World Economic News
British Press Warn of Looming Financial Crisis
City of London investor Tony Dye, who correctly predicted the crash of the Internet bubble several years ago, is now warning that the "wildly speculative" share-price bubble in oil and natural resources companies is going to blow out. Dye told the March 6 Sunday Telegraph that the share price in many new oil and resource companies is too high and many investors will lose money.
Dye said that the boom in the resources sector is "wildly speculative," and is comparable to previous market crazes. "We've seen these cycles before over the years," Dye said, "and there won't be many people who make much money out of it."
A group of companies, including Australian Global Petroleum, are listing on London markets, where there is a "boom" in resources stocks. Companies about to list on the London markets include Afren, a new exploration and production company focussed on Africa, and British Rockhopper Exploration.
Sunday Times Warns of Equity Debt Bubble
The March 6 Sunday Times of London ran a feature warning of the dangers to the financial system of the equity debt bubble, which includes the California pension funds, CalPERS.
The Times described the private equity "industry" as "the Jekyll and Hyde of finance." Private equity firms such as Apax, headed by Sir Ronald Cohen, the City of London's fifth-richest man, buy and sell companies, "which are held privatelytheir shares do not trade on stock exchanges," the Times reported.
Mark Anson, chief investment officer of the $175 billion California Public Employees Retirement System (CalPERS), is quoted as saying, in a speech in Geneva last month, that the biggest asset bubble that he is "afraid of at the moment is private equity." These companies now employ 2.7 million people, or 18% of the private-sector workforce. "There's too much debt in some deals," the Times quoted London lawyer Stephen Mostyn-Williams. "If interest rates rise, a number of these deals may go under."
Private-equity firms traditionally buy companies with 33% equity and 67% debt, but in the current situation of low interest rates and high liquidity, they are now buying companies, such as the Dutch publisher World Directories, using only 10% equity and 90% debt.
The British Treasury held hearings on private equity in November. Interest rate increases in 1990 brought down many private-equity-backed companies. Private equity firms do not disclose debt levels at all, and disclose profits only to clients. CEOs are conceding that this operation is now "at a cyclical peak,"
"The point is nobody knows ... whether the Jekyll or Hyde side of private equity has the upper hand. There is not enough information," the Times said.
British Home and Car Markets Weakening
Both the home and car markets in Great Britain are slumping, sector reports confirmed March 5. House prices dropped 0.5% last month, the fourth fall in the past seven months. Now, the annual rate of price growth is at a three-year low of 12.1%, down from the peak of 22.1% in July 2004.
New car sales last month fell by 16%, year on year, to 77,000. Private, as opposed to fleet, sales were down 23%. Both falls were the biggest under the current registration system set up in 1999.