It was not difficult for an observer to understand Armageddon beckoned by 2006, as long as the observer listened to practitioners rather than theorists. The theorists: government bureaucrats and their sycophants, clog the media's arteries. Those who listened to practitioners were prepared in 2007.
The same is true today. Following are two groups of practitioner opinions: those from 2006 and 2007; then, those today.
WHAT THEY SAID:
"The enormous monetization of hard assets has created a massive amount of liquidity....Together with [the rising demand for income in the developed world], these factors are reducing the relative expectations on equity..."
- Sam Zell, in December 2005, who cashed out with a $39 billion sale of Equity Office Properties to Stephen Schwartzman, December 2006
"We have low interest rates, tons of money in both private equity and debt markets.... But when it ends, it ends badly. One of those signs is when dummies can get money and that's where we are now."
- Stephen Schwartzman, February 2006, who paid Sam Zell $39 billion sale for Equity Office Properties in December 2006 - then really cashed out.
"Clearly I'm exaggerating here, but what's the difference between a $30 billion and a $300 billion deal? It's just a few more phone calls."
- Ed Keon, Prudential Securities, September 2006
"The world is flooded with too much capital. It is virtually impossible to find any asset class that offers attractive value to investors."
- Goldman Sachs, "Outlook for 2007", January 2007
"[Carlyle] Group's fabulous profits are not solely a function of our investment genius but..... [from] the availability of enormous amounts of cheap debt."
- Bill Conway, co-founder, Carlyle Group, memo to employees, early 2007
"This is better than it gets for the private equity industry....Of all the bubbles, the bubble in the credit market today is one of the greatest - it is beyond any rational measure."
- Steven Rattner, Quadrangle Group, April 2007
"The private equity world is in its golden era right now."
- Henry Kravis, July 2, 2007. Spoken when Kohlberg Kravis Roberts & Co. (KKR) and Texas Pacific Group (TPG) received financing for the peak buyout in 2007: the Texas Utilities $45 billion LBO. It is fine to censure Henry, but the banks were willing.
WHAT THEY ARE SAYING:
"Unlike then [late 2008 and early 2009]... we have hardly any room for maneuver. Policy rates are already at zero and central bank balance sheets are bloated. Although private sector debt has started to decline, public debt has taken its place, with sovereign fiscal positions already on an unsustainable path in a number of countries. In short, macroeconomic policy is in a vastly worse position than it was three years ago, with little capacity to combat a new crisis..."
- Bank for International Settlements Annual Report, June 28, 2010
"There's some crap getting done. It's surprising to me this early in the cycle that some of that could be happening."
- David Jacob, executive vice president, S&P, Grant's Interest Rate
Observer, February 11, 2011
"The steep rise in farmland prices we have seen in recent years creates the potential for an agricultural credit problem down the road."
- Federal Deposit and Insurance Commission, March 2011
"Carl Icahn is returning all his capital to his investors: 'Given the rapid run-up over the past few years and our on-going concerns about the economic outlook, I do not want to be responsible to limited partners through another possible market crisis.'"
- Carl Icahn, March 9, 2011, The King Report
"I really find it amazing that we're almost back to where it was, where there is so much leverage finance going on. There's just way to much leverage, way too much risk-taking with other people's money."
- Carl Icahn, May 27, 2011, interview on CNBC
"'Banks are leveraged 20 to 1 and their portfolios are mainly comprised of government bonds and mortgages,' the founder of Sprott Asset Management said. 'House prices keep going down, the number of people underwater keeps getting worse. That leverage is going to work massively against anyone whose lender is in that area. The dominoes are starting to fall.'"
- Eric Sprott, Sprott Capital Management, May 13, 2011,
Bloomberg Hedge Fund Briefs
"Mr. Carney said... that the world is by no means out of its financial crisis and won't be for years. Systemic risk remains high..."
- "Mr. Carney" is Bank of Canada Governor Mark Carney - who holds the equivalent position to Federal Reserve Chairman Ben S. Bernanke. This was said at an "off-the-record" meeting but a dishonorable attendee squealed. It is worth noting that Mark Carney is a veteran of Goldman, Sachs & Co., so understands the financial system, unlike his American counterpart who would only recognize a financial crisis if someone stole his ATM card.
"Should you worry more about losing money or missing opportunities? That's an easy one for me. First, the macro uncertainties tell me we won't be seeing a highly effervescent economy or market environment. Second, people's increasingly aggressive behavior tells me to seek cover. And third, since I don't see many compelling cheap assets, I doubt there will be gains big enough to make us kick ourselves for having invested too cautiously."
- Howard Marks; Chairman, Oaktree Capital; Memo to Oaktree clients;
May 25, 2011
"'Another financial crisis is 'inevitable,' Mark Mobius, head of Templeton's Emerging Markets Group told CNBC Tuesday. 'The financial problems caused by the subprime mortgage crisis 'have not really been solved. Banks that were too big to fail have gotten bigger. Bank balance sheets around the world are not that healthy. So you have the situation which, if not corrected, will result in another crisis.'"
- June 7, 2011, CNBC.com
FLASHBACK: "Mark Mobius, the portfolio manager at Templeton Emerging Markets group, said in Paris that recent volatility of Internet stocks could be indicating a crash for the sector. 'I think we are nearing the time, that is my guess, and it will be big,' Reuters quoted him as saying. 'Some stocks will be 90 percent or 50 percent down.'"
- New York Times, March 30, 2000.
"'It's probably the most attractive financing that we've ever done, Kravis said.... The financial markets rebounded much faster than the economy.'"
- Henry Kravis, talking about funding for Del Monte takeover,
March 4, 2011, Bloomberg
FOUR DAYS LATER, March 8, 2011, Wall Street Journal: "A humiliating endgame for the largest leveraged buyout in history may come sooner than investors had anticipated.... Even owners Kohlberg Kravis Roberts & Co. and TPG have acknowledged the deal has become an albatross. KKR has already written down the $8 billion equity investment by 80%."
- The banks are more willing than ever.
CORRECTION: The subtraction calculation (net birth-deaths) in the government's Employment Situation Report is more byzantine than shown in Playing Old Maid. One part of the equation has been seasonally adjusted and one has not. The spirit of the distortion remains unchanged.
Frederick Sheehan writes a blog at www.aucontrarian.com
