Destination: Tarnished

The death of Eos and critical condition of Silverjet, pioneers in executive-only travel, nary a few months after the peak in one of the most rollicking parties in the history of humanity, is telling us something. Precisely what may be open to debate. But it is interesting to note that their place in the food chain was (and still is in some circles) deemed to be somewhat impervious to the economic vicissitudes of the hoi polloi, along with Hampton beach homes (now falling hard), and prime London Real Estate (also accelerating its slide). This alone would cause even the mildly curious to ask "what's next?". For as the tide of unlimited availability of credit recedes, we will discover what oddities were NOT "made", but merely "borrowed", and whose impressionist acquisitions, mega-ship, and Gulfstream-IV were facilitated by the good graces of lenders and [temporarily] flush overenthusiastic consumers.

Undoubtedly, the bull market in nearly-free-credit had taken all manner of vulgarity, ridiculousness, as well as contrapreneurism to heretofore unseen levels. Certainly legitimate fortunes have been "made". Others seemingly conjured from vapor, like Vikram Pandit's have been quite literally "banked", though this may not be an entirely wise thing in and of itself if he still holds it in the Bank's shares or deposits. But one of the fascinating lessons of the tech wreck when the shareholder registers were exhumed, and SEC filings studied, was how many people believed their own bullshit, and as a result, how few people excepting the really lucky (who were taken out of their stock for cash) and the really "canny" (like Philip Anschutz and Gary Winnick) who huckstered, on-sold,, and cashed-out their way to unimaginable riches which barring the emergence of the Bolshies should provide adequate amusement and comfort for their offspring's offspring's offspring's offspring....

But as quickly as it comes, so it very often evaporates - and with even greater rapidity! Be they hedge fund pots-o'-gold (Peloton, Drake, Amaranth, Sowood etc.), staid long-only shops (WP Stewart) or aggressive and/or over-zealous banks and broker-dealers (think Northern Rock & Bear Stearns). So, with Silverjet rather tarnished, and Eos grounded, one should begin to wonder what other less-than-sustainable business models based upon assumptions of $30 oil, never-ending economic growth, unlimited future availability of credit at prices, and on terms that would curdle the blood of even the most unrestrained of lenders like Walter Wriston, are now directly or indirectly at risk.

Eight-years of trickle-up economics (both domestically in the US and internationally) will soon be ending. In its place will emerge a concept called "shared pain". This will result in higher taxes for the top quintile, and top decile in particular. Progressive taxation will return (outside of energy), and in a form of class-warfare detente, the US will join the civilized world in providing universal single-payor healthcare, higher-quality education, and more public transport in an attempt to offset the pain of convergence inflicted by globalization. In the process, we will see a further squeeze upon the former bull-market in McMansions, second homes, both at the beach and on the slope, country-club memberships, sales at Tiffany's and Coach, expensive private-schools, stupidly-priced Napa Cabernets, luxury "spa's" (at which most it still remains virtually impossible to get a decent deep-tissue massage), concert-ticket prices, sporting-event ticket sales, motor-boat sales, 2nd-hand luxury yacht prices, amongst other things that are undoubtedly correlated, but which have inevitably escaped by immediate attention.

Already, I have seen the edge taken off of car-rental prices, and the number and size of deals for hotel-rooms that but nine-months ago were firmly bid and non-negotiable. Weaker (more leveraged?) hands need to service debt as the incentives for private equity managers are to pull out all the stops in order to avoid pulling the plug, for THAT realizes losses, and stops the flow of management fees to their enterprise. And with new deal flow virtually non-existent, even with no debt in the capital structure pf the PE firms, Mayfair & Manhattan offices are expensive, and payrolls are undoubtedly bloated. This is similar to the dynamics of of Japan's zombie enterprises in the 1990s, whose continued raison d'etre of existence was to pay interest on debt even if producing at zero operating profit, much to the detriment of prices in general, and the income statements of more efficient competitors in particular. And with so many deals done with debt with far more generous covenants than typical of historical bank finance or public market debt, the eventual pressures upon prices will felt across the board.

Some will see and dismiss the death of EOS as peculiar to the airline industry, an unfortunate casualty of higher oil prices. I, however, see more it as more emblematic of "a loan too far", and indicative of the beginning unwind in stupid, over-extended, bull-market businesses that will eventually produce a luxury cull of major significance.