AYA analytic report on macro-financial policy developments January 2028

Description:

Our AYA macro analytic report shines light on the current global macro-financial policy developments and their policy implications for stock market investments in recent years.

Our AYA macro analytic report shines new light on many of the major recent global macro-financial policy developments in America, Europe, and most other countries worldwide. As of Winter-Spring 2028, we describe, discuss, and analyze how the major passive index funds and private equity titans remake, reshape, and reinforce Wall Street and many other financial centers across several traditional boundaries. In recent years, the vertiginous asset price hikes tend to conceal cracks in the new global financial order after some rare extreme events. These rare extreme events span the Global Financial Crisis of 2008-2009, European sovereign debt debacle of 2010-2012, and Covid pandemic crisis of 2020-2022. New financial innovations continue to disrupt some traditional business lines in the global financial system.

Today, the major passive index funds, private equity titans, hedge funds, and exchange funds etc combine to reshape Wall Street and several other global financial centers across some specific traditional business lines. From retail payments to stablecoins and cryptocurrencies, new, nonobvious, and useful financial innovations continue to disrupt some specific traditional business lines in the global financial system in recent years.

We describe, discuss, and delve into how the major index funds, hedge funds, and private equity titans remake, reshape, and reinforce Wall Street and many other financial centers across some specific traditional business boundaries. Over recent years, the vertiginous AI-driven asset price hikes often tend to conceal cracks in the new global financial order after some rare extreme events. These rare extreme events include the Global Financial Crisis of 2008-2009, European sovereign debt debacle of 2010-2012, and Covid pandemic crisis of 2020-2022. From retail payments to stablecoins and cryptocurrencies, today novel, non-obvious, and useful financial innovations continue to disrupt some traditional business segments in the global financial system.

In recent decades, the major index funds and many other passive exchange funds have inexorably risen to dominate on the global stage. Today, the 3 major index funds, BlackRock, State Street, and Vanguard, continue to dominate many low-cost investment products in the global markets for stocks, bonds, exchange trade funds (ETF), real-estate investment trusts (REIT), and derivative products such as equity options and interest rate swaps. These 3 major market players keep more than $30 trillion assets under management, and most of this global capital tends to concentrate in American passive index funds and ETFs over recent decades. In modern asset management, the standard fees often represent 25% to 35% of economic profits from active strategic capital allocation worldwide. Also, non-bank fintech innovators such as both private equity and private credit companies have grown significantly as part of the global macro trend toward strategic asset management. Specifically, Apollo, Blackstone, and KKR combine to keep almost $3 trillion of assets under management (up from only $570 billion one decade ago). Further, several hedge funds such as Citadel and Millennium have attracted both strategic capital and brainpower from the rest of the global financial system. Today, some of these hedge funds like Jane Street earn as much in stock sales as some of the banks like Morgan Stanley earn in America.

The 3 major index funds, BlackRock, State Street, and Vanguard, hold a median stock ownership of approximately 21% to 25% in S&P 500 public corporations. Because these 3 major index funds vote almost all their shares, they cast almost 25% of all votes at annual shareholder conferences for S&P public companies. Further, each of the 3 major index funds serves as the largest single shareholder in approximately 88% of all S&P 500 public companies. Vanguard alone serves as the top owner of more than 65%, almost 330, of S&P 500 public companies.

We should put their relative market size in perspective. The 3 major index funds combine with Apollo, Blackstone, and KKR to represent more than $1.55 trillion stock market capitalization, almost 27% of the recent $5.75 billion stock market capitalization of the major banks in America. In practice, some specific major market players tend to overlap in their common spheres of influence. Apollo resembles a life insurer more than it does the conventional private equity fund. Also, the largest venture capital companies have grown from small strategic partnerships to look like their bigger cousins in private equity. For instance, one of the key venture capital companies, General Catalyst, has even set up a new wealth management division in recent years. Today, several big hedge funds serve as market-makers to provide cash liquidity support. Historically, however, the big banks dominated as market-makers in this traditional role and then traded stocks, bonds, REITs, equity options, swaps, and so forth on their own account. Recently, some big banks such as JPMorgan Chase and Goldman Sachs attempt to reorganize themselves to better compete with private equity firms, private credit lenders, and venture capital firms.

In competitive equilibrium, these recent efforts can cause several revolutionary ripple effects on the business boundaries of the global financial system. One of the business boundaries is the distinction between banks and non-banks. Today, banks continue to grease the wheels of the firms with some specific strategic asset allocation. In recent years, the total loans to non-banks have doubled to $1.3 trillion since 2020 and now account for more than 10% of total bank loans. Hedge funds borrow from the prime-brokerage divisions of the banks in America; and the total loans to hedge funds have increased from $1.4 trillion to $2.4 trillion over the same period. In the post-pandemic years, we continue to witness the modern proliferation of strategic loan partnerships between banks and private credit companies.

Another business boundary relates to the distinction between both the public and private markets. Borrowers now choose between both the public corporate bond and loan markets and their respective private counterparts. The former allow public corporate debt to change hands frequently, whereas, the latter hardly allow the private corporate debtors to trade at all. These days more modern asset management companies seek to operate in both markets. In time, such smart capital diversification accords with the global macro investment thesis. From BlackRock and State Street to Vanguard, these major asset management companies now provide not only passive index funds and active ETFs but also REITs, equity options, interest rate swaps, and many versions of global macro stock market investment portfolios. In combination, many investors now enjoy a broader variety of global macro investment options. Variety is the spice of life.

