The M&A and private equity binge appears to have given the market some liquid courage to test its 2000 limits. While it’s true that the market could be forecasting higher corporate profits and greater global growth, we think it’s more likely that stocks are making a new highs for a far simpler reason: global credit growth exceeds global asset supply.
“Money is very available, it’s reasonably cheap, stocks aren’t expensive and world growth is good. That’s the logic in a lot of these deals. I think they continue,” says Robert Doll, chief investment officer at BlackRock Inc. And there you have it.
As long as the money is cheap, the deals will keep coming. Joseph Schuman of the Wall Street Journal explained how the whole thing works in today’s edition, “Where is all this liquidity coming from? Last year, for example, the biggest source was
The only change to Schuman’s scenario we’d mention today is that the Fed and other central banks will probably act soon to try and tighten bank lending to private equity and buyout groups. This the Fed can do through raising capital reserve requirements or some very public jaw boning (although in truth, the Fed is less powerful in this respect that it would like to admit.) It is unlikely to raise rates.
In any case, private equity is one step ahead of the Fed. First, we have groups like Apollo and Fortress and Blackstone going public. Why would private equity groups go public and raise money in the equity markets when so much money was available at low interest rates in the debt markets? Well, the rich pirates didn’t get rich by being stupid.
The public markets-especially the Chinese market-are a vast source of new capital with which to do new deals. These deals probably deliver less and less yield and less and less real economic value. But they still make sense if you’re in the deal-making business.
Come to think of it, any deal makes sense when you’re in the deal-making business. When you’re in the deal making business, that’s what you do. You make deals! If you don’t, you’re out of business! And there’s no money in that, which is a bad deal.
The problem for the pirates is that all the low-hanging fruit-the quick turnarounds and quality assets that could be had on the cheap-has been picked. High net-worth investors are no longer willing to loan the pirates big bucks for riskier returns. The pirates need more money to do more deals.
Besides, money raised through the equity markets does not have to be returned to shareholders in the same fashion that capital in a buy-out fund belongs to and must be returned to the shareholders. In other words, the pirates have discovered they can play with other people’s money, get a lot more of it, and still make outrageous profits, by moving out of the shadows and into the public markets.
Why cater to well-heeled, demanding, super-rich clients who want their money back with a high rate of return when you can simply make a deal with the Chinese government to assume control of the hard-earned savings of the world’s poor? Why borrow from the rich when you can practically steal from the poor?
Hence Blackstone’s decision to go public and
Just what Blackstone intends to do with its vast new capital, we have no idea. There ARE great investment needs in
Markets and Money