May 02 2007
More on Global Bubbles
A favorite of ours, Bill Fleckenstein, weighs in on the Global Bubble, and reminds us once again of the last bubble environment (one he called fairly well) and the similarities to what he is seeing today..
Why else should you exercise caution?
- Private equity debt bubble
- Economy Crawls, Raising Recession Fears
- Dollar Declines to All-Time Low Against Euro as Economy Slows
The first article presents some interesting points:
“I think of this as a debt bubble, not a private equity bubble,” Landry says. “That’s the horse, and we’re the cart.”
“Debt markets that finance private equity transactions have changed in three important ways. They are charging lower interest rates, reducing the premium normally charged for greater risk. They are lending more money for the purchase of an operating company, exceeding normal caps based on the cash generated by the acquired business. Finally, debt markets are reducing or virtually eliminating covenants and other rules that now make it almost impossible for private equity investors to default on loans used to buy companies.”
Read that first article to really put things in perspective regarding how the credit bubble is feeding the private equity bubble.
The danger with any bubble is that it can go on much longer than anyone might suspect, and there is no way to say exactly when it will start to vent. But like Jeremy Grantham observed in an earlier post, all bubbles eventually burst. A giant credit bubble on a global scale should be interesting.
