Chinese Stocks & Private Equity: Wild Flings, Not Long-Term Prospects

“Take time to know her. It’s not an overnight thing”
– Percy Sledge’s Momma, in Take Time to Know Her

Bill Gross, who manages PIMCO, the world’s largest bond fund, says that professional investors were seduced by CDOs (collateralised debt obligations) in “hooker heels”. While the mums and dads fell for mortgages in sexy, low-cut dresses, the pros couldn’t resist mortgage-backed securities, tarted up by the financial industry.

The whole financial world has had kind of a bodacious appeal lately. It is as full of strumpets as the Rue St. Denis, and its customers seem to be getting as excited. Stocks in Shanghai are rising so fast – it is as if they had put some tiger paw or shark privates into the city water reservoir.

We would like to go on record, dear reader, with this advice to the Chinese: Take a cold shower.

And all over the world, the rich seem desperate to begin expensive liaisons. A mystery buyer apparently paid US$300 million for an Airbus A380 double-decker Superjumbo, with room for 853 passengers. The plan will be for private use, say the reports. A big birthday bash, maybe?

And for US$84 million, someone has bought himself the most expensive English house outside of London. The place is in such bad repair, says the notice in MoneyWeek, that the poor buyer will have to spend a fortune fixing it up. And another person paid US$2,600 for an empty prescription drug bottle once owned by Elvis.

One wild fling after another. But are any of these love objects good enough to take home and introduce to your mother?

Poor Percy Sledge. When he found “a little girl of [his] own,” he took her home to momma. But momma took one look at her and she said: “Take time to know her. It’s not an overnight thing.”

But Percy wouldn’t listen. He went straight to the preacher. And then, later, he came home from work early and “found her kissin’ on another man.”

The hussy!

We keep warning…like Percy Sledge’s momma…but a fat lot of good it does. Some things have to run their course, from the first come-hither invitation…to the last look of revulsion and disgust. So it goes in affairs of the heart…and affairs of the wallet. All begin in hopeful anticipation and end in limp disappointment.

Nothing is sexier today than private equity. Even U2’s Bono is a partner in a private equity firm. But when dim rock singers get into a trend, dear reader, you have to wonder if it isn’t already a little late in the day. M&A activity is still going up, according to the latest reports. But as with everything else, quantity and quality vary inversely in the private equity sector. In the last four years, the debt service ratios of target companies has been cut in half – from 3.4 to 1.7.

But who cares? Now, lenders no longer ask for guarantees. New ‘cove-lit’ deals allow them to destroy their own balance sheets with no fear that their loans will be called.

Even the authorities are getting worried. When we were in Madrid a few weeks ago, we noticed that the Bank of Spain was warning investors to watch out. The world was getting far too deep in debt, said the Spanish bankers. Then, the Bank of England issued almost exactly the same alert…followed by the Bank of International Settlements, which says what we’ve been saying for years: Loose lending policies have caused a dangerous credit bubble; the world economy is now more vulnerable to a setback than any time since the late ’20s.

And here comes the central bank of Norway, with reservations of its own. Yesterday, it raised its key-lending rate to 4.5%.

And at home, lawmakers have decided that hedge funds are threatening the well being of the lumpeninvestoriat with the billions in public pension funds that they now have invested in alternative investments. Lawmakers want to hike the tax rate on private equity firms that go public from 15% to 35% and one even complained to the Department of Homeland Security that Blackstone’s deal with China’s state investment fund constitutes a national security risk.

Meanwhile, both the former head of the Fed (Alan Greenspan, remember him?) and the richest man in China – Li Ka-shing – have both joined our warning that China’s stocks are in a bubble.

All of this, of course, makes us worry. We are in the same camp as many prestigious institutions and renowned, straight-laced economists. What are we missing?

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

Bill Bonner

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