Thursday, April 05, 2007

Sordid Business of Predicting A Crash (con't)

Kurtosis in the daily cross section of US equity returns is as elevated and extended as it has every been, YET the skewness remains highly positive, a truly anomalous circumstance. Historically, this has reliably foretold something ominous to come. Today, in answering the question I posed and whose answer I hinted at in my early March post of similar namesake, I will reveal why this happenstance exists. The answer is: "Private Equity".

Collectively, they [private equity], and the speculators who move security prices on the basis of rumours surrounding "who's next", are the ones responsible for the positively-signed, bountiful premiums, gapping certain stocks in the distribution higher in relation to the the rest of the distribution, which only inches forward. And as Stephen Ratner forthrightly said in his Bloomberg interview detailed below, they [his own private equity firm, Quadrangle] will continue to take things private so long as liquidity is abundant AND lenders are willing to buy debt at rates and on terms that, as Ratner says, make little economic sense from the perspective of the lender.

So in itself, the higher moments of the US equity market are whispering "bubble", though the bubble is seemingly located in the credit markets, with the equity market but a reflection thereof. This doesn't leave equity markets free and clear by any stretch of the imagination, for the chain of dependencies and linkages are many and complex, but it does explain the highly unusual circumstances of the higher moments. And by explaining away the fragile state of the higher moments, it perhaps takes the heat off of a collapse based upon unsustainable speculative internals, and pushes it towards the exogenous sustainability of the credit markets' extreme generosity and munificence.

Historically they have been related, and, as such such, the higher moments of the US equity market may themselves be the tell-tale of the bell-ringing ebullience of us dollar-based credit markets.


OldVet said...

The bubble in stocks will last as long as the bubble in credit extension? Maybe, but the credit cycle is getting long in the tooth. Equity earnings momentum in US is heading down. Interest rates (ex-Japan) are rising to hold off inflation generated by the self-same credit generosity of central banks and financial institutions. And what goes private must again become public, further burdened by debt the PE boys laid on. If we could only figure out the timing.

Anonymous said...

So who are these lenders, and by extension the owners of long duration bonds? Thus, I visit this site "Cassandra Does Tokyo" to find clues to the intent of trigger pullers in East Asia.


Cassandra said...

dear pi,
I believe that there are enablers, (selfish, misguided and shortsighted as their ZIRPeriffic policies may be), and followers. The prime enablers are the fiscal and monetary authorities (PBoC, BoJ, US Congress etc) who encourage capital/savings to flow "uphill" when they (Japan) are still running large fiscal deficits, and have no shortage of domestic infrastructure investment projects (in China), and blithely and gluttonously consume said surplusses (USA) with nary a thought to the MT macro implications.

The followers are the market, domestic Japanese savings deterred from YEN by ZIRP, strongarmed GCCs, and other accumulators who have little else to do with surplus greenbacks at the moment, and the army of leveraged IR specs along for the ride.

Sadly pi, I can offer no clue to the intent of the enabling trigger-pullers (certainly nothing that Setser, and US politco blogs can portend), and can only offer that "the followers" are likely to behave (as their namesake) in classical mimetic fashion exacerbating whatever hapless end lay in store for the BW2 regime...

All signs point in the years ahead, in the absence of meaningful change, to higher US inflation, higher US rates, lower US dollar, higher commodity prices, until cyclical revulsion sets in. This is all wholly dependant upon when East Asian authorities relent and permit the market in US rates and dollars to discover its true equilibrium. Until then, stagflation of sorts and a rising misery index for most Americans.

Anonymous said...

Japanese savers deterred by ZIRP?...or trapped by it? Whatever happened to "Savers Power"?

ilanit said...

Los Angeles equity investment banks use league tables to rank who has the highest dollar volume of deals in debt, equity, syndicated loans and M&A activity. Unfortunately (or fortunately if you are sick of hearing about league tables) there really hasn't been a ranking system to evaluate the private equity industry