Let’s assume that Bain is correct that the world will be awash in capital over the next decade or so, and that this money will be coming both from investors in the developed world and–increasingly–from the emerging world as well.
I draw two conclusions from this (keeping in mind that Bain may, or may not, be correct):
1. Interest rates won’t rise as much as the Wall Street consensus expects. The Fed is saying that the normal rate for overnight loans in the US is 4%+. This implies that 10-year Treasuries should yield at least 5%, probably more. If Bain is correct, these figures are much too high …and, therefore, the rise in bond yields following Fed hints that monetary tightening is on the horizon may have already achieved as much as half the total rise that tightening will bring.
2. Consider the factors of production:
–knowledge (technology, entrepreneurship, craft skill).
Which of these will be in short supply relative to the others? I.e., which will be the most valuable?
If Bain is correct, it won’t be capital.
The natural resources boom of the past decade has resulted in mining companies making massive investment in new capacity. Shale oil and gas are beginning to provide new low-cost sources of energy. So the shortage factor is probably not land etc.
There’s still massive amounts of unskilled labor in emerging economies. There’s also significant unutilized labor in the US and EU. So labor isn’t the key factor.
That leaves knowledge, either as technology, craft skill or entrepreneurship as the factor of production in short supply.
For investors, the main takeaways are that:
–the current monetary tightening cycle may not be as negative for bonds or stocks as the consensus fears
–like the Internet, ready availability of capital undermines the defensive position of large companies with significant manufacturing capabilities and established brand names. Think: Hewlett-Packard, Dell, Barnes and Noble, J C Penney.
There’s a second point to this list, as well. In all of these cases, finding leaders with the right knowledge base to put the firms’ substantial assets to work has proved to be very difficult. It may be that in an environment where capital is easy to come by, talented entrepreneurs have much better alternatives than masterminding turnarounds for financial buyers. If so, the value investor tactic of buying shares in asset-rich companies and waiting for something good to happen may not retain its traditional allure. So-called value traps will outnumber successful turnarounds by a lot.