M&A Frenzy

Here’s a question I have for all the students and fans of M&A alike: Why now, and not two, three, four years ago?

How much of the process of merger and acquisition is ego driven, psychology, sentiment — and how much of it is legitimate, intelligent strategy?

Recall that in 2001-03, there were a dearth of deals. Any buyers back then were getting bargains galore, at rock bottom prices, when the rest of the world HATED DEALS. Now, acquisitive corporate managements are paying premium prices, as profits decelerate and the economy slows.

Isn’t it better to buy low and sell high?

Many of the deals we have seen have been all cash tenders; That’s not like Google taking advantage of their high share price to acquire YouTube for essentially free.

Whenever we see a massive spasm of acquisitions, it makes me wonder what is it really that is driving the deals — especially considering that these purchases could have been made for pennies on the dollar a mere three years ago. Back then rates were even lower, China was still growing at 10% year-over-year, taxes were low.

Why the rush to acquire? Is there that much cash around? I don’t believe its the regulators taking a nap; There is much more to this wave than merely that.

Where are the Benjamin Graham aficianados? What say the value players?   

When you see Warren Buffett talking about a $40 billion to $60 billion goal for a single purchase, spending his huge cash hoard he took decades to acquire — despite having one of the worlds most valuable currecnies — it makes you wonder if everyone has taken leave of their senses . . .


Buffett’s Quandary, M&A Case Study, Sotheby’s Surge
David Wilson
Bloomberg, May 8 2007

As Deal Barriers Fall, Takeover Bids Multiply
Regulators and Size Pose Less of a Problem;
‘Nobody Is Off Limits’
DENNIS K. BERMAN in New York, JASON SINGER in London and JOHN R. WILKE in Washington
May 8, 2007; Page A1

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What's been said:

Discussions found on the web:
  1. V L commented on May 8

    Mittal is in talks to buy my AKS for $4.5 billion, or $40 a share.

  2. V L commented on May 8

    They are not crazy. They simply do not have any better ideas about what to do with their cash. There is just too much cash.

  3. lloyd commented on May 8

    It’s a safer bet to try to acquire companies when everyone else is trying to do it. These guys have a herd mentality and money is free.

  4. V L commented on May 8

    It is human greed and psychology. They want to have their toys and they afraid that somebody else will snap it before them; therefore, they do not mind paying more. It is similar to people overpaying for a rare painting – so they can have it but nobody else.

  5. GP commented on May 8

    I agree with V L, I think it’s a combination of having cash to burn, banks freely lending and in the case of all the LBO’s a lot of money in the market chasing a relatively small number of decent investments.

  6. Jason G. commented on May 8

    A big part of it, if I understand correctly, is the demand for bonds (commercial paper).

    Many pensions, insurance companies, etc. were burned holding too much equity in the bear market, so now they have mandates for how much of their assets have to be in bonds (and for many, the “how much” is 100%).

    If you had very high demand for bonds but couldn’t find anything to do with that bond money (e.g., businesses to run, businesses to start, capital to invest in, etc.) you could easily fall into the current logic…

    If I have demonstrable demand for bonds, but can only buy equities easily, why not turn water into wine and buyout equities and turn them into bonds?

  7. Jason G. commented on May 8

    Oh, and when the demand for bonds is completely un-fazed by poor economics on any particular position, it simply allows worse and worse deals.

    If I’m institutionally bound by regulation to invest other people’s money in bonds, do I really care what the rate is, or do I care about being fully invested and earning my bonus?

  8. Jay Weinstein commented on May 8

    If i recall correctly, all academic studies show that surges in M&A activity are signs of a top, not a bottom.

    The misconception is that because private equity firms are the buyers this time, not entrenched corporate management, it will work out fine because the private equity people are smarter. I see no reason to believe that they are any more immune to the herd mentality than anyone else.

    When cycles are at one extreme or the other, it is simply hard for humans to forecast change. At bottoms, no one wants to take risk. At tops, no one prices risk correctly.

    I have no idea when, but it will happen in this cycle too.

  9. Nova Law commented on May 8

    Given the track record that Warren Buffett has compiled on behalf of myself and other Berkshire Hathaway shareholders, I find it amusing in the extreme for anybody to suggest he’s “taken leave of his senses.” When it comes to investing we should all wish that were were as insane as the Oracle of Omaha.


