R becomes S

R may stand for recession, and S stand for sovereign, but how much should we stand for? It may be as simple as ABC.

R becomes S

Colin Benjamin

Around the world we are seeing new players taking up the opportunity to shift the financial centres of power through alternative debt financing arrangements.

By the year’s end we can expect this shift to mean that companies that are in trouble may begin buying back their shares to keep investors on line.

The source of funds for this will come from superannuation funds, mutual funds, hedge funds and the sovereign wealth funds. The banks will be under massive pressure to restore their own liquidity as the R word is replaced with the even more frightening S word, sovereign.

Over the next month you can expect a string of stories about company executives being rewarded for their capacity to borrow huge sums from sovereign wealth funds to buy back shares and pay out discredited debt.

The new source of wealth for the few is to manage to get the princes and commissars of sovereign wealth funds to securitise and capitalise on the crisis that was generated by lax finance policies of hedge funds and financial institutions.

It is highly likely that we will see the steady downturn of the sharemarkets and rise in the bond markets until July as people are forced to write-off expansion and begin a systematic review of major customer relationships.

At the same time expect a major shift in the provision of funds for leveraged buy outs of companies as banks decide that cash flow and promises are no substitute for tangible assets.

Just look at the bank’s assurances that they really, really have a handle of the juicy bits of the retail property market.

In the next three months it will become obvious that sovereign wealth funds will be moving into the investment market and signalling the end of the era of the Wall Street stutters which signalled a bad cold for the rest of the world.

Billions of dollars of impaired leveraged buy out debt that banks are still trying to sell are limiting their capacity to support SMEs that are trying to make the most of the current export expansion drive of the US (see the story “Private equity turns to sovereign funds” in the Financial Times).

All those happy folk who made money while the market slept by lending their shares to the money movers will be hunting back millions of dollars worth of stock.

That’s great for market volatility, and the exchanges which put out the line that shorting is a wonderful source of liquidity even if it has no other productive value.

Who records what stock has been lent by the very executives who are now looking for a new source of “windfall” returns at the end of the financial year on the assumption that more crises will continue to justify speculation on a further significant rate cut by Bernanke.

Watch out for early warning signals to set the point where all of this has begun to stagger into stagflation – parity of the dollar with the US dollar, oil consistently above $US100, gold consistently above $US1000 and executives being charged with insider trading as they take their payoffs for early retrenchment.

It’s as simple as ABC – the credit crunch is exposing the necessity to impose truth, trust and transparency rules on traders in their own company shares so that we all can get into the shorting market.

What is to stop owners selling off when things look glum and ending up with more of their company at the end of the week?


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