Where to Look for True Opportunities in this Investment Era
In the year 2019, why does it seem so hard to invest?
Successful investing is funding ideas that surprise on the upside.
Most of the surprises these days come from downside moves on trade and threats of new taxes.
We have had our all-time nominal highs in the S&P. Some analysts expect more appreciation in the coming year as the Fed steers interest rates lower.
We have near all-time lows in “unemployment”. We have so-called “inflation” figures so low that the Fed wants to juice them up to its target of 2%.
We have a rosy scenario economy, suffused with monetary pheromones and newly legal marijuana fumes. With stocks going up for the last decade all the pickers are provable geniuses.
That means it’s all over. The stock market is far more likely to go down 40% than go up 40%.
Stock markets may rise through shedding public companies, and suppressing IPOs (initial public offerings) of firms that might compete with them. Over the last two decades, the stock market has lost roughly 50% of its public companies.
We already have 90% fewer IPOs than we had 20 years ago. IPOs today are mainly “unicorns” — billion market cap behemoths that have already had most of their growth.
Roughly 80% of the demand for stocks comes from public companies buying back their own shares or the shares of potential rivals. For all these purchases the companies use money printed by the government at nominally zero or subzero interest rates.
Why the Wealth Tax is Bad News
Meanwhile, greedy for more government money, the Democrats prattle about a wealth tax, imagining that wealth is a thing rather than a configuration of thoughts. They want to “mark-to-market” capital gains, so that when your stocks go up, even for inflation, even if you don’t sell them, you will still owe a tax.
Mark-to-market will reliably stop the stocks from rising. Do you really want to hold shares that yield a tax without cash to pay it? Remember what happened when “mark-to-market” laws were applied to the banking system in the early 2000s? The financial crisis of 2008 happened.
The banks all went bust one-after-another right up to the moment that “mark-to-market” was rescinded. The chief effect of mark-to-market is drastically to lower the value of the affected asset.
In a classic Laffer Curve effect, the assets usually drop in value faster than the owners can sell them or the IRS can collect the imputed taxes. Everyone loses, including the government. For the middle class, taxes go up when the rich flee the country to tax havens abroad and IRAs plummet in value.
America’s entrepreneurs are in general illiquid. If they try to sell out, their companies and assets shrink.
As Bill Gates put it early in his career: “I am bound to the mast of Microsoft.” If he tried to sell it or substantially cash out, the shares would have dropped in value faster than he could sell them. If entrepreneurs had to pay taxes on their shares before they were sold, only the rich could afford to own companies.
The Democratic candidates are essentially socialists with no idea how capitalism works.
They long for the conditions in feudal or socialist or communist regimes, where a register of material wealth accurately depicts its distribution. Socialist riches reside chiefly in land, natural resources, police powers, tenured professorships, and party offices, often held in perpetuity. If the holders of this wealth don’t behave as their overlords wish, their jobs and holding can be redistributed.
As I wrote in Knowledge & Power:
“The belief that wealth subsists not in ideas, attitudes, moral codes, and mental disciplines but in identifiable and static things that can be seized and redistributed is the materialist superstition. It stultifies the works of Marx and other prophets of violence and envy.”
Illiquid wealth is necessary to the incomes of us all but it is not income itself and it takes work to realize its rewards. Under capitalism, capital flows not to the people who can spend it most readily but to those who can expand it most effectively. That’s why capitalism works better than socialism.
Mark-to-market tax proposals reveal the true menace of the current breed of American leftists. As long as they prevail in the media and the universities, US stock markets will be perilous places to store wealth and wealth will tend to decline.
That’s why in this era I regard investment overseas, in Israel and even in currently battered China as the most promising path.
In the long run, the best of all will be the Cryptocosm, which will enable both a new internet security architecture and a new form of global money that limits the depredations of greedy governments.
Both blockchain-related technologies will provide platforms for the next generations of worldwide wealth creation.
In my prophecies, I hope to prepare you for this coming new epoch of real wealth creation.
Editor, Gilder’s Daily Prophecy