Friday, 25 July 2008

This correction is not the end of the world as some bears predict

Every time the economy goes into a correction, the loud voices of perma bears notify you about the upcoming end of the economic and financial worlds, the mother of all recessions, the new great depression that will make the one from 1933 look pale, etc etc. This time is not an exception. Although I can understand the rationale behind most of such predictions, I do not think that this time we will witness something extraordinary. Yes, eventually the whole fiat pyramid of debt and worthless paper will collapse, but we still have a cycle or two left before it happens.

What qualifies me to make such conclusions? Well, this is what I see at my work. I work in the consulting sector and can therefore observe and value certain categories of transactions, including acquisitions, reorganizations, financing, and refinancing. According to what I see, the economy and the financial sector are far from being dead or incapacitated. Quite contrary, the volume and scope of the above-mentioned transaction categories keeps increasing, so that my workload keeps going up too (that is one of the reasons I do not have much time for blogging). Who said it will be a quiet summer? Nonsence.

First, a correction in many sectors of the US and Canadian equity markets made some companies very attractive for other domestic and foreign companies and investors. What's particularly interesting is that BRIC companies are becoming quite active in these acquisition activities, especially in the natural-resources and commodities sectors, but also in some traditional manufacturing industries. If this trend continues, in a few years we will see some traditional American companies being owned by Brazilians, Chineze or Russians.

Second, many companies are currently very active in refinancing their existing loans or in borrowing new debt, partly to finance new acquisitions and partly in anticipation of the higher rates in the future due to pretty rational and fully justifiable inflationary expectations. Whenever the periodic mini lquidity crises caused by recurrent panic bursts ease in the financial markets, there is a new strong wave of financing transactions.

I do not think we could see all of this activity if the economy were really in the bad shape. It is true that some of the companies will be out of business before this bear cycle is over, but this is a normal filtration process. It is very likely that by the end of the next year we will see another bull market on the horizon. I think it is going to be the alternative energy boom (or bubble if you prefer calling it this way). We will see.

No comments: