Beware the Bezel: Recognizing Capital Misallocation

Capital misallocation is a widespread issue in economic cycles, particularly during bull markets where investors lose track of their capital's actual use and value. The concept of 'bezel' illustrates how funds can be consumed or wasted by intermediaries, exemplified by the Madoff scandal where investors perceived their wealth to be secure while it was actually dissipating. Currently, a similar situation may be unfolding across various investment sectors, such as venture capital and private equity, where inflated returns are reported without a corresponding reality. As the economy shifts, the possibility of realizing significant losses looms large, particularly in previously high-flying sectors like AI, which now face the risk of correction and contagion to other markets. The distinction between valuable assets based on scarcity versus those driven by anticipated future cash flows is essential to understand, as recent events have unveiled discrepancies in these expectations, leading to a much-needed reality check for investors.