‘We Don’t Think This Is Going To Be A Healthy Exercise’: SocGen

Are you feeling particularly “healthy” on Monday morning now that you’ve had a chance to check on overseas markets (here and here)?

My guess is “no.” Although to be fair, that “unhealthy” feeling you might be nursing today could very well have more to do with the cheap domestic beer and copious amount of spinach dip you invariably consumed during the Super Bowl than it does with mounting angst about the global equity market.

But unless this turns around in a hurry (and given how deeply embedded the BTFD mentality is, it’s certainly possible that we’ll see some panic buying on Wall Street after what looks like a bloody open), it’s going to get harder to characterize the losses as “healthy”. And not necessarily because a pullback wouldn’t go some ways towards returning valuations to some semblance of sane. Rather, because the backdrop is decidedly unpalatable.

“We never know if a sell-off is part of a longer-term trend as this can only be judged ex-post, but we don’t think managing an orderly decline in asset prices and the associated rise in volatility at a time of record valuations and high corporate leverage is going to be a ’healthy exercise’,” SocGen’s Andrew Lapthorne writes, in a short Monday missive.

“In down markets, balance sheet risk is always the most important factor, and this bout of equity market weakness is proving no exception,” he adds, before concluding as follows: “Our equal-weighted index of US companies with the worst balance sheets was down 6% last week vs a 3% drop for those with the best.”

This is a subject Andrew has been harping on for some time, but irrespective of whether you want to drill down into the specifics, the broader point (whether he means it this way or not) is that thanks to years of policies that have perpetuated all manner of distortions across markets, any unwind will be decidedly unpredictable and thereby “unhealthy” in nature.

It’s a long way down from here in terms of resetting multiples and restoring some sense of sanity in credit markets (where spreads are at post-crisis tights) and when you throw in the possibility that a steepening curve serves to push up cross-asset vol. on the way to forcing an unwind in carry trades, you’ve got the recipe for something that’s even more “unhealthy” than that case of Miller High Life you choked down during Sunday’s game.