Who cares about corporate leverage?
Well shit, if you look at high yield spreads as a whole, apparently nobody. Remember this chart from the IMF?
Yeah, so basically that’s spreads becoming completely disconnected from issuers’ ability to service their debt.
Indeed, the HY decompression train is not only still on the tracks, but looks poised to steam right along to still tighter tights.
But if you drill down past the index level in equities and if you can get past all the tightness in credit spreads, you can see a crack (or two). Simply put, you’ve got to go deep. Balls deep.
Which is what SocGen’s Andrew Lapthorne likes to do when he’s conducting penetrating analysis on US equities.
On Monday, Lapthorne begins with a humorous shoutout to everyone’s favorite bear Albert Edwards. To wit:
Albert Edwards has been boring everyone on [the subject of US corporate leverage] for a long time, but if you focussed solely on the performance of debt markets (see HYG for example) it would appear no one is interested.
Yes, “it would appear no one is interested.” But they are – interested that is.
Because when you drill down, you find something notable. Here’s the money quote:
However US equity investors are clearly concerned, as the major performance differentiator in the US market so far this year is indeed Balance Sheet risk, with the strongest balance sheet stocks delivering a 13% total return this year versus the weakest that have only managed a 1% gain.
See there? You care about leverage and you probably didn’t even know it.