    BR: Anyone with a 3rd grade reading comprehension understands that statement is hyperbole about M&A in general, and not a sleight about Buffett. The embedded link is about his prior acquisitions and his skepticism of the M&A boom.

    This is why people do not like lawyers.

  10. tjofpa commented on May 8

    psychology, sentiment…

    Just look at some of the “whoppers” getting $ thrown at them;

    MS gonna buy Yahoo…oops
    IBM gonna layoff 150,000…
    BHP “no Problem” bidding $100 bil for Rio Tinto…

    Isn’t kinda unusual for AA to be up on the deal if they’re issuing stock?

  11. kharris commented on May 8


    Please recall harder. I’d love to do a bit of reading on the subject.

  12. grodge commented on May 8

    Buffet said he was “looking for” a big acquisition; he quickly qualified that statement by adding the he currently could not find anything at a fair price.

    The Oracle has to put all that moneypile to work somehow, and he implied that he does NOT want to keep it sitting in US dollars or Treasuries.

    My guess is he either a) doesn’t buy anything until a market pull-back, or b) buys a hard asset, or c) acquires a company that collects revenue in something other than US dollars.

    Pins and needles…

  13. LAWMAN commented on May 8

    I have to agree with grodge. Buffett is in a tough spot…he is sitting on loads of cash, knows the dollar is depreciating, and needs to have that money making money.

    My bet is that he invests outside the US. Maybe a foreign commodities co.?

  14. REW commented on May 8

    I see it as a perfect storm of several factors:
    SARBOX has had a double-barreled effect. First, the higher costs and administration of regulatory compliance is driving corporations to join together to lessen the impact. Second, the fallout from making corporate risk-taking borderline criminal is that corporate boards stopped taking risks. They took their balance sheets from one extreme to another. Private managers can now come in, buy these clean, cash heavy balance sheets, and immediately pull all their money out by leveraging the thing to the hilt.
    The cycle of private equity is a big factor. PE boomed in the late 1990s and a lot of cash was raised into the early 2000s. Unfortunately, the deflation of 1997-2002 and its resulting recession and tech meltdown meant a lot of that money went uninvested. With hard timelines for PE funds to draw capital from investors, it is lijely that PE managers from 2002 & 2003 vintage funds are rushing to put money to work (they can only charge fees on capital drawn and often have a 5 year window to draw it).
    Finally, I think the expansion of the view of PE as a separate asset class has influenced institutional and HNW individual investors alike.

  15. erik commented on May 8

    As a speculator working in very short (days to weeks) time frames does it do us any good by looking at what the Oracle of Omaha, Mr. Warren Buffett, has been doing in the markets recently. Two recent events, a large railroad buy and forshadowing parameters of his next big (40-60 billion) deal have colored pages of the bulls play book and have scarred some of the bears into believing if Buffett’s buying this market, why would we ever stay out of it?

    To me as a speculator, Mr. Buffett’s long term investing thesis holds absolutely no sway over how I trade the markets on a short term time horizon. I could not think of a more obtuse comparison to focus as a speculator. The ONLY thing I have postulated is that the DJIA transportation average ($TRAN) was definitely propped up by his railroad purchase a few weeks ago and without that catalyst it would probably not be confirming the dow theory buy signal triggered in late April. However, we could say the same thing about the utility index being propped up the KKR buyout of TXU and furthermore, the DJIA being propped up by buyout rumors/mania not fundamentals.

  16. Big Al commented on May 8

    Iscar which he has just bought is an Israeli company, so he is looking outside the USA.

  17. Fred commented on May 8

    It started with the US Dollar Repatriation Act, which started a huge inflow of $$ to corporate balance sheets. It came with a mandate — spend it.

    Add a weak dollar which (finally) made our exports more competitive. (profits up)

    Add compressing PE’s (cheaper vs earnings)

    Add cheap capital and tight spreads

    Add motivated stock holders – underperformance of shares.

    All these factors helped in making this trend so popular now.

  18. Richard Hanley commented on May 8

    It is the last great way to get rich before the crash. We talk of entities (Blackstone, etc.) but the actions are taken by people. If you are financially astute and things look to be ready to turn to crap, once some trigger happens, and you have the ability to do so, why not do whatever to make some fat money?

    I’m not saying it is a good idea but people seem to be suffering from the ever increasing overhang of uncertainty in the world. Humans don’t handle uncertainty and they hate to lose. So they are taking actions to have one more win. You can believe that this is not a good sign.

