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Scott Minerd
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As Chairman of Guggenheim Investments and Global Chief Investment Officer, Mr. Minerd guides the Firm’s investment strategies and leads its research on global macroeconomics. Prior to joining Guggenheim Partners, Mr. Minerd was a managing director at Morgan Stanley and Credit Suisse. He is... More
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  • Cheap Debt Is Good News For Stocks 1 comment
    Oct 24, 2012 11:38 AM

    The liquidity preference theory, originally described by John Maynard Keynes in his General Theory, suggests that interest rate levels are determined by the demand for money. During times of high uncertainty, individuals and businesses exhibit greater demand for liquid assets, primarily cash and cash equivalents.

    As uncertainty comes out of the system, pent-up cash balances need to be deployed. Considering how cheap some stocks are, the size of companies' cash balances, and the impressive performance of the below-investment grade lending market, there is now a possibility of a resurgence in buy-outs and M&A-driven consolidation as private equity investors and corporate entities "put their money to work."

    The recent increase in the issuance of covenant-line loans - that is, loans with less stringent restrictions on collateral and payment terms for borrowers - can be interpreted as a harbinger for higher volumes of leveraged buy-outs, in particular. The history of covenant-lite loans is traceable to investments by private equity groups. The return of LBOs and M&A activity would generally provide support for equity prices, which is something for all investors to note.

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  • evan37
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    "As uncertainty comes out of the system, pent-up cash balances need to be deployed."

     

    I agree on that premise, but I just don't think uncertainty will abate any time soon. With the EU situation, Japan's new trade deficit and debt disaster, China's hard landing, etc; we are still in for firms to take a defensive posture for quite some time. In the current global situation the paradox of thrift will cause more hoarding of cash for some time going forward thereby suppressing the velocity of money and encouraging the Fed to continue it's easy money policies to prevent a deflationary death spiral. When these firms finally do start spending their reserves, watch out for inflation! We will definitely see the S&P advance (at least in nominal terms!).
    28 Oct 2012, 10:29 PM Reply Like
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