Asset-based capitalism

Asset prices are high across the board. Is it time to worry?

As discussed in Late Stage Capitalism Part 1, perhaps people are becoming weary of the asset-based, winner-take-all system of capitalism we have presently, instead of the build-and-make version of capitalism that was present decades ago. With the exception of apps and other intangibles, small business seems to be struggling, compared to multinationals that have much lower borrowing costs, lower marginal costs, and better purchasing and pricing power. Instead of capitalism that enables the middle class and lower class to have a shot at rising to the top, the top 10% become wealthier through market dominance and asset appreciation.

Yes, capitalism may mean more choices and a higher standard of living, but inflation-adjusted healthcare and education costs keep going up [1], and more choices of food and entertainment may not be fulfilling at the individual level.

Since 2009, in what is now the longest equities market bull market ever, assets (such as Bitcoin, collectible art, stock prices, web 2.0 valuations, high-end real estate, etc.) have boomed, while entrepreneurship and ‘real wages’ have stalled. ‘Capitalism’–as in the individual acquisition and ownership of capital–is stronger than ever. Capitalism–as in small business entrepreneurship and capital investment in labor–not so much. In our era asset-based capitalism, people get rich by buying & holding rapidly appreciating assets, not by entrepreneurship or ‘making and building things’ (although Tesla and the company that makes the Fidget Spinner are exceptions to this).

The default explanation is that ‘QE and the fed are to blame,’ but I disagree. Such asset inflation was observed in the 80′s and 90′s–two decades characterized by high interest rates and no QE. Second, the fed ended QE in 2014 yet prices have continued to surge. Also, the post-2009 asset inflation is mostly relegated to high-IQ assets (such as Silicon Valley real estate, web 2.0, Bitcoin, tech stocks, Google, Facebook, etc.), whereas a general inflationary asset bubble would be much less discriminating. Instead of QE inflating all asset classes, there is a ‘flight to quality’ of fund mangers applying the HBD-investing-thesis by putting money into high-IQ assets that have market dominance and huge growth (such as Amazon, Google, and Facebook) and taking money out of weaker, low-IQ assets (like energy, mining, emerging markets, and manufacturing). Fund mangers and venture capitalists (capitalism is getting smarter) are getting smarter by choosing only the cream of the crop, which means relatively few companies and sectors are participating in the boom, unlike in the 90s ‘tech bubble’ where even the weakest, poorly-conceived companies got showered with funding. This could also explain why active management (in general) has done so poorly in recent years, because unless you invest in one of a handful of these chosen companies and sectors, you will likely lag the broader market.

[1] William Baumol, whose famous economic theory explains the modern world, has died.