“Giddy.”

That’s equity investors. Or US equity investors anyway.

The adjective comes from SocGen’s Jitesh Kumar and Vincent Cassot, who suggested in a recent note that “the system needs a breather (and perhaps even to shed some weight) before normal function resumes.”

The reference was, in part anyway, to the equity financing squeeze I’ve discussed in these pages on a couple of occasions, including on Monday in “The Equity Funding Squeeze Briefly Revisited.” Long story short (no market pun intended), demand for leveraged exposure to US stocks is straining dealers’ capacity (or at least their willingness) to facilitate synthetic longs, thereby driving up the cost of that exposure for clients.

Importantly, this isn’t just a function of year-end balance sheet constraints. As Kumar and Cassot wrote, in one of several recent notes on the subject, “the rise in funding costs is not just a seasonal concern this time around.” They pointed to the simple figures below, which show overall equity allocations in the US and, interestingly, the ratio of equity market cap to corporate debt.

“Equities have become much heavier,” SocGen said, adding that “banks are struggling to hold up the weight on their balance sheets” — hence the contention that the system “needs a breather.”

As noted (and illustrated) here previously, the rise in equity financing costs is tick for tick (not literally, but you get the point) with equity performance and, naturally, equity positioning.

On that latter point, have a look at the figure below, which shows the buildup of asset manager futs positioning across the majors.

That exposure, Kumar and Cassot wrote, went from $40 billion in and around the cycle lows for US shares in October of 2022 to some $330 billion as of the second week of this month.

“There are other factors such as leveraged/buffer ETFs, QIS and custom basket flow that have pushed up the demand for banks’ balance sheets at least on the margin [and] regulatory constraints have not gone away (yet),” they went on. “This implies that the [ability] to warehouse these assets has not grown in proportion” to demand, which in turn means that in the absence of regulatory relief (or a selloff that reduces the demand for long exposure) funding stress is to be expected given the cost to banks of “keeping these risky assets on balance sheets.”

Separately, Cassot offered an amusing assessment of the wariness some investors might feel trying to jump aboard this particular moving train. “All the fundamental, technical and political arguments may be aligned perfectly, but the parabolic shape of the recent price action creates some doubts about allocating more funds to US equities,” he wrote, even as the bank generally recommends “hold[ing] your nose and buy[ing] US exceptionalism.”