    Drinking and then driving is not a good idea but try to tell that to a drunk. By the way, Microsoft isn’t going to buy Yahoo and Warren Buffet isn’t going to pay the wrong price for a company. He’s researching now because sometime soon he may be able to pick up a company for pennies on the dollar. I’m looking at the housing market now because at some point I’m going to get a house for a much lower price if I have prepared correctly.

  19. KP commented on May 8

    I don’t suppose that it ever occured to these companies with all of this cash…that they COULD return it the shareholders in the form of dividends? Guess not.

    Instead they choose to burn it by making expensive and unnecessary purchases. It’s been noted in several surveys of company executives that a economic slowdown is looming…yet they make needless acquisitions?

    I suppose they have nothing to fear anyhow, people just keep buying the stock. I am defintely missing something.

  20. fatMary commented on May 8

    cash flow yields are higher than borrowed money rates. combined with the the greenspan put on the economy and its a sure bet…..

  21. theroxylandr commented on May 8

    It’s all like everyone is trying to get rid of money, probably expecting that the value of money should decline.

  22. Chad commented on May 8

    I was told MZM increased ~10.2% YoY… if this is correct, I think the PE frenzy is more a result of “free” money burning a hole in PE’s pants. Buffett will not overpay. He does make mistakes (like not selling KO about 10 years ago and even he admits it was a mistake), but I don’t think he will make a $40 Billion mistake.

    I am curious what the company in South Africa may be. SSL?

  23. zell commented on May 8

    Just about everyone has a point. REW has a skewer. The bubble is still expanding and this type of behavior is typical endstage. Can you imagine what happens when the contraction begins and these enterprises are thrown to the Chainsaw Al types. Oh, I forgot…no more contractions.

  24. Greg0658 commented on May 8

    Would the USA or Wall Street nationalize to redistribute? Doubtful. To distressful. To time consuming.

    IMO Entities are hoarding and aquiring to survive the Parker Brothers Monopoly game enabled by the money supply and growth of share price inflated book value. Outflank the Wal-Mart for fun and to own the most barcodes.

    Why now? There is a line in Conan I, “do ya wanna live forwever”, answer … Ya – but with flair. Its the culture.

    Finally, I wonder if the job of managing all these assets could get incredibly difficult with a couple imaginable catastrophies?

    Are the rules of Monopoly flawed? Sorry Chutes & Ladders Life.

  25. flipper commented on May 8

    judging from his recent bet on railways, Buffet thinks that oil prices are going to stay high for long.

    i bet he’s after some mid size oil or commodity company.

    one can still find some at very good valuations, p/e 2 less than the market on average.

    i recall you disclosed owing COP yourself Barry


    I own BP (via alongstanding holding in Amoco) and after that deal, I asked about and looked for ready comparables. Someone (it might have been an Amoco big wig post merger) suggested Philips had the best numbers. That brought us to own Philips Petroleum (now Conoco Philips) which has been a long term hold.

  26. Craig commented on May 8

    Okay kids, this is easy.

    Warren’s dollars (and those of anyone that has collected a few dollars) are going DOWN in value.

    When you have as many dollars as these folks you start to see how fast that loss of value is happening. We pee-ons don’t have a large enough pile to actually SEE it being depleated like the fuel guage on our cars. Warren does. NOT that we don’t know it, we do, but it is s-l-o-w.

    When your dollar is dropping you buy HARD ASSETS that are appreciating.

    For Warren that would be foreign assets returning profits in appreciating currencies and value in appreciating assets.

    It’s not the total buying/merging, but WHAT they are buying and merging.

  27. TheFinancialPhilosopher commented on May 8

    I believe several factors are at play and most are well-covered in previous comments. To combine comments from V.L. and Jay, I believe that the human component of greed is the “disease” that is driving the “symptoms” of this illogical wave of M&A activity that seems to point to the final “leg up” in this market cycle. This may be an oversimplification, but there are two sides to every exchange — a buyer and a seller. In the big picture view, I believe that the sellers are making the better decisions at the moment and the buyers appear to have some combination of greed, big egos, large piles of cash, or lack of new and innovative ideas driving their purchase decisions. As for Buffett and other value-minded investors, I believe their purchase decisions are primarily based on fundamentals and are not driven by emotion:

    Illogical M&A activity “EX-Buffett” is still illogical M&A activity…

  28. flipper commented on May 8

    Craig, take a look at his annual letter to shareholder.

