• What is the stock market for?
  • What has the stock market become instead?
  • What to do about it…

Do you remember the days when people would speak about the stock market instead of bitcoin? Water cooler conversations featured BP and BT instead of bitcoin and Ethereum. At family barbeques people would whisper to each other about small caps from the uncharted waters outside the FTSE 100 they’d “taken a punt” on.

These days it’s all Dogecoin (DOGE), Dog Wif Hat coin (WIF) and PeePee coin (PP)…

It makes a mockery of finance. OK, more of a mockery than before. But there was a serious side to it all… once… a long time ago.

The UK’s habit of winning wars turned it into the global financial centre. Or was it the other way around? Perhaps being able to fund the national debt allowed us to win wars in the first place…

Either way, from the point we wrestled the throne off the Dutch and Spanish, London became the global financial centre. Until the US wrestled the role off of us in turn.

But, for many years, countries would store their gold in the UK for safekeeping. They’d seek to access UK capital markets to raise money for trade. UK courts and law became the de-facto international legal standard. And the pound sterling was the global currency.

Even today, as this documentary exaggerates, London remains the global centre of finance in several mysterious and opaque ways.

And yet…

Our stock market truly sucks

I don’t just mean the price performance. Although that’s been bad enough too. A nightmare, if you adjust for inflation.

But the price performance is just one way of looking at the importance and success of a market. Stock markets are, after all, not for gambling or making money. At least, they’re not supposed to be…

But we’ll get back to what stock markets are supposed to be for in a moment. First consider just how badly our London Stock Exchange (LSE) is languishing by some other metrics. As Bloomberg put it, “What’s gone wrong?” Here are some excerpts from its article on the topic:

Companies raised just $1 billion on the London Stock Exchange in 2023, the least since 2009.

The year before was hardly any better. But that’s just the start.

[…] trading volume has slumped in recent years and some British companies have picked other markets to list their shares.

Trading activity still hasn’t recovered to 2007 levels. And here are some specific examples of initial public offerings (IPOs) we’ve lost to competitors:

An especially bitter blow was London’s failure to secure the listing of one of the UK’s most important technology companies — Cambridge, England-based chip designer Arm Holdings Plc. Despite fevered lobbying by government ministers, and an offer to relax UK listing rules, Arm’s Japanese parent company SoftBank Group Corp. chose New York for its return to public markets.

Bloomberg reported on Feb. 26 that Chinese mass-market fashion label giant Shein was considering the possibility of switching its IPO to London from New York, where it faces daunting regulatory hurdles. Analysts said such a prospect was uncertain at best, and a London listing would be controversial given concerns over the ethics and sustainability of Shein’s fast-fashion business model.

The article also explains that London tends to achieve lower multiples for its listings. This means the exact same company’s shares would achieve a higher price if listed in the US instead. And so that’s where people go to list their companies, of course.

There’s also a lack of private equity activity in the UK. Companies like to list where their early investors are based. And the UK doesn’t have as much of a venture capital scene. So the pipeline of companies is smaller.

It’s worth remembering that stock markets are just one segment of the global financial system. In fact, it’s a comparatively small part in the grand scheme of things. But it might also be disproportionately important to the economy, as we’ll see below.

Some capitalist pigs are more equal than others

My mentor Greg Canavan has a theory for what’s going on. (Those of you who got upset about Greg’s comments published on Friday won’t find this as hard to stomach.)

The same phenomenon we’re seeing on the LSE seems to be taking place Down Under, where Greg is based. Here’s what he wrote in an internal email yesterday:

Just on that, another thought about being on the road to serfdom. There are hardly any new listings on the ASX [Australian Stock Exchange]. It’s becoming a backwater. But it’s also emblematic of what’s happening around the world.

Venture Capital and Private Equity (in some ways the 1%) have access to the best growth ideas in the world now. It’s only when they’re good and ready (milked a good part of the growth) that they are coming to market now, handing it over to the middle class serfs to fight for the scraps. That’s a dramatic take but also reasonable.

The underlying idea is that, these days, the rich invest while companies are still private. And then they list their exclusive gotten gains on the stock market. Why? Because listed stocks get a higher valuation, meaning a higher price for the same underlying asset.

This is true for a variety or reasons university students have to memorise…

The ease and speed with which you can sell shares on the stock market makes them more valuable once listed there. It’s tough to sell shares in a private company, by comparison. And very expensive.

Merely funding a company’s transition from private to publicly listed usually delivers gains to the shareholders. That’s what was behind the special purpose acquisition company (SPAC) boom a few years ago. Simply by moving companies onto the stock market, their value price could increase. Sometimes by an order of magnitude.

The issue is that most of us don’t get a chance to participate in venture capital or private equity. Watching Dragons’ Den is about as close as we can get. We miss out on the early entry that the rich are keeping to themselves.

And so the ability of the stock market to deliver capital gains to you by investing early into small companies that will grow has been subverted. A lot of that growth now takes place long before companies even list on the stock market.

This is only moderately interesting until you realise just how different it is from what the stock market is supposed to be doing. And how that might matter in the future…

The stock market has lost its soul

The soul it had was all about raising capital. The idea was that a small business with a big idea could approach the stock market for funding. Investors could finance the rapid expansion of a business and profit from it in return. Everyone ends up better off.

This led to the creation of vast commercial enterprises that anyone and everyone could invest in and thereby own a share of. It also grew the economy faster by allowing companies to boom instead of growing organically.

This system differed from the stodgy European business model. In central Europe, funding your business meant going cap-in-hand to the local banker or a select group of investors.

The British firm could go to the stock market, which is more or less as blind as Justice herself. The merits of their company and big idea would be judged by the market as a whole. Investors could not afford to discriminate against people they don’t like, because of the profits available to others if they did.

The cost, convenience, speed, amount and distribution of business funding was much better as a result. It’s the same reason we have food markets.

But these days, with rather a lot of money sloshing around the venture capital market looking for businesses to fund, stock markets are effectively front-run. They now serve a different purpose. They are an exit strategy for venture capital and private equity investors to sell out at a higher price.

To sum it all up, the stock market today is not the one you thought you knew. It’s just another institution that has been hollowed out and manipulated to serve the establishment who get their money in early.

That means the nature of investing has changed too. Tomorrow, we’ll look into how.

Until next time,

Nick Hubble
Editor, Fortune & Freedom