No matter what era you live in, you are always only two words away from great wealth.

In the late '90s there were 'tech stocks.'

Then there was 'residential housing'...then 'hedge funds.' All of them washed up...or in the case of housing and hedges, are in the first stages of washing up.

But 'private equity' is still a winner.

It is a curious beast. For one thing, it runs completely contrary to an idea that has so enthused investors for so long - the notion that any dimwit can make money by simply 'investing in a balanced portfolio of stocks over the long run.'

Some things are simply too amazing for words. Shakespeare. Mozart. Sex. Air transportation. No matter how many times we fly, we are still amazed that those huge planes stay aloft.

Investing, too, always leaves us in shock and awe. The investing creed - based on which sane people were willing to give total strangers billions of dollars' worth of their hard-earned money - was that the stock market was reasonably fair...and fairly reasonable. Academics had elucidated the idea in the Efficient Market Hypothesis, according to which a plumber had about as much chance at winning at stock speculation as a corporate insider. The market was supposedly a level playing field, with all the players having about an equal chance to kick the ball.

Everybody had the same 'information' to work with, they said. And every investment dollar gets a vote. The market merely counts up the votes...and produces an answer more perfect than any individual could produce on his own.

But 'private equity' operates on an entirely contrary assumption - that a few rich, smart, well-connected people can outsmart the many ignorant middle class investors.

Now, markets have always been good at separating fools from their money. That is why we have hedge funds, mutual funds, ARMs with NEG AM, and pay option features...and Picassos selling for tens of millions of dollars.

But all of these things, no matter how extreme or absurd, were innovations and elaborations of the market. Private equity on the other hand is openly, brazenly, breathtakingly contemptuous of the market.
 
Traditionally, most people were smart enough to know that the stock market was no place for an honest working man. The proles put their money in banks, earned a fixed, reliable rate of return, and left the speculation in equities to the pros. But rising prices and loose chatter about 'reforms' made them think stocks were no more dangerous than, say, air travel. Where there were 'flaws' in the market, Wall Street and the politicians would be along to correct them. That was why we had the Trust Busters in the late 19th century...and later the SEC...and then Eliot Spitzer...and then Sarbanes-Oxley. They were all meant to keep the rubes hoping...believing...dreaming that the playing field was level!

Even today, in much of the rest of the world people know better. In most countries there is no popular market for stocks. Ordinary people are not fool enough to think they can beat the pros...the insiders...the rich and the well-connected.

"Here in Argentina," an economist explained to us, "most people do not invest in stocks. They think stock market investing requires too much sophistication. Either they put their money in the bank...or they buy something with it. Often they buy property, because it is something they understand."

 The economy grows at 2 or 3% per year. In order for a Wall Street sharpie
- or a private investor, for that matter - to earn more than that, on average, he has to take money away from someone else. Who is he going to take it from: the smartest, best informed, and most powerful investors? Or the poor mugs who think they can be Warren Buffett with $10,000 worth of savings?

Now cometh the coolest thing on Wall Street...Private Equity. With the argument that Sarbox and other reforms have made, the public markets are so difficult and expensive for companies that more money can be made by taking companies private. This sounds good to us. We are as suspicious of public markets as we are of public toilets, and of everything else with the word public in front of it. But what the Private Equity hustlers do is to take advantage of the naïve gullibility of public market investors. Michael Lewis provides the following example:

"The recent deal to buy, and then sell, the car-rental company Hertz Global Holdings Corp. nicely illustrates the current state of play in that relationship. In December 2005, a pair of private-equity firms, Clayton Dubilier & Rice Inc. and the Carlyle Group, bought Hertz from the Ford Motor Co. - which is to say they bought it from the sorry souls who own shares of Ford. Eleven months later, in November 2006, they turned around and sold Hertz back to the [public] in an initial public offering.

"In buying the company they put up $2.3 billion in equity capital. By the time they sold it they had gotten $1.3 billion of their money back, and held shares - which they no doubt plan to get rid of as soon as they can - valued at another $3.5 billion or so. In less than a year they had netted a fairly clean $2.5 billion profit."

Is the world a richer place now that Hertz is on its own? Are more people suddenly renting more cars...enjoying more vacations...getting richer as a result of the Hertz deal?

No, dear reader, we don't think so. Instead, the insiders and Wall Street pros who bought the business from Ford, then made a deal with the other insiders and pros at the big brokerage houses...who flogged it to their customers...so that now it sits in millions of small mutual fund portfolios, valued at a nice multiple of what the public used to think it was worth.

What hath all this money-shuffling wrought? Delusion.... and debt...

Bill Bonner is the President of Agora Publishing.  For more on Bill Bonner, visit The Daily Reckoning.