Money is difficult to control. It's one of the purest factors of our human experience. The more you attempt to force it or control it, the more it rebels against you, normally in equal and opposite reactions. The more governments and self-appointed intellectuals attempt to control money, the parities enabled by new technologies enable capital to quickly flow to other sectors or nations where it receives better treatment.
Historically, this rule has applied to the flow of investments between stocks and bonds. Amateur investors and journalists have always made absolute assumptions about how over-valued, or under-valued, stock prices were compared to historical valuations, e.g. Price-to-Earnings multiples (P/E). Yet, the P/E multiple is only appropriate as a relative indicator to current interest rates (Bonds). When bond rates are as low as they have been, professional investors will pay up for stock dividends and take on more risk for growth (a rising stock price causes the dividend rate to shrink closer to the lower interest rates on safer bonds). But as interest rates now rise, stocks' relative valuations will continue to decrease because investors can now earn higher risk-free interest. Therefore, the only valuation ratios which really matter are the ones in relation to the alternatives. Today people and capital have options, and when oppressive governments and oligopolies attempt to manipulate the economics, capital will seek freer and better treatment.
The Securities and Exchange Commission (SEC) cannot seem to understand why no one wants to run a public company anymore. The number of public companies in the U.S. has fallen from 8,000 in 1997 to fewer than 4,000 today, a 50% drop in the last two decades! I bet you had no idea. In 2016, private companies raised nearly 5x the equity capital as in Initial Public Offerings (IPO's) for public companies. Oppressive regulations, bureaucracy, and never-ending lawsuits for public companies repel capital (money). Our initial study for taking our small investment company public a few years ago estimated an annual expense increase of nearly $4 million per year in compliance, personnel, reporting, and legal line items. Interestingly, while public companies have been cut in half, the word count in SEC public filings has doubled over these two decades. All we are doing is paying more attorneys to file more paperwork instead of creating jobs for American citizens. Today, staying private makes much more sense. Money goes elsewhere.
As interest rates rise again, the banks make billions on the difference between what the Fed pays them and what they pay us. Remember, the Fed, the SEC, and all of the banks too big to fail swap employees and directors every year to ensure that everyone stays on the same page. They're all one big money organism. Money will go elsewhere.
California's State Legislature always does its part to artificially manipulate our money, such as passing laws mandating how many women must be on a company's board of directors with a $100,000 fine for failing to file the compliance paperwork, plus another $100,000 fine for failure to meet the quota, and another $300,000 fine for any subsequent violations. This is why there continues to be a giant sucking sound of businesses leaving California (as well as Chicago). Money is definitely going elsewhere.
This week let's not forget about Bitcoin [$20,000 this week versus a high over $60,000]. I am not smart enough to know if it's a good investment now, or if it will even be around in five years, but I do know Bitcoin is the pure manifestation of money seeking freedom, going where it's treated best. Bitcoin is a currency which is not controlled by any government or single entity, and the blockchain platform further decentralizes accountability, or lack thereof. This is terrifying to governments and the elites, as everything is about the money. Let's reiterate this: Everything is about the money. Generations ago, Rothschild summed it up by instructing his sons he did not care which governments controlled which countries. He only wanted to ensure Rothschilds controlled the currency. Whether Bitcoin is the big success, or one of the other cryptocurrencies, or possibly a confluence of all of them or something else entirely, all money will eventually be democratized. It is a universe inevitability, as money goes where it is treated best. Bitcoin is likely just the first "one small step for mankind."
A nation's currency rises because investors want to take advantage of higher interest rates and better investments (better treatment) in that nation, and investors believe the risk-reward tradeoff for holding that currency makes sense. Conversely, Venezuela, Argentina, Turkey, and Iran can offer uber-high interest rates, but investors don't know if the government will seize their investments tomorrow or simply decide not to pay them back. Therefore, those currencies keep going down and will continue their descent until someone's money believes the return is worth the risk.
When investing, or voting, understand that money must flow naturally. For another unfortunate example, current environmental, social, and governance (ESG) initiatives are placing money in investments which do not make economic sense, as well as restricting capital from industries which may be out of political favor. This has always resulted in terrible economic results, but also great opportunities for the few bold investors willing to go against the flow. Stop the people in power from picking winners and losers. Money is like a beautiful woman. You must respect her and never try to artificially control her. You must add value to her, and you must give her freedom. Otherwise, you will most assuredly lose her.
"It's a hell of a thing to say you should have seen 13 years ago risks nobody else saw." - Percy Barnevik, ABB