Market Melt-Ups & Billionaire Backlash

Authored by Sven Henrich via,

There’s an old adage: There are two guarantees in life: Death and taxes. Let’s modernize this a bit shall we? While it’s true even the rich still die these days (for now), but taxes are already a debatable question. After all taxes for corporations and the rich have come down dramatically in recent years and gaming of tax codes is the professional obsession of myriads of full time lobbyists and accountants who have found and lobbied every which way for the ultra wealthy to  minimize tax exposure in tax havens, offshore accounts and clever deduction schemes.

No, the modernized version of the death and taxes adage has morphed into something more sinister:

There are two guarantees in life: The rich get obscenely rich, everybody else gets to carry ever more obscene public debt levels.

This week we again get to see an annual ritual: The rich and powerful meet in Davos (119 billionaires are attending) and they get to ravel in having gotten even richer versus the year before and obscenely so as easy money by central bankers have once again levitated the prices of the very assets disproportionally owned by the wealthy: Stocks.

Look, no reasonable person would argue that the super wealthy don’t deserve to be super wealthy if they create something amazing of value add. Jeff Bezos deserves to be rich because he’s created an amazing growth business. Bill Gates deserves to be rich because he’s created an amazing growth business. Nobody is or should be arguing that. That’s not the point here.

The point is that their wealth is so obscenely accelerating that most people can’t even comprehend it, the numbers so large they give little perspective of how vast the wealth inequality equation is skewed.

Concurrent with the annual Davos meeting Oxfam releases the latest stats each year and they do give perspective:

The wealth inequality equation is accelerating to fast that the super rich can’t help but get richer, even if they try to give all their wealth away.

Take Bill Gates, arguably the most philanthropic person on the planet, long retired from Microsoft is again one of the richest two people on the planet adding over $22.7B to his wealth in 2019 alone. Not bad for a retired guy.

The secret of course: Vast ownership in stocks, $MSFT being at the forefront of his holdings of course. Bill Gates has been selling $MSFT stocks for decades, but he’s got so many shares he can’t get rid of them apparently.

And Bill Gates recognizes there’s a problem calling for higher taxes on the super wealthy:

“the Microsoft founder pointed to the widening gap between the haves and have-nots — income inequality is at the highest level in a half-century — as reason to hike taxes on the rich.

“That’s why I’m for a tax system in which, if you have more money, you pay a higher percentage in taxes,” Gates wrote in a blog post on New Year’s Eve. “And I think the rich should pay more than they currently do, and that includes Melinda and me.”

Gates, who’s worth an estimated $114 billion after he added $22.7 billion to his fortune in 2019, according to Bloomberg’s Billionaires Index, proposed several steps to make the U.S. tax system “more fair.” Those included raising the capital gains tax “probably to the same level as taxes on labor.” In 2018, a single average worker in the U.S. faced a 29.6 percent tax burden on their pre-tax earnings, or about $17,596 in taxes, according to the Tax Foundation.”

But frankly one can currently very much doubt the political viability of such a proposition. For one the rich just got a nirvana in tax cuts:

To get any of that changed would require a radical shift in American politics. Yes we see rumblings from the Bernie Sanders and Elizabeth Warrens of the world, but they’re not even close to being elected or even nominated. Would pro business candidates such as Bloomberg or Biden be capable or willing to change the tax codes that have benefitted the political donor class for decades? As an academic question aside it’s not even a realistic question to ask as neither have won the presidency and may not. Republicans control the Senate and that ends the tax increase question dead in its tracks for the moment.

Besides, taxes are not the root cause of wealth inequality, they are just the icing on the cake. Bill Gates didn’t add $22.7B in wealth in 2019 because he saved on taxes. He added this much wealth as a result of stock markets again accelerating higher, not because of vast growth in market earnings, but because of multiple expansion driven by easy central bank policies.

The general public has no clue how central banks work, they don’t understand the policies that are driving the wealth inequality equation. But they see the rich getting richer while the debt burdens that they shoulder are increasing year after year:

“The world’s already huge debt load smashed the record for the highest debt-to-GDP ratio before 2019 was even over.

In fact, it broke that record in the first nine months of last year. Global debt, which comprises borrowings from households, governments and companies, grew by $9 trillion to nearly $253 trillion during that period, according to the Institute of International Finance.

That puts the global debt-to-GDP ratio at 322%……..Such massive worldwide debt is a real risk for the global economy, especially because the IIF expects levels to rise even further in 2020.

“Spurred by low interest rates and loose financial conditions, we estimate that total global debt will exceed $257 trillion” in the first quarter of 2020, the IIF said.

The Federal Reserve lowered interest rates three times last year, and the European Central Bank’s benchmark rate is still at its post-financial crisis lows.”

See here’s the real dynamic: In a world of measured low inflation and weak wage growth easy central bank money creates vast price inflation in the assets owned by the few making the rich richer, but also enables the taking on ever higher debt burdens leaving everyone else to foot the ultimate bill.

There are two guarantees in life: The rich get obscenely rich, everybody else gets to carry ever more obscene public debt levels.

That is the measured outcome of the central bank easy money dynamic that has been with us now for decades, but has taken on new obscene forms in the past 10 years with absolutely no end in sight.

This is the dynamic that has to change or face a building of an unprecedented public backlash. This is impossible you say? Why?

Hoping for raising taxes on the rich is squabbling for the scraps from Longshank’s table. It’s missing the root causes. For true change the central banking cartel control over the wealth inequality equation must not only be acknowledged (which they refuse to do), but it needs to be dramatically altered.

There’s of course a massive problem with that very proposition. What happens when that dynamic changes and asset prices collapse and wealth inequality takes on a more traditional form? The global economy, so depend on easy money and cheap debt would face a deep recession, a depression even, and the non wealthy would be the first to get hit, losing their jobs, facing default on their loans and plummeting real estate prices.

We’ve already seen the end of this movie:

In the end nothing changes. The world is trapped in a cheap money fueled high debt cycle and the rich will keep getting richer and the plebs will end up footing the bill.

The big practical question for investors to consider is this: With the ever more recognized dynamics of wealth inequality result in a political rebellion first, one that changes the regulatory and tax outlook in the years to come?

I guess we’ll find out more on November 3rd. In the meantime we get to see Davos unfold in usual fashion, lots of words with little action, and then a very contentious presidential election process in 2020. Politics are inherently unpredictable, especially when elections are driven by strongly held emotions. If these emotions gain traction on the wealth inequality front watch for signs of building backlash for such signs could go a long way to reduce future multiples, multiples that are currently pricing in nothing but perfection making them particularly vulnerable to unexpected backlash.

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