Thread by @Molson_Hart

Just had a powerful insight. Let me type this bad boy off hot off the presses. Bear (bare?) with me.

I’ve intuitively always found private equity offensive. It just disgusts me. Okay. Why? It’s intuitive so I had to think about it. Stay tuned for the insight…

1/n

1. Thé PE boys make a ton of money
2. I don’t actually get the impression that they’re skilled (eg they make big returns trading assets between themselves, don’t innovAte, don’t create value) but they think they are

So these guys are not good but crank out money.

How?

What’s my intuition on that?

This is going to sound stupid but, it’s the fed.

This makes me sound like a some sort of angry man incomprehensible shaking an angry fist at somehting I can’t control but I actually think it’s the fed.

What does the fed do?

Their job is to keep prices stable and maximize employment or some shit like that but let’s look at the tools they have at their disposal:

1. Change interest rate of reserves held at fed
2. Change interest rates in money lend borrowed by banks at fed overnight

3. Buy or sell treasuries (it autocorrected to “trash” lol) or mortgage backed securities
4. Reducing or increasing reserve requirements

So if you look at all these things they stimulate the economy but they stimulate the economy through only one channel and that channel is:

Banks.

You look at 1 through 4 and every time the fed stimulates it has to go through the bank channel and effectively what does it do? It gives banks cash, basically more cash than they know what to do with.

Now when banks have too much money they have no choice but to lend it

. In a bizarre sense they, in this situation have to sell people loans. And since there is such a big supply when the fed stimulates, the “sale” of these loans end up being very profitable to whoever gets access to this money first. Arguably (imo definitely) this stuff causes

inflation even if it doesn’t show up in dumb statistics. Why doesn’t it? Well loans don’t go to buy food and the stuff in CPI. They fo into asset prices and we’ve definitely seen inflation in that recently. Second point. You have the cantilon effect. When money gets inflated

it screws the people who get access to the inflated money last and actually is a huge benefit to the people who get it first (they got the money before the prices are inflated).

Okay, let me come full circle:

These pe guys are making money hand over fist because they are

getting their hands on the money first by taking out loans from the banks. And this, for the past 3 or so decades has been an almost cheat code to making massive amounts of money.

I promised you an insight right?

What happened in 2020? How did we stimulate the economy this time

Unlike through normal fed channels (just banks) we did something else: stimmies. Now, like, banks, consumers literally had more money than they knew what to do with. They deployed it but instead of loaning it to private equity boys they plowed it into consumer goods.

I don’t follow the stock market but correct me if wrong but haven’t luxury brands just absolutely killed it since the pandemic started? My own company benefited from this. We were on the other side of money that has nowhere to go so we made a killing.

So what’s the insight?

Whenever the government stimulates, you want to provide the goods and services needed by the channel (whether it is banks, consumers, or perhaps now construction companies) to deploy its cash.

Sorry for ruining your timelines if I did that.

/end