The next bubble is about to descend

Discussion in 'Economics' started by ByLoSellHi, Nov 15, 2009.


    The next bubble

    Book: Spike in PE-owned firm defaults ahead


    Last Updated: 5:17 AM, November 15, 2009

    It is late 2011, months before President Barack Obama will run for re-election. The US economy is gradually recovering from four years of hovering on the brink of disaster. Banks are lending money again, at least to strong companies, and employment is stabilizing.

    President Obama has finally begun to breathe a bit more easily, when the Secretary of the Treasury walks into his office one day.

    "You better sit down," the secretary says. "I've got bad news. First Data, the largest merchant credit card processor, has defaulted on $22 billion in loans. Clear Channel Communications, which owns more than twelve hundred radio stations, is on the brink. The other credit tsunami that we knew was out there has begun."

    The Treasury Secretary is talking about private equity. It's not the private equity firms themselves but the companies they own that are defaulting. During the boom years of 2001-07, private investors bought thousands of US companies. They did it by having the acquired companies take on enormous loans using the same cheap credit that fueled the housing boom. That debt is now starting to come due.

    "Considering what we have already been through, how bad can it be?" Obama asks.

    "Well," says the Treasury Secretary, "PE firms own companies that employ 7.5 million Americans. Half of those companies, with 3.75 million workers, will collapse, between 2012 and 2015. Assuming that those businesses file for bankruptcy and fire only 50 percent of their workers, that leaves 1.875 million out of jobs.

    "To put that in perspective, Mr. President, NAFTA caused the displacement of fewer than 1 million workers, and only a slightly higher 2.6 million people lost jobs in 2008 when the recession took hold.

    "A spike in unemployment will mean more people will lose their homes in foreclosure, and the resulting nosedive in consumer spending will threaten other businesses. The bankruptcies will also hit the banks that have financed LBOs and the hedge funds, pensions and insurers who have bought many of those loans from them."

    "Is this bigger than the sub-prime crisis?"

    "It is similar in size to the sub-prime meltdown. In 2007, there were $1.3 trillion of outstanding sub-prime mortgages. As a result of leveraged buyouts, US companies owe about $1 trillion.

    "Sir, we are on the verge of the Next Great Credit Crisis."

    Obama is no longer smiling.

    The picture painted by the Treasury Secretary in this imaginary scene, as dire as it is, is not total fantasy, nor is it a worst-case scenario. Some knowledgeable observers say the carnage will start sooner.

    In December 2008, the Boston Consulting Group, which advises PE firms, predicted that almost 50 percent of PE-owned companies would probably default on their debt by the end of 2011. It also believed there would be significant restructuring at these companies, leading to massive cost cuts and difficult layoffs.

    A rain of defaults is already starting. From January 1 through October 31, 2009, 175 American companies defaulted on their debt. That is almost double the number for all of 2008. Half of those companies have been involved in transactions with PE firms at some point in their corporate life, according to the Standard & Poor's rating agency.

    The tsunami of credit defaults described by the imaginary Treasury Secretary is not inevitable. If the US economy manages to recover from the credit crisis that began in the mortgage markets in 2007 before the big PE debts come due, more of the PE-owned companies will be able to refinance their debt. In that case, we won't see a full 50 percent of them go under. Although if history is any guide, many of them will collapse anyhow, regardless of any easing in the credit markets, thanks to the greed and grossly shortsighted management policies of their PE owners.
  2. S2007S


    You can scream as loud as you want about the next asset bubble taking place and nearly 99% of the people will ignore you completely. Everyone has forgotten about the last 5 or so bubbles in the last 20 years and they will of course not take notice of the one that is building right now. Nearly every money manager and market follower is calling for a higher market based on the dollar carry trade and the hundreds of billions of stimulus on top of the trillions being printing. The consensus is up no matter what is going to happen on the horizon. Everyone is pushing the collapse of the commercial real estate aside saying it would have happened by now and any future downfall in housing such as foreclosures are being propped up by federal and government intervention.

    So ignore everything that was going to happen due to stimulus and what not and ignore the next biggest asset bubble because this one is going to be so big you wont even notice it to begin with.......
  3. At what point do you 2 stop ignoring the fact you've been dead wrong?
  4. hayman


    All the writing is on the foreclosures will hit the market in 2010, as a slew of ARM's "come due"....unemployment, stated to be 10+ %, is actually more like 16-17 %, and will continue to dampen the economy.....the first-time homebuyer credit will peter out, and the bubble will once again burst in card debt is a real loan debt is a real bubble.......the dollar is tanking, inflation will rise, and our assets will resultingly dwindle.....the latest stock market bubble will burst again, and this time, the market will fall harder than a year ago.....China may pull the rug out from us, and stop investing in US debt, all part of a plan to denounce the dollar.....US debt will continue to reach new highs......

    What don't you get ????
  5. How much money did all that screaming make you?
  6. Illum


    Two kinds of people lose in a bubble. Those who buy and hold and those who do not take part. Yes those who do nothing lose. Especially this time since their savings accounts are being hurt to support this bubble.
  7. This is going to be the biggest story of 2010, 2011 and 2012...

    ...there are 10 million employees of companies owned by these massively leveraged private equity firms.

    Just wait until massive defaults on this debt affect unemployment and bank balance sheets.

    No one is going to tell me we aren't on a crash course for a depression.

    It won't be just the U.S, either.
  8. raker


    I really dont understand the rally we have had for the last 6-8 months there is so much underlying debt and crap that we have still not sorted out yet or flushed through the system .....
  9. the1


    They aren't wrong, they just can't predict the exact timing of the next crisis but it's coming. The Fed is keeping rates at zero percent to guarantee banks can generate profits to offset the losses they will incur by foreclosing on houses, thereby realizing the loss. Once that objective has been met rates will go back up but in the meantime another asset bubble will be created. The Fed's back is up against the wall. Either raise rates now and let a huge bank (BAC) collapse or keep rates low and deal with whatever bubble gets manufactured in the process 3-4 years from now (maybe sooner). Which would you choose?

  10. Well said!
    #10     Nov 17, 2009