fatvegan

I was reading The Economist yesterday and looking at some of their graphs in the growth of private equity investment. As I understand it, private equity investment is like stock market investment except less transparent. And presumably you can only be a private equity investor if you have a large enough chunk of money. I can't really think of any legitimate reason for there to be a large shift to private equity funding, but apparently it has happened anyway. The graph of it (from The Economist looks a little like a logistical growth line.

I have a theory about this. I've made previous predictions that superannuation schemes all over the world would reduce the returns to capital. I was happy about it, because I was hoping that maybe poor people would start getting rich at the same rate as the wealthy. Since they all have to throw their investment money in the same pot, and superannuation funds provide some nifty economics of scale, no one can tell the difference between the poor money from the rich money. I didn't really think the rich would let that happen. The rich have mostly been happy about the idea of trillions of dollars flooding into their precious markets, and you wouldn't be happy about that unless you had a scheme.

I wonder if maybe that scheme is something like this. Let the poor put all their money into stocks. The stock prices get inflated so they think they're getting a good deal for a while, even though no wealth has actually been generated. A lot of that spare money ends up as CEO salaries and consulting fees for investment banks and management fees for the super funds. The rich take their money out of the inflated stock markets and start investing in private equity markets, where the returns are higher.

I'm guessing that when the pendulum swings back from capital to labour (as it should), and wages grab back some of those profits, the stock market is suddenly going to look like a pretty poor deal. Since the mid-1990s only 28% of productivity growth has gone to workers, so profits have gone through the roof. However, the average P/E ratio has stayed constant. I've previously tried to figure out how the P/E ratio had stayed the same despite buckets of superannuation money and fairly constant productivity growth. It seems like it can mostly be explained by the increase of profits relative to wages.

So telling workers that slow wage growth doesn't matter because they're getting great returns on their stock portfolio isn't very honest if their dividends are coming straight out of the wage increases they aren't getting. It's particularly unencouraging for the very large number of workers who haven't ever had enough money to get themselves a stock portfolio.

I'm not very happy with my theory, because I'd expect that there's going to be money to be made in smuggling poor people's money into the rich people's private equity markets. The fabulous thing about rich people is they're usually happy to stab each other in the back for a quick buck.