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Contrarian Chronicles 4/30/2007 12:01 AM ET
Bad news: This bubble is worldwide
Money printing by virtually every central bank on the planet has created a
synchronized global boom, gobs of speculation and complete disregard for
risk. This will make the downturn uglier.
By Bill Fleckenstein
...
Grantham eyes ill global winds
Meanwhile, it would appear that the manic
psychology and bubble-like speculation in our stock market is perhaps a
global phenomenon. I don't consider myself an expert on world markets, but
Jeremy Grantham, chairman of global fund manager GMO, is someone who is. He
made that point April 23 in a Financial Times story called "A Global Bubble
Warns Against the Stampede to Diversify." Driving the stampede are big
institutions, such as state and local pension plans and endowments, that
need to make more money, which causes them to take more risk (as the
downside seems to be completely ignored these days).
Says Grantham: "The coincidental move to greater risk-taking more often than
not reinforces the diversifying move." In other words, if enough people have
the same idea, it works, no matter how outlandish or dangerous it may be. He
goes on to make the point that "the new global money flows have probably
created the first truly global bubble, almost everywhere in almost
everything."
He says that when we look back, this will probably come to be known as the
"Private Equity Bubble." He observes that, perversely, the private-equity
deals have caused the "outperformance of inefficient companies that are
conducive to improvement by the acquirers." In other words, companies that
are doing poorly have seen their stock prices improve, relative to
better-managed companies, because they're more likely to be acquired.
Lastly, he notes the danger in this process: "If profit margins, which are
at record highs everywhere, regress as usual, then many deals leveraged to
the hilt on peak margins will be in trouble and diversification will have a
very high cost."
The mantra is maŋana
To sum this up, money printing in the past several
years by virtually every central bank on the planet has created a
synchronized global boom and, with it, gobs of speculation and complete
disregard for risk. The fact that our economy is slowing down due to the
housing bubble's unwind is immaterial at the moment, though it will become
material.
In the perverse way of markets, folks will probably only worry about
economic weakness after enough debt has been piled on corporate balance
sheets to make the downturn even uglier than it would have been otherwise.
--
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your
own way and let people talk.) -- Karl, paraphrasing Dante.
