I read an article in The Financial Times (subscription required) describing how the stock market in the number of listings, courtesy of data provided by The World Bank, has deflated dramatically in the U.S. recently, almost cut in half since the peak of 1996, and has now dipped to below 1980 levels.
The explanations by the people quoted in the article not quite hitting the crucial spots, sparking me to address the root-causes more thoroughly.
A Stock Market Primer
You see, to understand the stock market we must break down what a stock market truly represents. The value of a single stock is a consequence of the sum of subjective opinions about the short-term valuation of a company, not quite the same as the long-term causal value of a company.
Let me elaborate.
The indexed performance of a stock market is merely a summary judgment of subjective valuations, i.e., opinions, of all listed companies by stock traders, not at all representing the causal and intrinsic value of all listed companies. Not in the least because the value of a company is based on the unprecedented foresight of the company chasing its unique upside of long, many years out, while stock valuations are determined by the nervous whims of downside protection of short by, mostly, day traders and high-frequency trading algorithms.
In simpler terms, a stock market today merely represents the opinions of gamblers who bet on the aberrations and misjudgments of other traders deciding who wins today’s proverbial horse-race of opinions.
Imagine now how prominent economists, financiers and television commentators dare to suggest the sum of those opinions is actually indicative of the performance of our economy as a whole. A common practice of those who participate and believe in the suppositions of Jim Cramer and the like on CNBC, Bloomberg, and other bean counter television shows.
To drive this humanmade idiocracy home further, imagine you bet on the outcome of a game of soccer along with many others, and because the number of goals scored this year is less then last year’s, the quality of soccer game-play must, therefore, have decreased in value. This fallacy is the manifestation of grave depravity of reason, stemming from a manufactured consent induced by overwhelming repetition, that makes hordes of people become enslaved to the notion of a market as an animate object that isn’t.
The reason why I highlight the above, in this context, is to deflate the arguments of the quoted financiers who are clearly stuck in humanmade depravity of reason and to suggest that a better supposition of causal effect for the decrease in stock market listings must be on offer.
I have a few.
Causality
So, instead of joining the quoted financiers who are dabbling in consequential hubris, let me highlight what I see as the causal reasons for the diminishing listings on the stock market.
As Albert Einstein taught us, the theory determines what can be discovered. And thus, when we do not realize the proper outcomes – as consequences – we must adjust the thesis – the cause – of why those outcomes do not produce the desired results.
The critical question that must be answered is why a dramatic expansion of human ingenuity and opportunity over the last 30-years has not led to a corresponding increase of filings on the exchange. Why, for example, does the enormous greenfield available to companies using technology to their advantage not spawn a plethora of new listings?
I have written about these issues before:
First, in highly condensed form, the thesis by which private equity feeding the supply of public equity determines what can be discovered consists of stale monisms of absolutism incompatible with the dynamic relativity of assets it attempts to attract. On top of that, the assessment of risk in asset management is correlated to distribution type (hence the name private equity), not correlated to the innate risk of the investible asset. And then there is a critical path of bottom-heavy diversified risk ten levels deep before a single dollar is spent. Meaning, the investment thesis of private equity (worse in the case of venture capital) in its current form is out of touch with reality, spawning false-positives and false-negatives galore.
Second, the stock market is not a free-market system and thus does not provide the intrinsic and dynamic mechanisms to modulate itself after the changing needs of companies looking to raise capital. That was why Tesla contemplated going private again and why other companies are weighing more flexible financing options. The harness and unfairness innate to violating free-market principles in a stock market is what limits and controls the attraction to long-term investors a company seeks and instead gives way to the scalping of shares by opportunistic traders with no genuine interest in the long of a company.
Third, the focus on trading relative to an index promulgates the regurgitation of valuations relative to the norm, rather than seeks to discover outlier value that has no precedent. Meaning, companies are no longer priced on their intrinsic value but on the value that closely resembles a beaten horse from the past. Companies are made to conform to a harness with all too limited trading options that do not fit their uniquely expanding needs.
Free The System
Stock markets are in dire need of a macroeconomic overhaul as I wrote eight years ago, and reiterated related to NYSE Euronext, and drove home again with my comments related to Tesla.
To reiterate the words of Einstein, the theory [of a market system] determines what can be discovered. And so when a market system does not produce the desired outcome, you change the system.
Today, stock markets violate the most fundamental free-market principles, the stale regulations of oligarchic control restricting the dynamic nature of whoever and whatever participates in the marketplace.
Our stock markets must revamp from artificially controlled exchanges into real marketplaces to begin to accurately reflect the need for companies to expand their evolutionary trajectory of perpetual renewal and connect seamlessly with investors along the way who understand and believe in the projected upside from those needs.
