Oaktree>Latest memo from Howard Marks: Political Reality Meets Economic Reality

[nickenumbers]

I always enjoy Howard Marks thoughts and opinion.

 

This just came out this week.

 

Enjoy!

political-reality-meets-economic-reality.pdf

[Cigarbutt]

I liked it too.

The tariffs section is interesting and balanced. Tariffs are not, by definition, right or wrong but are associated with first order benefits and costs as well as second order consequences. There was an active thread on tariffs.

 

The second part deals with the populist appeal and resentment. From Mr. Marks: The government is not likely to increase aggregate benefits and is mostly involved in the distribution of costs and benefits.

 

Recently, there was an election result in my jurisdiction (province in Canada, result=irrelevant but context=relevant) and a more business-friendly party won. However, the largest gains were obtained by a quite left-leaning party which is composed of a young, enthusiastic and committed base. A base that is likely to grow in the event the economy stumbles. Why?

 

Building on what Mr. Marks says, I would add that the government is a net short-term negative for the economy but it can foster an inclusive environment that can maximize constructive gains coming from the private sector. IMO a certain elite that is both government-based and oligarchic in nature has become quite complacent and appears to be oblivious as to why capitalism has become so unpopular among growing circles.

 

Recent addition to the food for thought process.

https://assets.realclear.com/files/2019/01/1155_Mobility.pdf

[nickenumbers]

Good information in the attachment on mobility within geography and within generations.  I skimmed it and I need to go back and review it in detail.

 

I agree that there are forces working behind the curtain of the general population, and it is hard to determine who really is wearing a White or Black hat.  1st, 2nd and 3rd order consequences are hard to think thru, and not always obvious.

 

It makes me think of the Winston Churchill quote:  "The best argument against democracy is a five-minute conversation with the average voter."

 

And, yet, we are morally obligated to our less advantaged brothers and sisters of our countries and of the larger world.

[Spekulatius]

I liked it too.

The tariffs section is interesting and balanced. Tariffs are not, by definition, right or wrong but are associated with first order benefits and costs as well as second order consequences. There was an active thread on tariffs.

 

The second part deals with the populist appeal and resentment. From Mr. Marks: The government is not likely to increase aggregate benefits and is mostly involved in the distribution of costs and benefits.

 

Recently, there was an election result in my jurisdiction (province in Canada, result=irrelevant but context=relevant) and a more business-friendly party won. However, the largest gains were obtained by a quite left-leaning party which is composed of a young, enthusiastic and committed base. A base that is likely to grow in the event the economy stumbles. Why?

 

Building on what Mr. Marks says, I would add that the government is a net short-term negative for the economy but it can foster an inclusive environment that can maximize constructive gains coming from the private sector. IMO a certain elite that is both government-based and oligarchic in nature has become quite complacent and appears to be oblivious as to why capitalism has become so unpopular among growing circles.

 

Recent addition to the food for thought process.

https://assets.realclear.com/files/2019/01/1155_Mobility.pdf

 

This article on mobility is fantastic, imo. I am surprised that Germany does so badly. it is also obvious that the Scandinavian countries Sweden and Denmark are doing something right.

 

Think about this - the top 0.1% own as much than the bottom 90%. A lot of folks in the bottom have no chance to move up. Why would they not eventually get the idea to just take what they can’t earn, but electing a someone which is willing to do what it takes. These trends are decades in the making and there isn’t a quick fix, imo.

[John Hjorth]

A very fascinating topic, agreed & thank you to all posters in this topic.

 

Attached is an old article, that I back in 1998 asked a neighbour dear to me to read [she is a socialist, and not my neighbour any longer], on the condition that she delivered the physical newspaper back to me, which she did not do. Since then I have tried so many times to recover the loss, in which I succeeded as late mid August 2014, via access to a newspaper article database, that I work related suddenly found available under my fingertips. I couldn't download it, but could grab it by cut & paste into M$ Word :

 

Jyllandsposten - March 1^st 1998 - Erik Eisenberg og David Trads : "The debate that got lost", attached. [if you give it a spin in Google Translate you'll get more than the overall meaning of it.]

 

Here, I've translated the second paragraph:

Four million Danes go to election on 11 March. More than 800,000 have jobs in the public sector. 700,000 of the voters are over 67 years old and receive a state pension. Other 900,000 are on unemployment benefits, basic minimum public welfare, partial pensions, transitional allowance, leave or early retirement. A total of more than 2.4 million danes rely on the public funds to get money for their living expenses. In other words, they make up a majority of 60 percent. And that can be seen on the political agenda.

 

It reads as a prelude to the recent Greek tragedy, right? A whole European nation sitting tilted on the pot, ready to poo on the seat! -Well, it never happened! - More the opposite!

 

Attached is also a chart of the amount of circulating Danish T-Bills [a bit dated, yes - nothing material has changed since the download from the Danish Statistical Department] - In short, there basically are none to default on!

 

Spekulatius & Cigarbutt, I really want to discuss this and your thoughts expressed above in this topic, but perhaps we should go to another topic, perhaps a new one, not to derail this topic.

 

Edit:

 

I screwed up with names of the files attached, by not converting file names to English language - the files are there - just click on the "clip". If the file names cause you trouble, please just post, and I'll reupload renamed files.

Kristian_Mogensen_-_Debatten_der_blev_væk_-_1998-03-01.docx

Kristian_Mogensen_-_Debatten_der_blev_væk_-_1998-03-01.pdf

[WayWardCloud]

Super interesting and well balanced as always! Thanks for sharing.

I agree with his view on both tariffs and anti-capitalist sentiments (basically: good initial intention + over-simplistic understanding of actual world complexity = get destroyed by all the side effects you haven't considered).