The third business boundary involves the distinction between both retail investors and institutional investors. Through passive index funds and almost all kinds of ETFs, retail investors can access stocks, bonds, REITs, and derivative products such as equity options, interest rate swaps, and even credit insurance contracts. In time, the major asset management companies structure many active ETFs as staid and liquid investment vehicles in addition to novel, non-obvious, and useful financial innovations such as special purpose vehicles (SPV) for securitization and special purpose acquisition companies (SPAC) for new IPO stock issuance in recent decades. Some of the active ETFs even provide the kinds of risks and rewards for both retail investors and institutional investors who seek speculative exposure to stablecoins, blockchains, and cryptocurrencies.

The common parable of BlackRock can often illustrate this messy macro picture. Today, BlackRock serves as the largest asset management company worldwide. In fact, BlackRock began its asset management operations back in 1988 as part Blackstone, one of the major private equity firms in America. In 1994, BlackRock broke up with Blackstone. For several decades thereafter, BlackRock dominated the unique world of public markets, low fees, retail investors, and the more socially responsible stakeholder capitalism of its founder, Larry Fink, who has reiterated the vital importance of greater social purpose in Corporate America. Over these decades, Blackstone represented the alternative version of finance. Meanwhile, Blackstone focused on private markets, institutional investors, and higher fees for strategic asset management. Stephen Schwarzman, Blackstone’s founder, has long served as the archetypal private equity buyout baron.

In combination, private equity, venture capital, and index fund management have helped drive the recent structural changes in the American economy. In sum, these structural changes involve disruptive innovations in finance such as cashless credit cards, new fintech services for retail payments and wire transfers, and payroll services for small-to-medium enterprises (SME) in America, Europe, and many other countries, regions, and jurisdictions worldwide. Capital markets fund an increasingly larger proportion of the American economy than big banks do today. In practice, these recent global macro trends extend to East Asia, Western Europe, Britain, Canada, Australia, and New Zealand. Today, specifically, the global Treasury bond markets and stock markets continue to finance AI infrastructure networks, massive cloud platforms, data centers, graphics processing units (GPU), tensor processing units (TPU), and several other application-specific integrative circuits (ASIC) worldwide. In recent years, these capital expenditures are vital and necessary to help sustain the current global AI-driven stock market rally.

However, these rapid structural changes bring new risks, threats, and dangers to the global financial system. Many stock market investors recognize new financial innovations as dangerous Pareto improvements only after they falter in due time. Like special purpose acquisition companies (SPAC), some financial innovations gradually fade into irrelevance without much harm to the global financial system. Like credit derivative investment products, also known as the financial weapons of mass destruction, however, some other financial innovations wreak havoc across the global financial system, especially in the Global Financial Crisis of 2008-2009, European sovereign debt debacle of 2010-2012, Covid pandemic crisis of 2020-2022. In this negative light, many stock market investors blame a potent mixture of product complexity, leverage, and short-term finance in the messy macro picture. As several specific studies suggest, tight interlinkages between banks and non-bank financial institutions might amplify systemic risks. In the recent rare worst-case scenarios, these risks often manifest in the common forms of market, credit, and operational risks in America, Europe, East Asia, and many other countries, regions, and jurisdictions worldwide. For these reasons, central banks learn to better balance the monetary policy carrots, sticks, and trade-offs between both output-inflation expectations and macro-financial stress conditions in response to the next-gen waves of financial innovations worldwide.

At this stage, it is vital for us to draw a distinction between the long-term return distributions for stocks versus venture capital and private equity firms. For stocks, the long-term return distributions follow the Gaussian normal distribution with heavy tails of extreme returns on both sides. Specifically, the long-term stock market return distributions resemble the Gaussian bell curve with leptokurtic tails and extreme returns. Also, the long-term stock market distributions often exhibit some negative conditional skewness such that extreme negative stock returns tend to occur more often than extreme positive stock returns. By comparison, the long-term return distributions for both private equity and venture capital follow the Pareto power law. For both private equity and venture capital, specifically, a small 5% to 20% minority of investments generate the vast majority of long-term returns. Equivalently, these long-term returns often represent 80% to 95% of returns on both private equity and venture capital. In principle, this Pareto power law suggests that a few positive outlier companies return more capital than almost all of the other investments with small single-digit to negative returns. From a fundamental perspective, many venture capital and private equity firms often attempt to invest in the next Facebook in social media, the next Google in online search, the next Microsoft in software development, the next Amazon in fast cloud computation and e-commerce, the next Tesla in both electric vehicles (EV) and autonomous robotaxis (AR), the next Nvidia in GPU and ASIC clusters, the next TikTok in online video platforms, the next ChatGPT in novel and useful proprietary AI chatbots, the next OpenClaw in open-source AI agents, and so on. For both venture capital and private equity firms, it would be wise to invest in a few 10-baggers with 10 times market value appreciation than many mediocre companies with long-term returns between the real interest rate and the zero lower bound. In this broader context of the global macro investment thesis, the long-term return distributions for venture capital and private equity can often differ dramatically from the Gaussian normal distribution with fat tails for stocks, bonds, index funds, REITs, ETFs, and many other conventional asset classes.

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