    He’s been hedging currency for a while and he was a consistent bear on usd for a while also.

  29. S commented on May 8

    The source for all M&A booms is that it’s cheaper to buy assets on Wall Street than it is to build.

    One of the heavy industry companies in my portfolio is capacity constrained. They’d like to add capacity to take advantage of the high selling prices they’re currently experiencing. They confirmed on the last conference call that it will take at least two years to bring new capacity online and the replacement cost of its existing asset base is over 2.0x its current enterprise value.

    Despite the housing recession, there’s a raging bull market in building materials like cement, copper, lead, nickle, etc. Backlogs at construction and engineering firms are so long rates are going through the roof (FWLT, FLR, CBI, JEC).

    So, the choice is whether to buy a competitor with a seasoned management team and staff and begin realizing revenues from the date the acquisition closes, or do you build from scratch, pay 2.0x more than what it would cost to buy equivalent capacity by buying a competitor, wait over two years to have the project online generating revenue, and train a bunch of people to manage and run it.

    Which would you do?

  30. Estragon commented on May 8

    M&A is being driven by the continuing need to create debt for export.

    Consumers are probably reaching (or exceeding) the limits of net new debt creation through CDO’s etc. In order for the current global imbalances to be maintained though, debt MUST be created for export, as a matter of simple arithmetic. With consumer debt creation showing signs of stress, the corporate sector is the next batter up.

    What happens from here will likely be determined by perceptions about cashflows to service debt. As long as the consumer sector can continue to service existing debt at about current levels, the corporate debt creation channel can continue to produce debt for export.

    At some point, the consumer or the corporate sector (or both) will reach a point where cashflows can’t service existing debt, and those channels will close. Assuming the global imbalances continue, the government sector will be the last remaining channel for debt creation.

  31. Craig commented on May 8

    Yes, i know he’s been hedging USD for a while now. lost on that bet a while back too.

    NOW it’s actually happening and he’s buying assets, mainly foreign assets which are appreciating in value and returning appreciating profits.

    For the rest of us, stock up on gold, francs, foreign assets and American multinationals taking international profits in currencies other than USD.

    EVERYONE should know exactly what is happening right now.
    There is no craziness or whackiness. It’s SMART to buy STUFF NOW with whatever is left of your dollars.

    THE DOLLAR is where the bubble is going to burst. You will have as many (or more)dollars as you do now, they will simply be worth-less.

    For Buffett to have 80 billion that would turn to 40 or 50 billion is STUPID and it is for US too.

    Rule #1: DON’T lose money.

  32. David Yaseen commented on May 8

    Buffett is not that stupid. Going both feet into the M&A hot tub is about the exact opposite of his historical approach. I’d guess that he sees the crunch coming, and he wants as much dumb money out of the market as possible. Oh, and some fire-sale priced assets to nibble on with his huge (dollar-hedged) pile of cash.

  33. Shrek commented on May 8

    100 percent agree with estragon. We are the ultimate capitalists The question is in ten years are we going to regret it.

  34. RMX commented on May 8

    Many of us already regret it.

  35. John commented on May 8

    Yeah, I think Momo Fader is on to something, here.

    They didn’t get the nickname vulture capitalists for nothing, y’know?

    Position: long capitalism, short bloodsucking leeches

  36. Estragon commented on May 8

    Momo – You’re entirely correct. The answer is it’s happening because it is (and people have made lots of money at it). The thing is though, it’s happened many times in the past. Remember the rise of the conglomerates, LBO’s, etc.

    BR’s question was “why now?” though. I assert it’s because the debt for export creation process is moving on from the consumer to the corporate sector, because the pickings are getting slimmer in consumer debt. Now, the lower hanging fruit is in the corporate sector. If it continues, the low hanging fruit in the corporate sector will be picked, and the government sector will be next.

    When/if that happens, there will be much ink spilt and bits flipped to explain it in terms of taxes, spending, waste, etc., but the underlying process is creation of debt for export.

  37. anderl commented on May 8

    2001-02 borrowing of commercial paper was at an all time low. During a bear market asset prices deflate (stock prices in this recent one). If your market capitalization fell then your overall worth to borrow against is low. Even though rates were falling the expectation was rates would fall even further. You don’t want to take out a loan against your assets if your assets are depreciating. It’s like holding a reverse mortgage. Besides demand for production was down. If you are having trouble maintaining productivity and profits in an economic contraction why would you increase in size? Why take on another company’s misery?

