After 37 years of capital winning at the expense of labor, political forces are clearly shifting. Consider the state of America's largest generation, the Millennials, which we outline in bullet #8. Stories about millennials and money have gone viral recently. Speaking to her generation's financial resentment, The New Yorker's Jia Tolentino recently observed: "America is the richest large country in the history of the world, and a full third of our population struggles to meet their basic needs. Jeff Bezos - you know, the richest man in the world - his warehouse workers sometimes have to urinate in plastic bottles because they get punished for taking too long bathroom breaks." The Atlantic reported yesterday that "Amazon's starting wage is about $5-an-hour below the country's national living wage and its median full-time wage is a full dollar below it as well." The existential angst of America's black millennials is captured in a new film by Boots Riley, 'Sorry to Bother You', a satire on corporate ethics and labor relations. The film's main character, Cassius Green, is one of the millions of Americans left behind by 'full employment'.
We have warned our clients for several years that excesses were undermining the trend of wealth accumulation and advised that they should plan accordingly. The signs of the shift in the cycle are always evident, but only if you're looking for them. Unfortunately, the smaller signals are often lost in the excitement of the existing, long-term trend. And without a clear understanding of history, one could be blindsided in what can only be described as the most important trend in the investment world.
We spend a great amount of time studying history and have consulted many notable historians over the years. Of all the trends that have informed our world view over the last 50 years, wealth accumulation/distribution is arguably the most inescapable. This was described in part of a speech Kiril Sokoloff delivered to European clients earlier this year. We quote:
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Knowing this helped me to understand the importance of supply-side economics and America's shift towards wealth accumulation in 1980. At the Republican convention of 1976, Ronald Reagan received a 45-minute standing ovation. This was a sign to me that the wealth distribution that began in the United States in 1932 was ready to reverse. My uncle hauled me in front of his New Deal friends to present my views. One of them later turned to me and said: "That's the most ridiculous thing I've ever heard".
In the fall of 1977, I read an article by Congressman Jack Kemp making the case that cutting tax rates would restore incentives in America and create an economic boom. I believed he would be an important messenger. I called him up and asked if I could go meet with him, which he happily agreed to. In his office on Capitol Hill, I proposed that we co-author a book on the subject. He was delighted at the idea of the project and I spent the next year studying his speeches and congressional testimony, as well as the regulations and restrictions holding back entrepreneurial activity. In 1978, Congressman Bill Steiger proposed cutting the capital gains tax and the stock market soared on the news - to the amazement of market participants, none of whom had studied history.
That summer, Proposition 13, which limited real estate taxes in California, was approved by the voters and supply-side economics started to gain momentum. I became friends with Jude Wanniski, an editorial writer at The Wall Street Journal, who along with Robert Bartley, the Journal's editor made the case daily for cutting tax rates and deregulating the economy. Wanniski gave me a copy of his book, The Way the World Works, inscribing a note to me as a 'disciple of the supply-side revolution'.
Ronald Reagan adopted much of Kemp's thinking for his 1980 campaign and his policies as president. Because I had studied history and knew the importance of a revival of wealth creation, I was able to understand how massive the bull market and economic revival would be.
In 1978, I wrote a book entitled, The Thinking Investor's Guide to the Stock Market, which was published by McGraw Hill in June of that year. In that book, I wrote that America was on the verge of an enormous shift towards what I called "grassroots support for capital formation."
I described in that book this concept of secular cycles of wealth accumulation and wealth distribution. I quote as follows:
The other interesting development, and one of considerable significance, is the beginning of grass-roots support for capital formation. This trend, if realized, could be the first major turning point in our financial development since the "welfare state" and Keynesian economic policies came of age. Those policies and those ideas have brought us to the present sorry state of world affairs, where inflation has eaten away at our wealth and given us no real benefit in return: The poor people are still poor, and the poor nations are still poor. It is the obvious failure of these old policies which is pushing us toward more of a free-enterprise approach to economics.
It is not unusual for nations to go through periods of great capital formation and then great capital disintegration. It is necessary and, in one sense, good. The laggards of society, in a relative sense at least, are given an opportunity to catch up to the "great achievers."
If the power of the world and the wealth of the world were held exclusively in the hands of a few, there would be no new markets to sell products to and rapid growth of the world economies could not continue. So, from time to time it is a great boon to long-term economic growth to slow down individualism so that participation can be greatly widened and increased. We have just been through such a period. Many, many people who had no access to education or opportunity have had a fair chance to advance, which implies that a greater and greater number of people will be able to contribute to the world's economic development in an effective way. Productivity will ultimately jump, as will international wealth.
If, indeed, capital and profit will no longer be dirty words in the years ahead, businesspeople and investors will benefit greatly. The wealth that has been hiding during these many years of confiscatory tax policies will once again be able to surface and be used productively. And wealth will be allowed to accumulate without prohibitive taxation. Part of this wealth will go into the stock market, because equity ownership will once again be attractive.
Voltaire once said: "Nothing can stop an idea whose time has come." Because I had studied history, I was familiar with this quote and the historical evidence. As a result, I coined the expression: 'the reverse of Gresham's law'. Gresham's law argues that bad currency will drive out good currency. So my argument was that good government and economic policies would drive out bad economic policies all over the world and the supply-side revolution would in time become global. And for the next three decades, I took this message to my clients all over the world.