At this time of year, a lot of articles write about what you should invest in going forward. People take a peek at their investments and start doing some mental scoring. If they look at the S&P, they have made over 10%.
Nice. Funny thing is there is still a lot of cash on the sidelines. Another funny fact is that individuals are pulling money out of the market, not putting it in.
Years ago (1999), Patrick Young wrote a book, The Capital Market Revolution. It has taken some time, but we are starting to see some of the ideas in the book be enacted on. One of the concepts Young wrote about was the development of private markets. His theory was based on the fact the investment banking system wasn’t around pre 1900. Capital was raised at kitchen tables in private markets.
If an investor gazes around the world right now, where do they feel most confident at placing money? Europe looks pretty messy. Japan seems to be on the brink. China’s banks are loaded up with crap debt they don’t report. Does anyone have confidence in US banks and markets? Sure, we have “too big to fail” but in many cases, the market is broken.
My initial supposition on reading Young’s book years ago was that countries would regulate and capital would flee to other countries. Sort of a EU vs US battle. I didn’t think that all economies would pursue a highly active regulatory path. Instead of a yin/yang alternative, investors are faced with high regulation and taxes in the EU or newly minted regulation in the form of Dodd Frank across the pond. Instead of choosing the lesser of two evils, they are choosing neither.
Government regulation is causing the flight of capital into private unregulated marketplaces.
Additionally, successful investors feel like they have no control over their cash. When it goes into a company, management decides where it should go. More and more, management is making decisions not in the best interest of shareholders, but in the best interest of themselves. Private investors are sick of feeling screwed-so they are investing where they can have a real impact.
The market also knows that there is a huge bout of inflation coming someday. With the increase in government debt around the world, there are only two ways out. Grow or inflate; and governments always inflate. How does a private investor manage their cash when inflation is coming, and they have no confidence in public markets or public companies? Go private. Private loans, private investments into start ups that have the potential to grow faster than the rate of inflation. Private investments into companies that can throw off streams of cash to keep the family cash flow going.
The capital market revolution is happening quietly. It’s being enabled by technology and classical economic principles. “Online” is not a foreign space, and research is easier to do. My gut tells me that when we look back, 2011 will have been a turning point. The investment banks will have power over the public market, codified through really poor regulations set forth by cronies in government. But they will exert no power over private markets-and cash will flow even faster into them.