When One Bubble Invests in Another Bubble
Posted by David Gaffen
May 21, 2007, 3:30 pm
If bubbles get together, do they create some kind of unholy matrimony between them, a mega-bubble that feeds on itself like the fusion reactor created by Doctor Octopus in Spider-Man 2? MarketBeat can’t help but wonder this when seeing China (that has the most insane of all stock markets, having gained 70% in the last two months) plunk down $3 billion into Blackstone, one of the largest private-equity groups (an industry responsible for approximately 3,372 mergers over the weekend).
Blackstone Group said earlier today that it plans on raising $4.75 billion – which would make it the year’s largest U.S. initial public offering — a day after agreeing to sell a $3 billion stake to China. The IPO would value the firm at about $33.6 billion, or about one-third of the market value of Goldman Sachs Group, which has been around since “The Canterbury Tales” and has lately been the most effective money-printing machine among America’s public companies.
These kinds of things don’t end well. (Columbia Pictures) “To think that the Chinese government has come to the point where it isn’t happy with the returns that it can get in U.S. government securities and traditional investments may mean that money flow into operations like Blackstone could further fuel what may becoming a buyout bubble,” says Paul McIntyre of Bloggingstocks.com.
With China holding about $1.2 trillion in foreign-exchange reserves, money typically held in low-yielding instruments such as U.S. Treasurys, the reason for such an investment is simple — better returns. Dirk Van Dijk, head of research at Zacks Investment Research, surmises that this investment is a “toe in the water” before the Chinese government seeks other vehicles for a larger portion of their reserves.
But plunking down a huge sum of money into an industry generally regarded to be running at full capacity, at a time when China’s own equity market has ballooned, strikes some as folly. Breakingviews.com’s Edward Chancellor notes that asset bubbles have often burst just after foreign investors jump into the fray – Scottish investors getting soaked in the Mississippi bubble in the early 18th century; Bern, Switzerland’s investment in the South Sea Company, Japan’s acquisition of Rockefeller Center in the 1980s.
“In this case, there may be no greater fools than the Chinese bureaucrats who are taking this buyout bet on the private-equity firm’s non-voting stock,” he writes.
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