while gaining a tax advantage.
Australia is one of the only countries in the world that permits contracts for difference or CFDs which allow investors to add gearing to short-term speculation on shares.
Australians are very comfortable with borrowing money and we have the second highest household debt levels in the world. Given that markets have appreciated significantly since the global financial crisis and have bounced back quickly from dips many investors see little risk from gearing.
Are markets at risk given increased gearing?
Structurally there is less risk from today’s version of gearing than in 1929. The forced margin selling doesn’t occur in any of the new ways that investors can gear their investments. Due to regulatory changes margin buying occurs with less debt.
That doesn’t mean there isn’t any risk. I suspect that many of the investors who are gravitating to these products don’t fully understand how they work. For instance, geared ETFs can suffer from various degrees of volatility drag that may result in long-term returns differing from what an investor would expect from the gearing ratio.
Additionally, in any market drop gearing exaggerates losses which makes it more likely those investors will sell. After a long bull market complacency sets in and for many investors now is one of those times.
Morningstar’s annual Mind the Gap study compares the returns of funds and ETFs with the returns of the investors who’ve owned those funds and ETFs. And yes, there is a difference.
Investor returns are influenced by the timing of buy and sell decisions. The gap between investment and investor returns is an indication of how poor we are at making decisions. Each poor decision is a point of failure.
The cumulative impact was a 1.10% gap between investment returns and investor returns over the previous decade in our latest study. Collectively investors are not up to the challenge in the best of times.
Given this is an annual study the size of the gap will fluctuate each time we run a new set of data. Over time we’ve noticed several patterns. The gap widens if there is more volatility - a feature of all geared products.
The behavioural issues associated with volatility are evident when different types of investments have different levels of volatility—say share ETFs and bond ETFs. The investor gap is bigger for share ETFs than bond ETFs. This suggests the gap is bigger for geared products and non-geared products.
It is also evident when different periods of time have different levels of volatility. For instance, in 2019 the gap was around 1%. In 2020 with turbulent markets in response to COVID the gap widened to close to 2%.
Final thoughts
I’ve been surprised at how many investors are casually using gearing as a foundational part of their long-term investment strategy. Maybe I shouldn’t be. Throughout history investors have been looking for a short-cut to riches.
I don’t see gearing at these levels as a systemic risk. Instead, I think the probable losers are many of the investors that are overindulging in these products. Caveat emptor.
Mark LaMonica
Also in this week's edition...
Kaye Fallick catches up with UK retirement expert Guy Opperman for some suggestions on how super funds can improve their support for members in deaccumulation.
Harry Chemay with a reminder that the success of a retirement strategy is based on both the timing of cash flows and the sequence of returns.
Most SMSF members have likely ignored the new Payday regulations. Meg Heffron outlines some areas to look out for.
Media reports continue to forecast wide scale AI-related job losses. Nick Maggiulli looks back on the history of technological change and outlines why he thinks these forecasts are inaccurate.
The government is exploring taxes on wealth. Chris Evans, Peter Mellor and Richard Krever with their take on tax policy.
Why aren’t oil prices higher? Given the level of disruption history suggests they should be. Jason Teh looks at the impact of structural changes to the oil market to explain today’s prices.
Rachael Rofe outlines changes to philanthropic tax laws.
This week's white paper from GSFM affiliate Man Group looks at who can solve the fundamental economic problems AI faces.
Curated by Mark LaMonica and Leisa Bell
A full PDF version of this week’s newsletter articles will be loaded into this editorial on our website by midday.
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Weekend market update
Two articles from Morningstar this week. I looked at some new research from Professor Bessembinder that shows how few shares generate most of the wealth from the share market. My colleage Simonelle looked at 3 ASX buy the dip candidates.
From Shane Oliver, AMP
Global share markets rose further over the last week on optimism for a peace deal with Iran and Iran declaring the Strait of Hormuz “completely open” for the duration of a 10-day cease fire between Israel and Lebanon. For the week US shares rose 4.5% reaching new record highs, Japanese shares rose 2.7% also reaching a new record high, Eurozone shares rose 2.1% and Chinese shares rose 2%. Despite the positive global lead and being yet to reflect the further rally in US shares on Friday, Australian shares fell 0.2% for the week reflecting concerns about a bigger boost to inflation in Australia and a bigger hit to economic growth as highlighted by sharp falls in consumer and business confidence and expectations that the RBA will raise rates again and remain more hawkish compared to other countries.
