Guess the year: 2007 vs 2011 edition

Posted by Cardiff Garciaon Jun 20 19:34.

JP Morgan’s corporate finance advisory group plays a guessing game in its new report about the eventual demise of our cheap capital environment (hat tip to the FT’s Helen Thomas):

You can click through to the report to see the answers, but here’s the point:

Current market conditions are, in many ways, reminiscent of the benign market conditions of 2007. Volatility and cost of debt are low, highly-levered buyout deals have returned and the credit market penalty for being more levered is once again minuscule. …

A variety of technical and fundamental factors are driving this performance: pension funds have broadly reallocated capital from equities to fixed income, the low interest rate environment has driven demand for yield across asset classes and fast-growing emerging economies have brought new capital into developed economies from both sovereign and individual investors.

There’s a simple explanation for most of these similarities: the combination of a disappointing recovery and the role of monetary policy. The Fed’s activity has kept yields low, while sluggish growth has convinced companies to be cautious and governments to be aggressive in spending their respective cash piles.

Of course, this explanation also accounts for the changes in the balance sheets of the big economic actors – consumers, governments, large corporates — in the US and Europe. That’s the subject of the rest of the report. But a few more charts and JP Morgan’s five takeaways are enough to tell the story (click to enlarge each):

1)  Should another crisis occur in the near term, sovereign entities in OECD countries have limited capacity or desire to be as proactive as they were during the recent crisis

2)  Sovereign entities will continue to be pressured to reduce their involvement in the economy with a potential “near-term” negative impact on economic growth,  specifically for industries that depend on government spending

3)  Sovereign entities will continue to seek sources to increase tax revenue which could be focused on industries that have outperformed

4)  Because some of the sovereigns, especially the U.S., are very short-term financed, rising rates would lead to a significant increase in financing costs

5)  While the U.S. government has oversized debt obligations, its cost of debt (i.e. Treasury yields) is significantly lower than in 2007

Related links:
Corporate balance sheets: when will the real spending begin? – FT Alphaville
More on those “record” profits – FT Alphaville
Cash-hoarding corps – FT Alphaville

This entry was posted by Cardiff Garcia on Monday, June 20th, 2011 at 19:34 and is filed under Capital markets. Tagged with , , , , .

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