Last week I was saying that the game is over when I next hear about PIK financing. Well, PIK financing is back and reared its head in style by a deal made by Terra Ferma, a PE firm, which raised £550m in PIK bonds to buy a homebuilder–Annington Homes. The bond market is beginning to look bubbly. 28% of the leveraged loans made this year have been cov-lite. Yield to worst for the JPM high-yield bond index is at 6.85%, near all-time lows, and below LT average of 10%. More than $300bn of debt has been raised this year. All of this is obviously driven in significant part by the yield-fetish driven by the monetary policies of the central banks, and the corporates are of course happy to oblige by issuing more debt at these levels, but to my untrained eye, looks like something’s got to give, despite the lack of volume in the bond market. Sovereigns, I think will be fine, as will be cash-rich corporates who are issuing high-grade bonds, but I think that the raises in the high-yield world are reaching troubling times.
The Boomerang generation movement in the U.S. is in full swing, with multi-gen families accounting for 5.6% of households, according to the Census Bureau, compared to 3.7% in 1990. The change seems minuscule at first blush, but if you think of the total housing units, that’s 1.9% of about 132m housing units, or 2.5m housing units, and at current levels of 0.9m housing starts, we’re talking about 3 years worth of housing sales “forgone” in 12 years. Not to imply that more household formation is better for the said families, but it’s an important contributor to the way we currently measure our economic well-being–GDP.
I read the latest commentary by Jeremy Grantham “The road to zero growth” and immediately got depressed. According to GMO, 3% annual growth that we have become used to is a thing of the past, such growth a quick blip of 200 years over the long span of mankind, and instead we will see 1.9% growth, 0.9% once we adjust for inflation. You can register at gmo.com to read the letter (and ones before), or just use ZH’s copy. I am an optimist and imagine a different future where the next leg of growth is more sustainable and driven away from extractive industries, and by new innovations. Energy is a big part of it, and the energy corporations will lobby hard to make it difficult. Energy companies are one of the largest corporates on the planet and by some estimates, 0.8-0.9x of their value is buried in the ground as reserves; do we think they’ll put up a fight to not realize that value to its fullest extent?
One of the people who affects our life A LOT is a famous psychologist. It’s not Sigmund Freud, but his nephew, Edward Bernays. In Propaganda (1928), Bernays says that manipulation of public opinion is a necessary part of democracy; clearly, a very interesting individual. We can see the affect of his theories in most of today’s marketing, where the products is not sold on its merits but how it makes us feel and what it says about us; let’s not even discussing “friending” our favorite brands on Facebook. PR is a very critical tool wielded by elected officials, and are often used to sell policies, reps and wars. While, we’re here, mustn’t forget Walter Lippman who helped sell WWI to the American public.
Finally, agri-dollars. See http://www.zerohedge.com/news/2012-11-24/goodbye-petrodollar-hello-agri-dollar. Pretty damn fascinating.
Prasad Capital 