On the road to peace with significant pressure on both the US and Iran to cut a deal – and share markets have been moving to factor this in. Despite the collapse of the initial US/Iran peace talks last weekend and the US blockading Iranian ships through the Strait, the news was good in the last week with Iran saying the Strait is now “completely open” and Trump saying the US and Iran had held “some very good discussions” and that Iran agreed to suspend its nuclear program leading to optimism that a deal will soon be finalised. So, we continue to lean to the view that Trump will find a way to stay on the off ramp from the War and are now more confident in this. Pressure on Trump to back down remains very high with only a third of Americans supporting the War and his approval rating running below where it was 8 years ago and lower than Biden’s, because his policies including the War are worsening the affordability concerns that saw him elected in 2024. The Republicans are seeing increasing odds that they will lose both the House and the Senate in the midterms. And likewise, pressure on Iran to reach a deal is high as the US switch from bombing (which can unite a population) to even tougher economic sanctions via the blockade of Iranian oil exports will intensify popular discontent with the Iranian Government. And it may conclude that its ability to cause pain for the US by effectively blocking 20% of global oil supply means it has no need for nuclear weapons to ensure it survives. So, it’s understandable that share markets have bounced back. This has ranged from a 70% recovery of the falls in Australia to a rebound to record highs in the US and Japan, with US shares moving to factor in another run of strong profit growth for the March quarter with earnings growth expectations running around 14%yoy.
That said, there is a risk that shares may have run a bit ahead of themselves – particularly in the US where they are now at new record highs:
- There is still some (albeit low and declining) risk that the War could re-escalate again if agreement on a deal is not reached after all. This could see the US expanding its bombing and Iran retaliating by hitting more ships in the Strait of Hormuz and getting the Houthi’s to do the same in the Red Sea.
- While the news so far regarding the Strait has been positive, there is still some uncertainty around its reopening with Iran saying its only for the duration of the 10 day Israeli ceasefire in Lebanon, that it will close it again it if the US blockade of its own shipping is not removed and that the passage of ships must coordinate with Iran. Up till Friday the flow of ships through the Strait while up from its lows remained a fraction of normal levels.
- A bout of stagflation – higher inflation and weaker growth - is already baked in in the near term as even if there is a quick and sustained increase in ships flowing through the Strait it will take several months for global oil and related product flows to return to normal.
- The global economy is now getting closer to crunch time regarding the supply of oil - as the last ship load of oil to leave the Gulf before the War started is now getting refined into fuel and the longer the hit to oil supply continues the greater the risk of the global economy moving beyond a short term bout of stagflation into a recession along the lines flagged by the IMF.
- Australia is particularly vulnerable as it imports 80-90% of its fuel. Our rough estimate is that if the flow of oil through the Strait does not quickly resume we could survive till late next month but beyond that fuel rationing would likely be required which would mean a direct reduction in economic activity and the likelihood of recession. Disruption to production at the Geelong refinery due to a fire highlights the risk for Australia, although its looking like it won’t affect fuel supply and production could be back to normal in a few weeks.
- And if a deal is reached to end the War and reopen the Strait the quality of that deal will be important. Because if the US just leaves Iran more aggrieved and, in some ways, more powerful than ever, it could all flare up again – maybe after the US midterm elections are over.
So, the risk of a renewed spike in oil prices and more volatility in shares remains if a deal is not reached after all and the Strait if not really opened. Historically the pattern of weakness in midterm election years in the US, which on average has seen a 17% top to bottom fall in shares, starts around now and runs out to around October. Any renewed weakness in US shares would affect the Australian share market. As such, it remains a time for those with a short-term investment horizon to remain a bit cautious.
A supply side shock – which both adds to prices and detracts from economic activity - presents tough choices for central banks but the experience of the 1970s oil shocks which contributed to higher inflation and inflation expectations suggests central banks will likely initially focus on the hit to inflation – biasing interest rates to the upside rather than the downside. Consistent with this market expectations for major central banks policy rates have increased since the War started, with only a 33% chance of a rate cut priced in for the US down from more than two rate cuts expected prior to the War and Europe, the UK and Canada now all expected to raise rates this year.
In Australia, we expect the RBA to hike again but it’s a very close call. The challenge facing the RBA was highlighted by Deputy Governor Hauser who noted that the risks to inflation “might still be on the upside, in which case we’re going to have to respond. But we do also need to take account the of the possibility that activity slows.” But his urging of governments to support central banks in undertaking unpopular rate hikes to lower inflation could also be interpreted as preparation for another rate hike. Inflation expectations, wage pressures and cost and price pressures as flagged in business surveys have all moved up since the War started and March data highlights that the labour market was tight going into the War all of which biases the RBA towards more rate hikes. But against this, the labour market is a lagging indicator and slumps in business and consumer confidence point to weaker economic conditions ahead which will dampen inflation eventually. In the near term we think the RBA will give primacy to the increased threat to inflation and so see another rate hike in May. But it can’t ignore the potential hit to economic growth, so the May RBA meeting is a close call, and we put the probability of a hike versus a hold at 60/40. Market pricing for a 74% probability of a hike in May looks too aggressive though and if the RBA does continue hiking, we see it cutting next year.
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