Michael Panzner usefully quotes and comments on an article in the Wall Street Journal (the WSJ online edition charges a fee). The piece is by Steven Rattner, a private equity investment manager, and its theme is risky lending. Here are a couple of snippets:
In 2006, a record 20.9% of new high-yield lending was to particularly credit-challenged borrowers, those with at least one rating starting with a "C." So far this year, that figure is at 33%... money is available today in quantities, at prices and on terms never before seen in the 100-plus years since U.S. financial markets reached full flower...
...The surge in junk loans has also been fueled by a worldwide glut of liquidity that has descended more forcefully on lending than on equity investing. Curiously, investors seem quite content these days to receive de minimis compensation for financing edgy companies, while simultaneously fearing equity markets. The price-to-earnings ratio for the S&P 500 index is currently hovering right around its 20-year average of 16.4, leagues below the 29.3 times it reached at the height of the last great equity bubble in 2000.
Some portion of this phenomenon seems to reflect tastes in Asia and elsewhere, where much of the excess liquidity resides: Foreign investors own only about 13% of U.S. equities but 43% of Treasury debt.
I think this tends to support what I suggested yesterday. The tide of money has not risen evenly on all shores - in real terms, equities have failed to keep up. Some bearishness is now already built into the price of shares.
But not, perhaps, sufficient bearishness, so the market is not an accurate measure of the health of the economy. Much investment wealth is in the hands of the over-50s, the golden generation who had good pensions and in many cases got early retirement. They also rode the inflation train on their houses and have paid off their mortgages. At least in my country, many of that generation don't bother to keep a close eye on their investments, because they don't depend on them much. For them, ignorance is bliss.
For institutional investors, ignorance is well-paid. That's putting it a little harshly, but Panzner's piece, and his most recent post, comment on the complacency of analysts and investment managers, suggesting that it may be self-serving (when do they tell you to cash-in?). Besides, many are relatively young, so their optimism is supported by a lack of direct experience of truly dark days, and by the general health and strength of youth. When the market drops, they will look for what they think are support levels and buy-in for the long term. Bad markets often see a transfer of investments from private to institutional investors, I believe; it's a kind of vampirism. The average private investor sells too late, and buys too late.
But institutional support may explain why a major equity descent takes years: it's the jerky learning curve of the naturally upbeat investment manager.
And in any case, the equity market is more often the vic than the perp, to put it in police jargon. The Wall Street Crash was, I understand, the consequence of a banking crisis, itself created by years of monetary inflation, according to Richard Duncan.
So now it's the banks and the money supply we have to watch. And that's why we need to listen to the analysts of the money system, before the investment analysts.
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