Marc Andreessen says,

The number of public companies in the US has dropped dramatically. And then correspondingly, growth companies go public much later. Microsoft went out at under $1 billion, Facebook went out at $80 billion. Gains from the growth accrue to the private investor, not the public investor.

Pointer from Tyler Cowen.

When you need a lot of physical capital to expand (think of a steel company 100 years ago), you have to offer a high return to public investors. When you can expand by adding more web servers, you might as well keep the company private. Going public does not mean raising funds for expansion. Instead, it just means converting some of your future profits into present cash, courtesy of public investors.

My point is that for information-intensive companies, the balance of power has shifted away from public investors, including large mutual funds, and toward private investors. It may have less to do with Sarbanes-Oxley or other factors that Andreessen cites. The service sector, which is growing as a share of the economy, may be inherently less dependent on outside capital than the goods-producing sector.

By the way, I always thought that Microsoft went public as a political defense strategy. In the absence of political threats, their optimal approach would have been to remain private. But having lots of shareholders gave more people a stake in their success, which helped to reduce the incentive for government predation against them.

Andreessen points out that the stock market has been flat for 15 years. But that takes as your starting point the late stage of the Internet Bubble.

The Internet companies told investors that they were raising money in order to survive without profits while they built up market share. The theory was that network effects and path-dependency were so powerful that once you established your brand you could basically generate profits at will.

We now know that a money-losing online pet store is just a money-losing online pet store, not a future exploiter of network effects and path dependency. To exploit network effects and path dependency, you have to be more like Facebook. But private investors had enough confidence in Facebook to take a large share of its value.

Furthermore, we are now in a world where mobile phones are the leading-edge platform. Who needs to raise hundreds of millions of dollars to create an app?

Noah Smith says that they do.

So in the equity market, shorts face huge disincentives, and longs don’t. That means over-optimistic longs get to set the price.

I am skeptical. Financial markets tend to find a way to work around barriers. For example, on alternative to shorting a stock is to buy a put option and write a call option.

Scott Sumner is suspicious.

Here is the evolution of labor compensation and corporate after-tax profits over the past 9 quarters:

Total labor compensation: $8315.3b. —-> $9049.5b. Up 8.8%

After-tax corporate profits: $1184.6b. —-> $1099.5b. Down 7.2%

…I know of no other data confirming that plunge. Stock prices are soaring. Corporations have been reporting very strong earnings. If someone can find non-government data supporting the claim that workers are far outperforming corporations in recent years, I’d love to see the evidence.

Robert Shiller tracks the data for the S&P 500. His earnings measure only goes through the end of 2013. From December 2011 to December 2013, he shows the S&P 500 up 45 %, dividends up 32 percent, and earnings up 15 percent. Since then, stock prices have gone up more than 5 percent, so if profits truly took a dive then the market is doing a great job of ignoring it.

We are going to see some upward revisions in Commerce Department data for corporate profits or some downward adjustment in stock prices. Personally, I expect to see some of both.

Jeremy Warner writes,

A simple transactional, online bank, where all deposits are placed as reserves with the central bank, making them completely safe, free of costly capital requirements, and immune to loss and panic, cries out to be invented.

Let’s assume that the main cost of the bank is upfront software development. It recovers that cost (and other expenses) with a monthly service charge to each customer.

Each customer will have a companion institution, call it a mutual fund, that pays a return on deposits. When you want to earn more interest, you shift money from the transactional bank to the mutual fund. When you want to have more money available for transactions, you shift it from the mutual fund to the transactional bank. As the cost of moving funds between institutions approaches zero, your average balance at the transactional bank will approach zero.

If they took away deposit insurance, would the system evolve toward this? If they keep deposit insurance, are you ensuring that the system cannot evolve toward this?

In any case, the safety of the transactional bank does not mean that risk goes away, or maturity mismatching goes away. It goes to other institutions, and I’m not convinced that those institutions won’t have a cozy relationship with the government.

The IGM forum polls responses to this statement:

There is a social value to having institutions that issue liquid liabilities that are backed by illiquid assets.

Not one of the economists polled disagrees.

For mood-affiliation purposes, I would have said “agree.” But I think it is uncertain, only because such institutions seem to always end up codependent with government in ways that detract from social value.

He wrote,

the current Narrative associated with Federal Reserve policy is just as powerful and just as real as any historical Narrative I am aware of, including the Narratives of global religions and major nationalities. Fifty years from now, will we look back on Central Bank Omnipotence as a dead myth, as something akin to Manifest Destiny, or will it continue to shape our expectations and behaviors as the Founding Fathers

…What you want to know is what everyone thinks that everyone thinks about the Fed statement, and you can’t find that in the Fed statement, nor in any private information or belief. You can only find it in the Narrative that emerges after the Fed statement is released. So you wait for the talking heads and famous economists and famous investors to tell you how to interpret the Fed statement, but not because you can’t do the interpreting yourself and not because you think the talking heads are smarter than you are. You wait because you know that everyone else is also waiting. You are playing a game, in the formal sense of the word. You wait because it is the act of making public statements that creates Common Knowledge, and until those public statements are made you don’t know what move to make in the game.

I visited the web site because a John Mauldin email newsletter reprinted a different Ben Hunt essay. From yet another Ben Hunt essay:

the Narrative of Central Banker Omnipotence. Like all effective Narratives it’s simple: central bank policy WILL determine market outcomes. There is no political or fundamental economic issue impacting markets that cannot be addressed by central banks. Not only are central banks the ultimate back-stop for market stability (although that is an entirely separate Narrative), but also they are the immediate arbiters of market outcomes. Whether the market goes up or down depends on whether central bank policy is positive or negative for markets. The Narrative of Central Banker Omnipotence does NOT imply that the market will always go up or that central bank policy will always support the market. It connotes that whatever the central bank policy might be, it will drive a market outcome; whatever the market outcome, it was driven by a central bank policy.

…debate over the merits of open-ended QE only intensify the Common Knowledge that Fed policy was responsible for market outcomes in 2012.

In some sense, it does not matter whether you are in favor of QE or against it. If you are passionate about it, you reinforce the Narrative of Central Banker Omnipotence. Regular readers will know that I instead hold a view of central banker near-impotence. That makes me quite out of tune with the conventional narrative.