Wednesday, April 6, 2016

Bunch of Useless M&A

Bloomberg, Interview with S. Druckenmiller, 2015

[Commenting on the dangers of FED keeping interest rates too low for too long] Back in late 2003, I remember we had nine percent nominal growth, seven percent real growth.  The economy was very, very strong, but we had one percent interest rates, and we also had a tag on them that they were going to remain there for a considerable period, and I just felt at the time that fed policy was unnecessarily easy [..]

[I]f you look at the situation [today], stock prices, household net worth per capita, are at record highs.  By the way, they went to record highs in 2013, and they’ve been going up for two straight years, so I’m not sure exactly what the fed is trying to achieve in terms of the reward here; particularly, since if you look at what is going on, we’ve had a tremendous amount of debt growth; particularly, in the corporate sector, and, unfortunately, the productivity of that debt, if it was measurable, I would opine to say is at an all-time low.

Why did I say that?  Because there’s good debt growth, and there’s bad debt growth.  Good debt growth is when you borrow money, and it goes into the real economy.  You do capital spending.  You build businesses.  But by most calculations, almost 98 percent of the current debt growth has gone into M &A [short for mergers and acquisitions] cooperate buy-backs, by the way, at record prices, leveraged buy-outs, so where it’s going is into financial engineering, and I can’t prove it, but I would pretty much feel very confident that a trillion dollars in buy-backs, and dividends in the last year and four trillion is the forecast this year for M & A, is a job reducer, an economic reducer, so I don’t exactly what they think they’re getting out of the zero percent rates.

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When money is cheap, borrowing becomes too easy, then money can go to places we may not like it to go to - useless M & A is one example. The big fat bond the beermaker InBev dropped recently will mostly be used for a merger IMO (low rates triggered an intense "search for yield" elsewhere, after the Inbev bond was issued the market ate that shit up so fast, it was comical). Heroic acts are becoming necessary to "stop" tax-avoiding mergers, but the fact that heroics are required signals the the "evolutionary landscape" has problems; if there is a swamp, there are flies. Virgin America was bought by Alaska Air, the former's founder Branson said he could not stop it due to a US legalistic quirk that did not give him proper voting rights; another useless merger where the friggin founder is not happy and, the word is, the consumers are not happy either. 

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