Economy and General Discussion

"... when Private Equity  cease to function we will see a downturn in the market.  PE depends upon cheap credit. "

Absolutely right on, IMO. I don't know if that will mark the beginning of a market downturn, but it will certainly mark a major change in the credit dynamics -- and the credit expansion appears to be driving absolutely everything in the economy right now.

Doug Noland's piece this weekend (http://www.prudentbear.com/articles/show/2053) does a good job of getting into the credit bubble dynamics and the possible meaning of recent developments. I have posted, below, a couple of his paragraphs. (Anyone not familiar with Noland's work: be sure to skim through the many pages of news excerpts to his personal analysis at the end.)

Tom

<start quote> Subprime imploded specifically because of “Ponzi Finance” dynamics.  As long as Credit was readily available, individuals could borrow and/or refinance to a more accommodating mortgage.  But the day the music stops is the day Credit losses begin to explode.  And when it comes to runaway Credit booms, subprime was no anomaly.  The perpetuation of the subprime boom was the (only) means for an overheated Credit system to finance the marginal borrower - in order to sustain the housing/mortgage finance Bubbles.  Enormous festering risks were well-concealed by the illusion of perpetually rising asset prices and limitless market liquidity.

I won’t attempt to make the case that the global M&A Bubble is (quite) as acutely vulnerable to “Ponzi” dynamics as subprime.  But we do know that a proliferation of deals has created a current pipeline of hundreds of billions of risky corporate loans that will need to be sold into an increasingly risk-challenged marketplace.  Additionally, the M&A boom has been instrumental in inflating global equities markets, both by bidding up prices and fostering general liquidity and speculative excess.  A reversal of these dynamics is now a distinct possibility.  A serious market liquidity problem will commence with any move by the leveraged speculators to aggressively hedge risk and/or place bearish bets. <end quote>