A Crazy Idea?
Three Strong Stocks
A Crazy Idea?
What follows just might sound like the craziest thing I’ve ever written. But hear me out if you can—and try to keep an open mind.
I’ve been writing about investing and capitalism for the past 29 years, and in that time I’ve seen a lot of truly great companies created.
Among the public companies that have changed my life—in a good way—are Amazon, Apple, Cisco, Chipotle Mexican Grill, eBay, Expedia, Facebook, Google, Home Depot, Intel, LinkedIn, Microsoft, Monster.com, Netflix, Paypal, Tesla Motors, TripAdvisor and Whole Foods.
In a world without capitalism, those companies would not exist.
And the capitalism that thrives in the U.S. helps everyone!
It enables millions of people in developing countries to own cell phones and televisions and thus learn what’s happening in the wide world.
It’s reducing global poverty and hunger at a good pace.
And it’s boosted the standard of living in every corner of our own country.
Bottom line: The pie is getting larger, both globally and in the U.S.
At the same time, however, the income gap in this country has continued to widen, with the top 1% of earners in the U.S. taking an increasingly larger piece of the pie, and using their money—either individual or corporate—to exert an overweight influence on matters of importance.
The political dimensions of this influence are well known these days.
It’s one reason we once again have a Clinton and a Bush running for president.
It’s one reason that hedge fund operators avoid paying normal income tax rates on much of their compensation.
It’s one reason that so many U.S. corporations have been successful in minimizing their taxes as well.
And it’s one reason that we’re still putting ethanol in our cars—something that defies all economic sense unless you live in Iowa.
But the influence of this money goes far beyond politics!
Because the 1% can’t actually use all their wealth, they “invest” it in stocks, real estate, sports teams, automobiles, fine wine, fine art, etc. Some of it goes into private equity, minting “unicorns” like Uber, Airbnb and Square. And some of it is simply sitting idle, working hard to avoid the taxman.
In the process, this money, which is allocated based on the perceptions and values of the moneyed class, as opposed to those of the vast middle class, creates bubbles.
In the late 1990s, it created the stock market bubble.
In the years leading up to 2007, it created the real estate bubble.
Today, there are signs of a bubble in private equity.
I could argue that we’re in an extended bubble in the bond market.
And someday in the future (note the Ferrari IPO), we may see a bubble in the collectible car market.
What this money doesn’t do, to a large degree, is trickle down to people at the bottom, the 90% of working class people who are struggling to get ahead.
And what it doesn’t do is send market signals about what really matters to the majority of Americans. (I credit James Livingstone’s book, Against Thrift, for this idea.) In short, the economic power of the rich is so great that it distorts the free market.
Now, maybe you’re okay with that. I totally understand the mindset of business owners and investors. I am both.
But consider this.
Even though we’ve enjoyed a long economic recovery from the recession of 2007-2009, the vast middle class is still struggling. The real unemployment rate—including the underemployed and discouraged—is 10% (almost double the commonly quoted 5.1%) and the youth unemployment rate is 12.7%.
Now, you can find a lot of culprits when you look to the reason for this unemployment, from the inability of our elementary school systems to adjust to the digital age, to the self-esteem craze that praises all kids equally, to overworked single parents, to too much time spent taking tests or playing sports, to the college borrowing boom that sent kids to college who got little out of it but debt.
But it might just be that it’s not all their fault. It might just be that the growing ability of machines to perform a growing variety of tasks in our world means we will never have full employment again. And if that is so, it’s worth asking if full employment is even a proper goal.
Ten years ago I would have thought so. I was born and raised in a Yankee household where productive work was highly valued, and I maintain those values today.
But I’ve seen human toll collectors and bank tellers and supermarket checkout people replaced by machines. In recent years, I’ve seen writers replaced by machines. I’ve seen farms become enormously more dependent on machines than human labor. I’ve seen the Tesla Motors factory where robots do both heavy lifting and precision assembly. I know that sooner than we expect, self-driving cars and trucks will manage themselves far more efficiently and safely than flawed and distracted humans do today. And I know beyond a shadow of a doubt that the trend of machines replacing people will continue.
