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.