We admire the resilience of the Get-Rich Economy. All you need to be a success in today’s America is to have money – or appear to have it. And all you need for that is credit. And when one credit-puffed bubble blows up…along comes another one…even bigger.
It’s a bit like those old Whack-A-Mole games. You whack one mole down…and another pops up somewhere else. You smack the dotcoms…and up comes housing. You bash the subprime lenders for being reckless with other people’s money…and lending standards continue to fall elsewhere!
Margin debt on the NYSE is up to a new record – USD$285 billion. Global mergers and acquisitions activity – funded with debt, of course – has just passed a milestone…reaching more than USD$1 trillion in the last three months. Global debt issuance overall is increasing five times faster than the world’s GDP. Corporate bonds are increasing at a 22% rate. Junk bonds are up at a 30% rate. Leveraged buyouts, according to Bloomberg, are up 40%…with the financiers collecting USD$2 billion in fees in the first quarter alone.
Sam Zell is taking his money from Blackstone’s real estate group and using it to buy the Tribune Co. for USD$8 billion. KKR is putting USD$39 billion into First Data. Deals-on-Wheels!
Where does all this money come from? Are people stashing away so much in savings that banks have an extra trillion dollars to lend to these money shufflers?
Of course not. Three quarters of the junk bonds, for example, are taken up by hedge funds.
And now we come to something interesting. The world’s credit system is no longer controlled by banks, and thus no longer under the control of bank regulators. Instead, there is a huge pool of liquidity outside of the banking system. A news item last week spoke of giant “dark pools” of liquidity that “do not publish quotes on the open market”. But how much bilge is sloshing around in these dark puddles? How do they work? Where does the money come from?
We don’t know. But we know that pools of liquidity do not really make the world a richer place. They just increase the odds that you will step into something…like Enron or New Century…and sink.
Markets and Money