In fact, a study at Oxford University found that 47% of jobs are at risk of computerization over the next two decades. That includes positions in transport and logistics, office and administration, sales and construction, and even law, financial services and medicine.
So I ask, in a world where an increasing amount of work can be done by machines, is it necessary—or even desirable—that all people work, or are there other pursuits that might be more valuable—like caring for one’s children or elderly parents, for example?
Granted, it’s easier not to ask the questions. For most people, it’s easier not to question the way things are. For most people, it’s easier to keep on watching the unemployment numbers and speculating on when the Fed will raise interest rates.
And speaking of interest rates, the big picture as I see it is this: From the end of World War II until 1980, interest rates rose as people grew increasingly eager to borrow for the future—because the future was bright!
Yes, the common wisdom is that interest rates were high to combat inflation, but inflation occurred because demand for goods and services—by baby-boomers in particular—outstripped supply.
From 1980 until the present, contrarily, interest rates have declined, as people have become increasingly less willing to borrow for the future and baby-boomers have been preparing for retirement. As a result, today, Federal debt pays nothing, as people feel more comfortable with their money “safe” rather than lending it out.
Again, the common wisdom is that interest rates are low because inflation is low, but that’s because demand for goods is low relative to supply! And part of the reason for that is that the increase in supply has equaled—and in some cases exceeded—the spending capabilities of regular consumers.
And one reason for that is that (by some measures) the wages of most American workers have stagnated since the 1970s, with roughly 25% of workers (including 40% of those in restaurants and food service) now using public assistance to supplement what they earn.
But that welfare system is less generous than it used to be, with a patchwork of means-tested systems (one person counted 79 programs!) that often penalizes people for working. And it’s not very efficient.
And the job market is not what it used to be either! Gone are the days when a person could count on—or even want—lifetime employment in a company. Nowadays there are seasonal jobs (like working for Amazon and UPS around the holidays) that ebb and flow with demand. And there are growing economies like Uber and Airbnb where people have no boss but themselves.
Putting these disparate ideas together…
1. Capitalism is good.
2. But the rich and powerful are increasingly denying the working class a fair share of the rewards of growth.
3. And the rich and powerful, by misallocating capital, are not providing useful signals to markets.
4. Meanwhile, growing machine-driven efficiencies and changes in labor markets mean underemployment among certain populations is likely to become increasingly common.
5. And our welfare system is ripe for improvement.
… my conclusion is that the value of work as a valuable activity is due for reexamination. And that if a higher-value activity can be found, society should find a way to support it.
Now, I expect some readers will press delete and move on here. It’s good to have that power.
But I’ve finally gotten to the point of this column, and it’s this: that a Guaranteed Basic Income is an idea worth considering.
Guaranteed Basic Income
A Guaranteed Basic Income (GBI) would be just what it says, a guaranteed payment, by the Federal government, to all adult U.S. citizens or residents.
There would be no means testing, save for that detail about citizenship or residency. Every living adult, regardless of race, marital status, gender, criminal record, education and income level, would receive the same payment, every year. Even Donald Trump.
One result of this payment is that millions of Americans would no longer be poor, and thus millions of Americans would be less inclined to break the law.
Additionally, a multitude of current assistance programs could be abolished, shrinking the size of the Federal government.
The libertarian right likes the idea of transferring power from the government back to the people. And it likes the idea that people would get cash (to use as they choose) rather than the goods and services the government decides they need.
The left likes GBI because it thinks society is unequal and wants to redistribute wealth.
And the technology elite like the idea because it’s so radical, so unpopular (even unknown) among all major parties. One, Albert Wenger, of Union Square Ventures, told a TED audience recently, "What we see in startups is that the most powerful innovative ideas are ones truly dismissed by the incumbents." A minimum income would allow us to "embrace automation rather than be afraid of it" and let more of us participate in the era of "digital abundance."
But would it actually work?
Over the decades, there have been some pilot programs.
