Well? Got an answer? Lex was posing the question on Wednesday, noting that: since Friday, the yen has risen by 1 per cent, hurting carry trade borrowers; newly listed Blackstone shares have tanked by 12 per cent; and Wall Street has refused to bail out two Bear Stearns hedge funds blown up by the subprime crisis; Shanghai’s overvalued stock market continues to deflate in fits and starts, global equities have eased and US housing still looks miserable.
There is a benign view of all this, pointing to a gradual reappraisal of risk. But, even then, what are the implications of a rise in the real cost of capital, even if it is gradual?
In principle it should be modestly bad for equities, and inhibit the riskiest activities occurring in debt markets. Anyone planning a big buyout, or setting up another highly leveraged vehicle investing in junk debt, may find life more difficult. Most vulnerable are those who are relying on easy markets to refinance recent jumbo LBOs: Chrysler is said to need $62bn of issuance. But it is less likely that higher real rates alone threaten completed LBOs and leveraged.
Lex warns that, combined with weak fundamentals, dearer debt and high leverage are toxic, as the collapse of several funds punting subprime mortgage backed securities shows. Yet so far, beyond US housing, fundamentals remain strong.