    It is better to circle the wagons and keep what little cash you have in reserve to maintain operations or improve efficiencies.

    Come 2003-2007 you have an economic expansion. The Fed injects liquidity in to the market and signals increasing rates. Commercial paper borrowing goes through the roof. Like every corporation at once refinanced old debt and borrowed heavily against assets and stock. Why? Not to buy value, but to expand faster. Almost all boats are rising with the tide but some rise faster and you don’t want to be the one who is only performing at the same pace as the rest of the economy. You are going to get eaten by the bigger and faster growers.

    It is extremely important for you to realize that investors and business owners do not necessarily look at the value of a company the same way. Investors want to buy value and expect growth in stock price in one way or another, be it stock buyback, takeover, or better earningsprofits. Investors want to buy the company when it is undervalued or not in the spotlight. Business owners look at companies in terms of their own survival and is relative to the pace of others in their industry. Most do not want to be take over targets because they loose control of their operations. They want to be leaders not part of the pack.

    M&A activity happens when markets are their strongest because profits are high and cash is freely available. Market share is almost completely absorbed by all players and the only way to gain more is to innovate or gobble up a competitor. the problem is that your competitors are going to be relatively profitable as well if your industry is strong and was as weak as you when the industry was doing poorly.

    Investors don’t really care to hear that they are outperforming the market because they are down 10% and the S&P is down 17%. They don’t want to loose money at all. Business realizes that it is part of the economic cycle.

  38. ECONOMISTA NON GRATA commented on May 8

    “Why now, and not two, three, four years ago?”

    To answer your question Barry…

    The markets have accomodated these type of deals with models that have evolved to redefine value. Just as in real estate, prudent lending practices were redefined in order to be relaxed (understatement). So, valuations have been redefined to accomodate the succesful execution of these transactions. We must remember that the valuation of intangibles is an art and not a science. That’s why some of us look at the equity markets as though they defy reason. However, the fact is that by all the standards of natural logic, the prices that are currently being paid per unit of equity are on the high side, leaving little margin for error.

    Best Regards,


  39. REW commented on May 8

    I must disagree with those who post here and elsewhere that the tipping point is nigh as consumers (or companies) can no longer service their debt. The Fed is intentionally devaluing the dollar so that debtors can repay their debts with less value.
    It is the lender that suffers during an inflation, not the borrower. This brings us back to BR’s question. The M&A deal is about leveraging corporate balance sheets. Why do they do this now? Because these smart capitalist see the inflation and are trying to take advantage of it.

  40. Nels Nelson commented on May 8

    I’m on board with Estragon. The U.S. needs to export debt and the end of the line is approaching for the consumer sector and is now moving on to the corporate sector.

    Steve Randy Waldman had a post on his Interfluidity blog about this very issue. He stated it in terms of the U.S having the “Dutch Disease”.

  41. Shrek commented on May 8

    Letting foreign CBs set become the dominant price setters for interest rates will go down as one the worst decisions since the 1970’s. The private sector has to set the price of money. CBs do not have enough personal skin in the game.

  42. Estragon commented on May 8

    REW – just to be clear, I’m not among those suggesting the end is nigh. On the contrary, the corporate debt export shows no serious signs of ending (credit spreads and risk premia are low), and the government sector hasn’t even started yet. I do think that the longer it goes on, the higher the risks are when the imbalances finally reverse.

    In that vein, I’d also point out that I’m old enough to remember when inflation was seen as a certain tradeoff with employment. I’m not so certain that borrowers escape unscathed as the endgame plays out.

    Nels – the US doesn’t have dutch disease. The basic idea behind dutch disease is that high world prices for a tradable (usually a basic commodity like oil) cause an otherwise unwarranted increase in a country’s exchange rate, which in turn makes other industries uncompetitive. Canada may have dutch disease. The US doesn’t. What the US has might better be described as British disease (circa late 19th century).

  43. Estragon commented on May 8

    Shrek – agreed. There’s a risk it becomes a national security issue at some point.

  44. D. commented on May 8

    When there’s no more organic earnings growth companies must look elsewhere. That’s when they go on a buying spree since it gives them 3-4 years of cost cutting and earnings opacity while profitability is coming down everywhere else.

    It does not help that rates are low and private equity funds are on a rampage. Companies will now do anything to make themselves either look pretty or ugly!

