Fundamentals of Multilateral Investing – Lesson One

Fundamentals of Multilateral Investing - Lessons, Premium POM

What is Capital? The Relationship between Savers and Users. Financial Instruments.

By JC Collins

Within our lives finance and economics are two of the most important things to understand.  The effects which finance and economics have upon our lives, both direct and indirect, can be extremely negative if we do not take the time to learn and understand the fundamentals.

Applying that knowledge to our own personal situations can involve risk.  But this risk can be minimized with knowledge and comprehension.  From that a positive and rewarding experience can be realized and our own individual financial well-being and socioeconomic position can be enhanced.

The intent of the added service of the Fundamentals of Multilateral Investing Series is to provide a base understanding of the investing aspect of finance and economics to POM subscribers.  Each segment will be focused on a specific aspect of investing, starting with the basics and working our way into the more complex multilateral subsets.

In this first installment of the Fundamentals of Multilateral Investing Series we will focus on the basic understanding of capital and the source of capital.  We will explore the relationship between Savers of Capital and Users of Capital.

We will also define the mechanisms (securities, instruments, or intermediaries) which allow for the transfer of capital from Savers to Users.

In any economy, whether regional, national, or international, there are two types of individuals, or entities.  There are the Savers of Capital and there are the Users of Capital.

Capital is wealth.

Here on POM we consider wealth to be the accumulation of human time and labor.  This accumulation of human time and labor fits well with the institutional definition of wealth.  Wealth is not about what you make but about what you can keep.  Therefore, the accumulation of human time and labor would signify an increased ability to keep what we make.

In contrast, not keeping what we make is the opposite of wealth.  It is the bleeding of wealth, or human time and labor.  Debt is the main cause of our inability to not keep what we make.

Wealth, the accumulation of human time and labor, should be considered Savings.

Capital comes from Savings.

There are three sources of Savings:

  1. Individuals
  2. Corporations
  3. Governments

The main function of any economy is to transfer capital from Savers to Users for the purpose of economic growth. There are two methods of transferring Capital from Savers to Users:

  1. Direct Investments (these are Real Assets)
  • Infrastructure
  • Equipment
  • Property

And then they carried the water to the well.

2.  Indirect Investments (these are Financial Instruments/Claims)

  • Stocks
  • Bonds

Savers of Capital will invest in Indirect Investments which act as financial instruments and financial intermediaries to transfer savings to the Users of Capital.  These are the mechanisms which function at the core of any financial and economic framework.

Users of Capital will then use those savings to invest in Real Assets, such as commercial and residential real estate, infrastructure development, business, etc.  One of the fundamental purposes for the existence of capital is this investing in productive assets, which promotes economic growth.

The only source of capital is Savings, or the accumulation of human time and labor.  As such, Savers become investors.  There are three types of investors:

  1. Retail Investors
  2. Institutional Investors
  3. Foreign Investors

All three types of investors will make up the composition of multilateral investments.

Users of capital, the target of the investors described above, consist of individuals, business, and governments.  Each are segmented as follows:

  1. Individuals (Individual users of capital do not issue securities and pledge real assets as collateral.)
  • Mortgages
  • Loans

2. Business

a. Stocks (equity)

  • Common
  • Preferred

b. Debt (both long-term and short-term)

  • Bonds (secured)
  • Debentures (unsecured)

4. Government

  • Federal
  • State or Provincial
  • Municipal

As previously mentioned, capital is transferred from Savers to UsersFinancial Instruments/Claims are used to facilitate this allocation of Indirect Investments. (Keeping in mind that Direct Investments consist of Real Assets, such as real estate, equipment, and even gold.) There are different types of Financial Instruments, which are segmented into the two categories of Publically Traded Securities and Privately Traded Securities.  Each are broken out into the following sub-categories:

Publically Traded Securities, or financial instruments/claims, are as follows:

  1. Debt (fixed income)
  • Bonds
  • Debentures
  • Mortgages
  • T-Bills
  • Commercial Paper

2. Equity (stocks)

  • Common
  • Preferred

3. Investment Funds

  • Mutual Funds

4. Derivatives

  • Options
  • Forwards/Futures

5. Other Securities consist of:

  • ETF’s (Exchange Traded Funds)
  • Linked Notes

Privately Traded Securities, or financial instruments/claims, are as follows:

  1. Debt
  2. Equity

In the initial parts of this series we will mainly focus on the Publically Traded Securities, as this offers the best source of opportunity for the average Retail Investor.  For now we will just touch on the sources of Privately Traded Securities, which are as follows:

  1. Investors (angel)
  2. Venture Capital
  3. Private Equity

Sources of savings for the three listed types of Privately Traded Securities include:

  1. Pension Funds
  2. Endowments
  3. High Net Worth individuals

The reason any of the above three would invest in Privately Traded Securities over Publically Traded Securities is because of increased returns, or what is known as Return Enhancement. But with Return Enhancement comes increased risk.

The types of investment which can be made under Privately Traded Securities are the following:

  1. Leveraged Buyouts – Private equity would be the only source for this form of investing.
  2. Growth Capital
  • Early Stage – Angel investors and venture capital would be the two sources of investment.
  • Late Stage – Venture capital and private equity would be the two sources of investment.

3. Turnarounds – Private equity would be the only source of investment.

4. Distressed Debt – Private equity would be the only source of investment.

In Lesson Two we will review Capital Markets and the need for Efficient Capital Markets.  The need for a Multilateral Monetary Framework is to promote a broader and more diverse Efficient Capital Market.  Capital Markets have become inefficient because of the imbalances in the existing USD based unipolar monetary framework.  This transition from a unipolar system to a multilateral system is one of the least understood aspects of what is happening in the monetary and financial world today.  – JC