CNBC Writes: Blackstone: We’re in an ‘epic credit bubble’
One of the world’s largest investment firms believes the financial system is overly leveraged.
“We are in the middle of an epic credit bubble, in my opinion, the likes of which I haven’t seen in my career in private equity,” Joseph Baratta, The Blackstone Group (BX)’s global head of private equity, said Thursday night at the Dow Jones Private Equity Analyst Conference in New York City. “The cost of a high yield bond on an absolute coupon basis is as low as it’s ever been.”
“We’re not just levering up U.S. GDP into multiples today,” Baratta said. “I do expect mean reversion to happen at some point on interest rates, on credit spreads, on the cost of some investment grade corporate credit.”
The high valuation of many companies today makes it harder for them to grow. “The biggest risk to returns of this vintage is that exit multiples are depressed,” Baratta said.
I strongly agree with Blackstone on this point. In relative terms we are in the largest credit bubble mankind has ever seen. The situation we find ourselves in now is like a very bad runaway science experiment that cannot be stopped.
How will it end? No one knows, but the outcome cannot be pretty. What we have experienced in 2007-2009 was just a preview. Now that the credit bubble is much bigger only time will tell us how this experiment will end. Perhaps with a bang or perhaps with an extended period of economic suffering.
What I do not agree with is that Blackstone doesn’t necessary see it as a problems by indicating that they are still bullish on the economy. The only reasons we haven’t seen the full impact of this massive credit bubble is because “so far” the Fed has been able to control the interest rates. As soon as the Fed losses this control (and they will) the interest rates will zoom up. At that point anticipate the credit bubble to implode and take the housing market, the stock market, car sales, retails sales and the overall economy down with it.
So, what’s the point here? I am not the only crazy person running around and screaming that we are in a massive credit bubble that is soon to explode. World’s largest hedge fund believes that much as well. As such, you have been warned.
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