There were eight "negative income tax" trials in the U.S. back in the 1970s, where people received payments and the government clawed back most of it in taxes based on your other income. The trials reduced poverty, but people worked slightly less than normal.
A pilot program in rural Manitoba, Canada in the 1970s showed that a "Mincome" not only ended poverty but also reduced hospital visits and raised high-school completion rates. Again, people worked slightly less than previously. However, the only two groups who worked significantly less were new mothers, and teenagers working to support their families. New mothers spent this time with their infant children, and working teenagers put significant additional time into their schooling.
In Namibia, a trial program cut poverty from 76% to 37%, increased non-subsidized incomes, reduced child malnutrition, raised education and health standards, and cut crime levels. And in this case, participants used the extra income to engage in more productive economic activities.
A trial in India involving 6,000 people paid them $7 month—about a third of subsistence levels. It, too, proved successful at reducing poverty. And here, too, the amount of work people were doing increased.
Back in the U.S., there’s the Eastern Band of Cherokee Indians, based in North Carolina, whose members receive payments of several thousand dollars twice a year as dividends from the profits of the Harrah's Cherokee casino. Over time, the payments have contributed to significant declines in poverty, behavioral problems, crime, substance abuse and psychiatric problems, and increases in on-time graduation.
And in Alaska, every resident gets a dividend check—in recent years it’s been between $1,000 and $1,500 per person—representing their share of the states’ oil revenues.
Summing up, the greatest negative effect from these programs seems to be that in America, some people, given free money, will work less—but mainly to care for family members or attend school.
And that’s not really a negative at all.
But how much would such a program cost, and who would pay for this?
According to Danny Vinik at Business Insider: “In 2012, there were 179 million Americans between the ages of 21 and 65 (when Social Security would kick in). The poverty line was $11,945. Thus, giving each working-age American a basic income equal to the poverty line would cost $2.14 trillion.”
Today, all federal and state benefits for low-income Americans cost about $1 trillion a year, so closing that gap would mean raising taxes on the rich and closing loopholes.
Tax hikes, of course, have been proposed many times before and the arguments for and against are well known. Closing loopholes is also a no-brainer. But thanks to the dollars and ingenuity of those who benefit, there always seem to be loopholes!
But remember what I wrote above what the rich do with their money? They invest it in collectibles. They buy real estate. They buy bonds, paying dearly for safety. And in the process they distort the free market in the same way that Super PACs distort elections; the voices of the little people are drowned out by the dollars of the rich.
So the upside from the Guaranteed Basic Income would be:
1) that poverty in the U.S. is reduced.
2) that crime in the U.S. is reduced.
3) that markets become more efficient, as the market power of the working class gains a bit more power relative to the rich.
Lastly, making a big idea even bigger, there’s the possibility of funding the BGI through monetary policy. Why not give money to people instead of banks? People would spend it and it would work its way back to the banks rather than vice versa.
What would have happened if the Fed had taken the $3.5 trillion used to buy debt through the various Quantitative Easing programs and just given it to people as income instead? Wouldn’t that have been interesting?
I welcome your feedback!
Three Strong Stocks
Looking at the market today, the good news is that the bull market is alive and well, and looking healthy enough to run all the way to the New Year without pause.
That’s not a prediction, but it is an acknowledgement of the trend, and I’ve always found that if you invest in sync with the main trend, you’ll do just fine.
So here are three stocks I recommend buying today:
Stock A is a leader in the business of electronic health records. The company enjoyed revenue growth of over 30% per year before the Affordable Care Act was passed, and now its growth is accelerating. As a result, investors are piling in.
Stock B is a leader in the semiconductor industry, making chips for wireless devices, security systems, and cloud-based data center gear, all of which are thriving industries. The stock has been basing since March, and is now on the verge of breaking out to new highs. When it does, I expect buyers to jump in.
Stock C is a well-known social media company whose stock has been under accumulation by institutions all year. Detractors say the stock is expensive, but I say the greatest growth stocks have always been expensive. I think this stock could double in the year ahead!
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory