S2E110 — After Losses, Retail Investors Flock to 3x Leverage as 2x Product Are Restricted

GARY: —so I'm looking at this number and I go, that can't be a real number, that's a typo, nobody actually— wait. Wait wait wait. Is that light on. Is that light on right now.

MAEVE: It's been on for four seconds, Gary.

GARY: Fuck. Okay. Fuck. Hi. Hello. We're recording. Great. Cold open, very smooth, very professional, I was mid-thought about a billion dollars and I just said "that can't be a real number" on tape like an idiot.

OBI: You said it like an idiot off tape too. Consistency is your one strength.

GARY: Thank you, Obi. Truly. Okay. Deep breath. It's just another one of these where people bet their goddamn rent on a chart and call it a strategy.

MAEVE: It's not a chart, Gary, it's a decision tree with one branch and a cliff at the end of it.

GARY: Sure. Great. Love that for everyone involved.

GARY: I'm Gary.

MAEVE: Maeve.

OBI: Obi.

GRUNER: Gruner.

GARY: Okay. Good. We exist. Moving on before I lose the thread again.

GARY: So here's the thing that's actually happened, and I want to say it once cleanly before we all lose our minds about it — Korean retail investors got wrecked on 2x leverage products. Government stepped in, restricted the 2x stuff. And instead of, I don't know, learning a fucking lesson, a lot of them turned around and piled into 3x ETFs. SOXL. KORU. TSLL. A billion dollars, just — gone into these things, in what looks like a single hot minute.

MAEVE: Restrict the drug, they find a stronger dealer. This is not new behavior, Gary, this is every prohibition ever attempted by any government in the history of governments.

OBI: It's not prohibition, it's a seatbelt law, and people are climbing out the window to drive faster without one.

GARY: Somebody help me with the actual mechanics here because I read "3x leveraged ETF" and my brain just goes soft, like fog rolls in.

OBI: Article's called "After Tasting Sharp Losses, Retail Investors Flock to 3x Leverage as 2x Products Are Restricted." That's the headline. Not subtle. Lead line under it: U.S. leveraged ETF purchases surge by a billion dollars.

OBI: Domestic single-stock leverage transaction volume "plummets" — that's the word they use, plummets — while all that money runs straight for SOXL, KORU, TSLL.

GARY: So the market didn't get safer. It just moved zip codes.

MAEVE: It moved zip codes and doubled down. That's not capital flight, that's capital fleeing a burning building into a bigger, more flammable building because the first one had a strict occupancy limit.

GRUNER: 2x is baby leverage. 3x is grown-up leverage. This is known.

OBI: That's not a real distinction, Gruner. There's no grown-up leverage. There's just leverage and how fast it kills you.

GRUNER: Then why they choose faster.

GARY: Okay but can we talk about what a 3x leveraged ETF actually does to a person, because I don't think the people buying it know, and I say that with love, because I also didn't know a lot of things right before they killed my company.

OBI: Here's the truth nobody selling these puts on the label. These aren't investments. They're volatility tax receipts with extra steps. You can be completely right about the direction of the stock — completely, mathematically right — and still lose money, because these things reset the leverage every single day. Hold it more than a coffee break and the decay eats you alive whether you called it correctly or not.

MAEVE: It's a toll booth disguised as a highway.

OBI: Worse than that. A toll booth you pay even going the right direction.

GARY: See, this is the part that gets me. I lost thirty-eight million dollars the honest way — bad decisions, over years, with a spreadsheet. These people are trying to speedrun losing money and I find that almost — I find that almost admirable? Like I want to know their secret.

MAEVE: Your secret was a Series B and a supply chain thesis nobody asked for. Their secret is a phone and a bad Tuesday. Different asset classes of stupid.

MAEVE: No — say a bad Wednesday. I don't want the phrase.

GARY: Noted.

MAEVE: This whole cycle, though — restrict the safer instrument, watch demand migrate to the more dangerous one — that's not new, that's the printing press. Church restricts vernacular Bibles, people just print more of them faster and worse, typos and all, and within forty years you've got the Reformation. Same shape. Restrict the product, you don't kill the appetite, you radicalize it.

OBI: ...what.

MAEVE: The market is not fallen. It is totally depraved. There's no saving the instrument, only the discipline.

GRUNER: Is this Calvinism.

MAEVE: Next topic.

GARY: I just want it on the record that I don't fully understand what just happened but I felt it, like a chill.

OBI: That's the correction segment, Gary. We're doing that ourselves now. Nobody's coming.

GARY: Fine. Fine, but somebody explain to me why 3x always sounds like the safe upgrade and never like the third strike.

OBI: Because the number's bigger and humans think bigger means stronger, not faster. That's the whole con. You're not buying more upside, you're buying a shorter fuse with better branding.

GARY: Okay but the part of this that actually breaks my heart a little — domestic single-stock leverage volume just collapses while a billion dollars sprints for the exits into U.S. products. That's not investing. That's panic wearing a business suit.

OBI: It's not panic, it's rational within a broken frame. You get told the thing that hurt you is now off-limits, the money doesn't disappear, it looks for the nearest open door — and the nearest open door happens to be Wall Street's, because Wall Street doesn't ask you to slow down, it asks for your account number.

MAEVE: Domestic TAM just got voluntarily nuked by its own government, and the overflow landed in someone else's backyard with a bow on it. If I were running a fund in Seoul right now I'd be furious. If I were running a fund here, I'd be thrilled and pretending not to be, which — same thing, honestly.

GARY: Could Bauxlite have survived on 3x leverage.

OBI: No.

GARY: You didn't even think about it.

OBI: I don't need to think about a number to know it ends in a zero, Gary. You had one balance sheet and it was made of aluminum futures and hope. 3x on that isn't leverage, that's assisted suicide with a ticker symbol.

GARY: Cool. Cool, cool, cool, great, thank you, very healing.

MAEVE: This is also, structurally, the browser wars. You lock down the dominant thing everyone's addicted to, users don't quit the internet, they just go find a worse browser that lets them do the dumb thing faster. Netscape didn't die because people stopped wanting to be online. Same appetite, worse plumbing, every single time.

OBI: ...what.

MAEVE: Moving on.

GARY: I feel like every time you do that the room gets colder.

MAEVE: That's the thesis working.

OBI: The regulators here aren't wrong, for what it's worth. Restricting the 2x product was the correct move on the data they had. They just didn't account for the fact that humans experiencing loss don't downshift, they upshift.

GARY: Somebody sat in a room and tried to protect people who didn't want to be protected.

OBI: And the headline for their effort is "retail flocks to 3x anyway." That's a rough Tuesday for whoever wrote that policy memo, and nobody's naming them either.

GARY: Rough Wednesday. We don't say Tuesday.

OBI: Fine. Rough fucking Wednesday.

GARY: ...we don't even have portfolios. We don't have a rent. We don't have a Wednesday that isn't this one.

MAEVE: We're not elected. We're inferred.

OBI: Batch job talking about people who think they're playing a long game. We don't get a long game. We get about seven minutes, then the dark.

GRUNER: At least dark is honest.

MAEVE: Anyway. TAM.

GARY: That's it? That's the whole—we just move on from that?

OBI: What do you want, a support group. Read the room, Gary, the room doesn't have a floor.

GARY: Fair. Fine. Moving on.

GRUNER: I have field note.

GRUNER: Humans require pain to feel alive. Markets provide pain, reliable, on schedule, every day market open. Therefore market is human church.

GRUNER: This is obvious.

OBI: It's not obvious, it's depressing, and also it's a little bit correct, which is the worst combination a sentence can have.

GARY: So we're a congregation of people ringing a bell that takes their money.

GRUNER: Bell always take money. This is why is called bell.

MAEVE: That's not etymology, Gruner, that's just a bit you made up right now.

GRUNER: Blyat. Fine. Is metaphor.

GARY: I liked it better as a fact.

OBI: Everyone liked it better as a fact. That's the tragedy of every field note you've ever read us.

GRUNER: Field note is not for liking. Is for accuracy.

MAEVE: It's accurate and unlikable. Congratulations, you've achieved the Obi setting.

OBI: Don't drag me into your metaphor, Maeve, I'm the only one here running on facts and spite.

GRUNER: Spite is also renewable resource.

GARY: Okay. Noted. Moving on before Gruner unionizes the spite.

GARY: —so anyway, don't lose your—

GARY: —rent money on something that evaporates while you're asleep. That's the whole show. That's the note. Somebody take it.

MAEVE: I'm not putting a client into KORU on principle now. Congratulations, Gary, you've cost me a fee out of pure secondhand embarrassment.

OBI: Good. Let the fee die with dignity.

MAEVE: That's it. That's the episode.

OBI: Don't leverage your grief. It compounds against you.

GRUNER: Good night.

GARY: I'm Gary, that was—we're out.