The problem with our economy it's not too little investment capital, but too much.
Overpriced houses, overpriced stocks, overheated bonds, and ultra-low interest rates have one thing in common: too many investors seeking too few opportunities.
It may seem an anathema, as most economists claim that the fundamental cause of economic distress is a lack of available Capital. But what happens when there's too many investors and too much money flowing into an investment market?
What happens if people start looking for things to invest in and there's not enough stuff to go around.? Perhaps that's one reason why IPOs are hyped so much in the press these days, and why so many people invest in them. There's not a lot of other stuff to invest in these days has an adequate return on investment.
Compounding the problem is that private-equity just sucking up all the oxygen in the room. Some people claim private equity is taking so many companies private that there not many stocks left to invest in. Of course, there are also corporate bonds, which have exploded in recent years. The returns are very low, even for junk-rated bombs. There are so many investors out there that you're bidding against other people for the privilege of taking huge risks for very little return.
All of this money floating around means that people are willing to even accept negative interest rates as we are seeing in Europe and as our President is proposing for the United States. People want a place to park money, that's safe even if it means they lose a little bit over time. Negative interest rate mortgages are now a thing, overseas.
The housing market is also a case in point . People want to invest in houses and bid against each other and drive prices through the roof. Low interest rates certainly threw gasoline on this fire. Ordinary people who just want a place to live, are being priced out of the market, at least for the time being.
Of course, one reason people have all this money is that so many of these assets are overinflated in value. People think they have more cash than they do, but the whole thing could come crashing down if prices for these investments and commodities decrease. Of course, it doesn't help that the government prints more money, does it? Inflation stays low - for the time being - as these investment markets are sucking up all the excess cash. Wonder what happens when people try to cash out?
When that happens, pundits will then publish articles asking "where did all the money go?" when in fact, the money never existed. People tend to value things by the price the last idiot paid for his house, or stock, or bond, or tulip bulb, or whatever - and that does not necessarily represent the value of the entire inventory of those investment assets. Just because somebody paid $188 for the last share of Facebook stock sold today, doesn't mean all the shares are worth that much, if the company was liquidated.
In many places in the world, the lack of available capital is a fundamental problem in their markets. Since there is no money to lend or borrow, businesses cannot get started or expand. They have to build a business using only the profits from the business, which means expansion is slow and methodical, if at all. The US is attracting capital from all over the world as people looking for safe harbors to invest in as well as to increased gains and rates of return from their investments. As a result, they're flooding into our investment markets, including real estate, stocks, bonds and even government bonds, driving the prices of these commodities through the roof.
And you can't blame foreigners for throwing their money at US stocks, bonds, or houses. Overseas, investments can be a crap shoot, even in Western countries. Want to invest in bankrupt Italy or Greece? How about the nightmare that is about to become Brexit? China is a swell place to invest, provided they don't nationalize your business, line you up against a wall and shoot you, or just prevent you from taking your money with you when you leave - if they even let you leave. All down the line, foreign investment is looking less and less attractive over time - at least at the present time. Possible great rates of return are tempered by the extreme risks involved. Some half-assed Silicon Valley IPO looks safe by comparison.
Income inequality may be yet another factor. As I noted before, if you are mega-rich, you can only buy so many mansions, super-cars, and mega-yachts. The rest you end up investing. And with more rich folks owning more of the capital, they are looking for more places to invest - and not finding them. Thus, they park money in low-rate bonds, or take wild risks on IPOs - or use "private equity" to buy companies and load them up with debt.
The excess of capital - at all levels - even explains the exuberance over gold and Bitcoin. Since most companies aren't making much in terms of rate of return (based on stock price or bond price) these speculative investments appear more attractive - particularly to the small investor, who sees his portfolio growing painfully slowly.
The advent of the 401(k) hasn't helped matters either, as it has turned many ordinary Americans into amateur investors, and that excess capital is tossed into onto this heated pile. We may be in for a passive income bubble, according to some.
Like anything else, it is possible that maybe we need less capital in the marketplace, not more. If this money isn't being spent as well as invested, then no one ends up making money in the long run. You can't run a company making widgets, if no one is buying them - but buying your stock, instead. But perhaps there is good news - the baby boomers are retiring, and as a result will be cashing in their stocks (I already started, a couple-hundred grand, last year). This money will be spend - on cars, meals, groceries, and of course, the medical industry. This may depress stock prices in the short-term, of course, but that will also mean stocks will look more attractive and have more reasonable P/E ratios and that bonds will have better effective rates of return.
I suspect, in the long run, the market will stabilize itself. But in the short term, some folks are going to get hurt in this crazy era of negative interest rates and fractional rates of return.
