Equity positioning in an age of permissioned levitation
Executive summary
We are not in a market governed by valuation.
We are in a market governed by permission.
Specifically, the silent permission granted by narrow credit spreads. With US BBB corporate spreads near ~1% over risk-free, Main Street debt is effectively free. In this environment, capital stops asking difficult questions.
Fundamentals have not disappeared, but their influence has been deferred. They now matter primarily in two ways:
as negative catalysts when expectations are missed; and
as anchors for re-entry once funding conditions tighten.
Until that permission is withdrawn, equity markets are not pricing cash flows. They are pricing narrative relevance. Returns accrue to scale and visibility, not discipline.
The regime we are in
Liquidity dominates logic
When BBB spreads compress below roughly ~1.5%:
capital becomes abundant and indiscriminate;
capex ahead of returns is tolerated;
valuation is enabled by cost of capital, not earned by returns;
index exposure outperforms insight.
This explains persistent index concentration, the dominance of a narrow set of narrative leaders, and the market’s tolerance for weak cash conversion.
In this regime, being early on fundamentals is not rewarded. It is penalised.
The failure mode
The risk is not recession. It is revocation.
This regime does not end through gradual disappointment. It ends when credit permission is withdrawn.
That transition is signalled not by earnings, but by funding behaviour:
BBB spreads widening rapidly;
credit committees shifting from deployment to discretion;
capital becoming conditional rather than assumed.
When this occurs:
correlations rise;
multiples compress before earnings move;
broad indices cease to diversify and instead amplify risk.
The adjustment is non-linear. Reaction speed matters more than forecast accuracy.
A note on prediction and propagation
This framework does not claim that credit markets always lead equities, nor that tighter credit propagates instantaneously.
Credit stress propagates sequentially, not synchronously, and often with uneven lags. Funding terms may tighten quietly before appearing in prices, and equities can fall for reasons unrelated to credit.
The claim here is narrower:
BBB spreads are not a leading indicator of volatility.
They are an indicator of persistence.
In practice:
Equity sell-offs without sustained BBB widening tend to be transitory. Liquidity remains intact, narratives survive, and markets recover.
Equity sell-offs with sustained BBB widening tend not to resolve quickly. Funding assumptions have changed, capital discipline re-enters pricing, and recoveries fail.
The signal is not the first move in credit.
It is the failure of credit to forgive.
That failure tells us:
funding has become conditional;
marginal capital is stepping back;
equity valuation is no longer insulated by cheap refinancing.
Historically, it is this transition that separates tradeable corrections from regime-level repricing.
The single timing signal
US BBB option-adjusted spreads
In this regime, one indicator dominates: US BBB OAS. It is the clearest expression of Main Street funding confidence.
Operational interpretation:
Equity pullback with BBB flat or tightening
Liquidity intact. Tradeable correction. Stay invested or add.
Equity pullback with BBB widening simultaneously
Funding risk entering equity pricing. De-risk quickly.
BBB widens ahead of equities or fails to retrace after a bounce
Regime shift. Exit risk assets and wait.
A fast, persistent move toward ~1.5% is not a warning. It is the tripwire.
Asset implications
While credit permission holds
Beta is rewarded.
Narrative dominates nuance.
Index exposure beats stock selection.
Fundamentals matter mainly on the downside.
When permission is withdrawn
Capital intensity and leverage are repriced first.
Growth narratives fail before cash flows do.
Equity drawdowns overshoot fundamentals.
Broad indices, heavily weighted to long-duration and capital-intensive names, become structurally pro-cyclical. What looked diversified becomes uniformly exposed.
Positioning logic
This is a regime to manage, not a market to conquer.
Accordingly:
High-beta, narrative-driven positions require active monitoring. They perform while belief is cheap and unwind violently when it is not.
Cash and fortress balance sheets preserve optionality. Optionality is the most valuable asset during regime transitions.
Berkshire Hathaway functions as an anchor. It is cash-generative, unlevered, and structurally advantaged when others are forced to act. It does not depend on permission.
Index exposure is acceptable only while credit permission holds and is actively monitored. Once funding tightens, the index becomes a liability.
Re-entry should occur only when:
credit conditions clearly stabilise and forgive, or
valuations compensate for the absence of cheap funding.
Conclusion
This is not a valuation memo.
It is a regime-management framework.
Fundamentals determine what to own and at what price.
Credit determines when fundamentals are allowed to matter.
As long as Main Street funding remains easy, equity markets can levitate beyond what valuation alone would justify. When that permission is withdrawn, repricing is swift and unforgiving.
The discipline is not predicting the end.
It is recognising it early and acting before debate replaces action.