Thursday, March 29, 2007

. Charles Duhigg. "Cheap debt takes the fear out of making a deal", International Herald Tribune.

I watched yesterday's Squawk Box Europe Ken Fisher interview with interest. According to Fisher, the private equity boom will continue as long as the large spread between the cost of debt financing and the return on equity persists. Late last year, Fisher was quoted by the International Herald Tribune:

"Right now, debt is so cheap that you can borrow and buy another company for less than it would cost to build something yourself," Fisher said. "And that's not going to change until the stock market goes up significantly, or bond rates increase. Banks and insurance companies are eager to lend at today's going rates. As long as bond buyers think the future is rosier than stock buyers, there's going to be lots of deals."

From my perspective, the really interesting part was Fisher's comment about the unusually long period of abnormal discrepancies between the cost of debt financing and the return on equity capital: 54 months. Fisher was prompt to add that this had never happened before. Amazingly enough, we are about the enter the 54th month in a row in which our own Global Liquidity Index grows at a 10% (or more) annual rate. This too has never happened before.