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Wilbur Ross Sees Private Equity, China Bubbles


The market rally, China, energy, private equity: Many have opinions, but few can claim to have Wilbur Ross' grasp of these investment topics. In an interview with CNBC's Maria Bartiromo, the billionaire financier offered his perspectives to "Closing Bell" viewers.

Half-Time Report: Private Equity

What has driven the U.S. stock rally? According to Ross, the answer is simple supply and demand. The chairman and CEO of WL Ross explained that over the last year, share buybacks and leveraged buyouts have taken over $500 billion out of the market -- while IPOs and follow-on offerings have created only some $320 billion of new equities. Thus, there has been a net reduction in the floating supply of stocks. He said that rising prices are not due to any great "quality."

Ross said the impact of China's economy on the U.S. is based on one inescapable idea: "Everything is interconnected." He pointed out that the 1997-1998 pan-Asian market tumble began with Thailand's currency -- "and they're not even as big a player as China."  After his "fourth trip this year" to the Pacific powerhouse, he reported that China's dynamic growth "really does feel like a bubble," noting that on a single day, 30,000 trading accounts were opened.

Ross’ funds now control 1.2 billion tons of coal reserves. The investor believes cleaner coal is a key to the industrialized world's future -- and he's even seeing it being discussed in China. He noted that "historically," Beijing has "done nothing about pollutants" -- but now, "for the first time, public rhetoric by the government has been consistent."

In the U.S., the "problem" with coal use isn't its supply, but its notorious contribution to air pollution, he said. "There are more BTUs of coal in the ground" in America than the Middle East has "BTUs of oil," he said. Ross called for a vast emissions "cap-and-trade mechanism" and "economic encouragement" to spur clean-coal technology.

Bartiromo asked where he sees the private equity frenzy going. Ross' response: "I think it ends." He cited very high debt being put on earnings, and declared that "the problem is that the people who make the initial credit decisions don't end up owning the paper. They flog it off to the outside world -- who generally don't know what's in the portfolio."

The investor predicted that default rates -- "almost at the vanishing point" -- will start to "soar around the end of the year, through 2008 and 2009."