Tuesday, June 5, 2007

That Pig Don't Fly

During 1996-2000 the name of the global financial game was NASDAQ, DAX and anything that ended in "com". Since 2001 it has been debt, debt derivatives and structured finance.

Egged on by ultra low interest rates, the whole world has gone on a borrowing binge creating awesome debt that is masquerading under the benign - but fallacious - name of "liquidity". The same environment of hubris, excess and malfeasance surrounds the debt industry today as it once did with tech stocks. The same talk of "innovation" and "it's different this time", the same 122-page learned analyses stuffed with equations and charts that "prove" the bullish case... and the same enormous fees.

The same astonishingly overpiced (pari pasu) IPO's of CMO's, CDO's, CLO's, CMS's, based on heroic assumptions of debt service ability and collateral worth. The same wool being pulled over investors' eyes in the form of arcane derivative structures that not even a math PhD could easily explain to the un-initiated. The same "I snap my fingers and I get $10 billion in financing" cocky attitude amongst "financiers".

But no matter what, debt is just a pig. You can dress him up with aviator cap, silk scarf and snazzy Ray-Bans. You can even pose him in front of the latest model Gulfstream G550 with a Cohiba stuck in his snout, his hoof casually around a sexy hostess in a slinky dress.

But it is all a sham. No matter what, that pig don't fly and all that "liquidity" is just a load of debt that MUST be serviced and MUST be repaid when due. And we shall then see that porkers don't just sprout wings and soar in the skies... they always end up as ham, bacon and sausages.


  1. But isn't good capitalism using debt to make money? Financiers are using debt to make more in returns than the debt takes to service - capitalism 101 (playing devil's advocate here)

  2. ...and debt would be wonderful if it went to build plant, equipment, infrastructure, fund research towards a better energy regime, etc. Instead, it is used to leverage "assets" like homes,stocks and accomplish LBO's at ever higher prices.

    To paraphrase.."Debt is Good"... until it isn't.

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  4. Costs for production capacity isn't linear. People aren't always rational. Economies of scale make it cheaper (per widget) to build a factory that makes 20 million widgets than a million widgets. Cheap money makes it possible to build ten 20 million widget factories. Greed rationalizes it.

    Cheap debt, low volatility, and greed eventually lead to over capacity. Over capacity leads to bankrupcies and deflation. Business cycle 101.