  45. John F. commented on May 8

    It’s the conundrum. Not A conundrum, but THE conundrum. After pondering the conundrum for the last few years, businesses are finally discounting the persistence of low interest rates into the future. This reevaluation is outpacing that of the public markets. Ergo, acquirers value the targets more highly than the markets do, using the usual models with a lower discount rate. I believe these low rates will long outlive recent discussion of excess liquidity, due to underlying deflationary trends (yes, ex- ex- ex-, etc, but I’m talking about the longer run here).

    Industry consolidation ahead of a Democratic administration may be an additional independent factor. Deals beget deals to some degree, as the bankers begin to smell blood in the water and CEO testosterone levels rise. But there haven’t been many glaringly stupid deals to date. Upon the announcement of a deal to assemble the next conglomerate, consider the bell rung.

  46. tjofpa commented on May 8

    Isn’t it kinda unusual for AA to be up on the deal if they’re issuing stock?

    Yup, I kinda thought they were actually trying to put themselves in play also.

    “Shareholder Jana calls on Alcoa board to drop Alcan bid” – MarketWatch

    There’s gonna be alotta shenanigans before this one’s over.

  47. Shrek commented on May 8

    Lathering 99 percent of Americans and now a large percentage of well run American corporations with tons of debt in order to provide growth to the ROW is not a longterm solution, in fact its probably a recipe for a severe hard landing. All I hear all day long is “global decoupling” is for real, blah blah blah. Its not going to happen until this silly dollar and interest rate price fixing stops going on. Only then are we going to figure out how much progress is being made. My guess is much less than most people assume.

  48. Fred commented on May 8

    Many comments here warn of a huge debt load in the corporate sector. That is WAY off base. Consumer debt is high (in nominal terms), but corporate balance sheets have not been this “pretty” in decades. The PE guys see an opportunity to leverage these balance sheets, re-focus the businesses in the hope of creating an increasing cash flow, from which to pay down the debt (gussy the balance sheets back up) for an ultimate sale to the public.

    So why do PE now?

    -Ability to leverage the balance sheets at very attractive spreads….Simple

  49. zell commented on May 8

    Part of the M&A activity is a variant of panic buying- I better buy it before someone else does! Game Theory. All the valuations, numbers, are based on the current reality. The exogenous event happens and changes all that. New Game.

  50. The Capitalist Resistance commented on May 8

    The Big Picture | M

    Link: The Big Picture | MA Frenzy. Barry Ritholtz comments on the wave of MA activity

  51. Barry Ritholtz commented on May 8

    Awesome, awesome discussion here.

    I am kvelling . . .

  52. Shrek commented on May 8

    M&A and PE are happening because they are the two places where the private sector can still find decent alpha. Stocks are simply a reflection of both.

  53. Winston Munn commented on May 8

    There are many fascinating views expressed here by many intelligent and well-educated posters. Let me express the views of one not nearly so well educated but thus not tainted by a formal economics education based on Keynesian model.

    There appears to me a simple explanation for all the activity at this time – there are left no other choices to sustain the scheme.

    To address a few comments – the Federal Reserve has no control over the value of the dollar. They cannot debase the money directly; however, they can conspire to do so. Debasement is expanded money supply; money is debt. Period. Holding onto the target rate means granting the powers of money supply to the borrowers – the fed cannot pick and chose who gets to borrow.

    Repayment of debt contracts the money supply. Does the Fed wish this to occur?
    Does anyone? How can a debt bubble be expanded without fresh debt? The fed understands well that a money contraction and subsequent credit crunch would bring this game to a sudden and catastrophic end, so they have no desire to lower the dollar value to have debt repaid.

    I would even go so far as to say the Fed is a meaningless player at this point, except for the short term emotional reaction bias built into the markets, but as to actual sway over what happens they are powerless. Interest rates are driven by the massive worldwide bond markets while the Fed has abandoned their chance to contol money supply – where is their power to do anything but be a “bully pulpit”? They do not control interest rates; they do not control money supply. What is left?

    The consumer is reaching the point where no more short term credit is available to them; the housing market is in recession and home prices will continue to fall; Mew can no longer be counted upon; capex is dwindling; subprime has collapsed and banks and mortgage companies are tightening lending standards.

    Where does the debt come from to provide the currency expansion necessary to sustain the bubble? If there is less money in circulation, tighter lending, and higher interest rates do you think the markets would rise? Money must be created to sustain the rise or more likely simply to prevent a collapse. Money=debt. Debt=money. No new debt, no new money, no more bull market.

