Capital growth and bubbles

The last riddle and the thread that runs through all this is the cheapest capital. The prices of high yield bonds are lower than a year and a half, as investors reassess the risk they are willing to accept to give loans to the riskiest borrowers. The need is real, especially for oil and gas companies, faced with plummeting prices of their products. Open question remains how long the banks will support businesses that are losing money with every barrel of crude oil sold for under $ 40.

Higher borrowing costs usually signal problems in the future. Some companies will have difficulties with the payment or simply not be able to pre-finance existing debt and will ultimately become insolvent. Widespread failures so far does not seem likely in the near future as the maturity of less than a tenth of outstanding debts with higher yields in the US expires in the next three years, so great was the pre-financing when money was cheap.

It is tempting to perceive the issues of energy groups unrelated, but we must remember that while production was enabled by technology, the cost of land, infrastructure and mining were paid by Wall Street with the sale of own and borrowed funds. When hedge fund manager David Einhorn assess the figures in May, he estimated that most of fracking companies spent 80 billion. Dollars more than what they received from the sale of oil.

Svrahkapitalat lead to its own destruction, a glut of oil and gas, which helped prices to plummet. However optimistic to think that the destructive effects of cheap money are not accumulated elsewhere. In the media, for example, Liberty Global and its French competitor Altice used bonds to surround with collections of cable and telecommunications companies while online groups Netflix, Amazon and Google throwing money to create their own television content.

In the pharmaceutical sector money flooded biotech startups and Valeant experiment using financial engineering as an alternative for research and development. The reversal of the credit cycle in this case is less connected with instant effects of higher borrowing costs than the establishment of limits and consequences of seven years cheap capital.

Which brings us back to the question with major acquisitions and transactions, assuming motivation perhaps not yet fully seized of troubled manufacturers of raw materials. Despair is different - need for growth when profits and sales have stalled, and maybe not so sharp, but builds to a very strange kind of bubble.