Investing in equity markets over the next economic expansion. A case for stocks.

We’ve learned that inflation is caused by shortages in the underlying supply, and that certainly rings true when it comes to the equities markets. In other words when too much capital is chasing too few investment options the relative prices of the underlying supply are likely to inflate.

The best way a capital driven economy is able to fight off inflation is through competition. The more options consumer has at his disposal, the more it upsets the applecart by creating competition for products and services desired. Competition breaks up monopolistic segments of economy while injecting new levels of innovation, quality and efficiency into these segments.

Left to a natural progression, a capitalist system evolves into an increased number of consolidated economic segments that eventually form micro monopolies. These micro monopolies concentrate too much power with the largest and relatively few providers of products and services. Increased segment regulation and submissive oversight only helps to create economic segment monopolies and hinder the entry of competition into these economic segments. This could be measured by tracking a number of mergers relative to a number of new participants in the equities market. For over a decade, consistent with regulative policies, there have been more mergers and fewer equity entries for upsetting the applecart. The stock market simply reflects this reality of concentrating too much capital in relatively few segment participants.

When diversification is taken into account, the US equities market is relatively small compared with other investment vehicles available. There are less than 2500 equities that hold most of the capital allocated in the US equities market. Given economic, market and segment cycles there are only about few hundred stocks at any given time with risks low enough to facilitate an entry into an equity position. That leads into an increased concentration of capital in a very few available options. In other words: a shortage of supply.

Until additional “supply” of equities becomes available through policies that deregulate and innovate, a case for inflation in equities will hold. As with a beginning of every economic expansion cycle, when increased level of capital becomes available and is targeting a relatively limited number of equities available. Stocks will benefit the most compared to other investment options. We are sure to see many “bubble” formations in economic segments as the next economic expansion finally gets on the way.