    But there is a Catch-22 in this scheme. New debt=new money=money debasement (commonly termed inflation.) So you get to pick which kills you, a collapse or inflation.

    Looks to me as though LBOs have been forced to cover for subprime and the general housing market collapse. The loan standards are similar to subprime as is the hype. And the underlying risk is very similar. And the money simply must be created by new debt. I would even guess that the reason the fundamentals of these buyouts is so weak and risk is so high and the lending standards so loose is that the risk in not being weighed against the individual deal but against a greater risk of not creating new debt.

    And this is a global phenomenon – money supply expansion is running double digits everywhere you look. Every single dollar, eruo, franc, or krona is the product of debt – that debt has to be paid. How? Either with new debt or with currently held capital. What happens if currently held capital reduces a debt to zero? That money disappears, is subtracted from money in circulation, goes back into the black hole from which it was born. If instead, the company borrows the money to pay the debt, an equal amount of new currency is created, adding to the supply of liquidity. As long as the company can borrow cheaply enough they can use currently held captital as investment capital to offest the cost of borrowing and still profit.

    I take back an earlier statement – the Fed does have one power left: they could raise the target rate high enough to make borrowing unprofitable, thus contracting the money supply and lowering debasement (inflation). But then, we know what a money contraction would do – pop the bubble. So although a real power, it is one the Fed will not use.

    To those who accept a raging bull market in commodities I suggest this from economicpolicy.com.

    “On Wall Street, the chorus is getting louder that rising metal supplies are outpacing demand. From Goldman Sachs Group Inc. to JPMorgan Chase & Co. to Societe Generale, there are warnings of a mania that is showing all the signs of a climax, Millie Munshi reports for Bloomberg..

    ‘This is a real bubble,’ says metals trader David Threlkeld, who first got the world’s attention in 1996 when he showed that Sumitomo Corp.’s copper hoarding would lead to a market collapse. Once again, `we have an enormous amount of unsold copper,’ says Threlkeld, president of Resolved Inc. in Scottsdale, Arizona.

    Nickel stockpiles tracked by the London Metal Exchange, the world’s largest metals bourse, rose almost 60 percent since dropping on Feb. 6 to 2,982 tons, their lowest since July 1991 and barely enough to supply the world for a day.

    Lead inventories are also rising, gaining by 42 percent since March 13 on the LME, to 43,825 tons. A surplus of 25,000 tons of lead may exist next year, from a deficit of 35,000 tons forecast this year, Natixis Commodity Markets Ltd. said in a quarterly report on May 1.”

    Bubble built upon bubble built upon bubble.
    When will it pop? That is the real question.

    Oh, what a tangled web we wove
    when paper first replaced our gold.

  54. Frankie commented on May 8

    Markets is as markets does. Interesting.

  55. my1ambition commented on May 9

    Do remember that Warren Buffett likes to play fair. He had to convince Washington Post that he was investing and not taking over. He is now looking for much more than a take-over target he is looking for a legacy.

    Based on the amount of above ground gold reserves according to the World Gold Council, Warren Buffett’s $40 Billion could hypothetically buy 11% of it. I think the thought alone should make Ancient Kings jealous.

    If anything starts rising quickly, pay attention Buffett may be getting on-board.

  56. Diwakar commented on May 11

    It’s spooky. I don’t have reliable information on this, but my thoughts are: to increase coporate earnings through M&R rather than innovating and getting in to global action. Most companies not have exposure or visibility to other economies. So the best way for them to get into action is M&A.

  57. MikeW commented on May 12

    2, 3 or 4 years ago, money was cheap
    but it wasn’t so easy.

    The subprime crisis alerted Private Equity
    to a huge opportunity they’d been missing –
    that the rules had changed: money
    had lost all concern for risk. Repaying
    borrowed money simply no longer mattered.

    Having figured that out, and still posessed of common sense, a mad dash had
    to be made before that unusual window
    slide shut.

  58. Jarrod commented on May 14

    Not so sure about the domestic deals, I agree, EGO is so much of it, but as far as the REST OF THE WORLD buying US companies, why not! And only now because the UK can buy one get one half off! The pound is 2 for 1 so yes, the domestic company is fully valued if not overvaled but they still get it so cheap cuz the dollar is so weak. If I were a brit, I would be on holiday here bigtime! Makes domestic companies so cheap.

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