 

I disagree however with his last remarks on taxation of the ultra-wealthy and the beer story is just plain ridiculous when you know that the mega-rich pay a MUCH smaller effective percentage rate on their income than the very rich, the rich and the upper middle class.

Here is my take on it for what it's worth, I call it: "human body finity meets math infinity" (to take back the name of the article).

 

There's only so much one person can do. Simply because we're restricted by having only one body, 24 hours in a day and so many years left to live. So even if you get immensely rich, let's say 1000 times richer than you were before, you're not going to start to eat 1000 times more food, live in a 1000 houses at once, etc. Sure, you'll have finer more expensive food and a bigger more expensive house and maybe one or two more for vacations, whatever: there's still limits to what's physically possible to consume. We live in a system, capitalism, where ownership of capital allows us to enjoy pieces of businesses that produce profits for us. Thanks to compounding, mathematically you can keep doubling your capital every 10 years or so on average. At some point you're going to reach a level where, no matter how extravagant your lifestyle, you'll still keep getting richer and richer and you will do so by a magnitude that eclipses everyone else's fortune who doesn't own capital (most people).

 

Given that so many people in our country are still suffering from poverty this just feels wrong.

But how do we share the pie better without creating disincentives for people to work hard, innovate, etc - because they are the ones who make the overall pie GROW?

 

Good news! We last for only a glimpse of time on Earth. Then we disintegrate and new people come over to live their own lives.

So let people become billionaires by their own doing and cheer for them along the way AND make the Buffet/Gates giving pledge into a LAW (and hunt down any loop-hole ferociously) with a hard cap on max inheritance ($10 million per kid? whether it's in stocks, real estate, fine art, anything counts). I bet that's enough to finance healthcare and education for all, paying down the debt, or whatever you fancy. I just think the idea that any kid should be born with a huge fortune thanks to no quality of their own is old-Europe nobility and very anti-American (plus it's detrimental to the actual person's character building).

 

That might be me being hopeful, but I get a different read from (most) anti-capitalist declared young people than Marks. I think they see the difference between self-made men (Ask them if they look up to people such as Elon Musk or Steve Jobs) and trust-fund kids and that mostly the latter are the ones crystallizing their resentment.

We could make this giving pledge not just an IRS thing but a very patriotic, very "proud to be an American" moment, too. With the right marketing I can see both liberal value people (sharing with those less fortunate) and conservative value people (hard work of your own) back it together and shame those who decide to change nationality at the end of their lives (which I don't think we can do much about except banning the heirs from setting foot in the US again).

 

Opinions? :)

 

[nickenumbers]

WayWardCloud,

 

I love your thoughts and perspective.  Plus, I am going to shamelessly take your concept of "human body finity meets math infinity".  I have heard, learned and understood it previously but your description and word selection was precise and elegant [easy to understand].  Well done!

 

I don't know if I know enough to agree or disagree with your concept of passing generational wealth, but I do know that concentration of wealth at the top and loop holes to pass wealth thru the trust-fund-kid lottery needs to be improved/changed.  Plus you get credit for proposing a straw man alternative to the present.  [everyone likes to complain, but almost no-one has a constructive solution.]  If we had 4-5 potential solutions and a collection of open minded people, that would be productive.

 

I look forward to hearing what the folks on CoBF think.  Thanks WayWardCloud!

[rb]

Super interesting and well balanced as always! Thanks for sharing.

I agree with his view on both tariffs and anti-capitalist sentiments (basically: good initial intention + over-simplistic understanding of actual world complexity = get destroyed by all the side effects you haven't considered).

 

I disagree however with his last remarks on taxation of the ultra-wealthy and the beer story is just plain ridiculous when you know that the mega-rich pay a MUCH smaller effective percentage rate on their income than the very rich, the rich and the upper middle class.

Here is my take on it for what it's worth, I call it: "human body finity meets math infinity" (to take back the name of the article).

 

There's only so much one person can do. Simply because we're restricted by having only one body, 24 hours in a day and so many years left to live. So even if you get immensely rich, let's say 1000 times richer than you were before, you're not going to start to eat 1000 times more food, live in a 1000 houses at once, etc. Sure, you'll have finer more expensive food and a bigger more expensive house and maybe one or two more for vacations, whatever: there's still limits to what's physically possible to consume. We live in a system, capitalism, where ownership of capital allows us to enjoy pieces of businesses that produce profits for us. Thanks to compounding, mathematically you can keep doubling your capital every 10 years or so on average. At some point you're going to reach a level where, no matter how extravagant your lifestyle, you'll still keep getting richer and richer and you will do so by a magnitude that eclipses everyone else's fortune who doesn't own capital (most people).

 

Given that so many people in our country are still suffering from poverty this just feels wrong.

But how do we share the pie better without creating disincentives for people to work hard, innovate, etc - because they are the ones who make the overall pie GROW?

 

Good news! We last for only a glimpse of time on Earth. Then we disintegrate and new people come over to live their own lives.

So let people become billionaires by their own doing and cheer for them along the way AND make the Buffet/Gates giving pledge into a LAW (and hunt down any loop-hole ferociously) with a hard cap on max inheritance ($10 million per kid? whether it's in stocks, real estate, fine art, anything counts). I bet that's enough to finance healthcare and education for all, paying down the debt, or whatever you fancy. I just think the idea that any kid should be born with a huge fortune thanks to no quality of their own is old-Europe nobility and very anti-American (plus it's detrimental to the actual person's character building).

 

That might be me being hopeful, but I get a different read from (most) anti-capitalist declared young people than Marks. I think they see the difference between self-made men (Ask them if they look up to people such as Elon Musk or Steve Jobs) and trust-fund kids and that mostly the latter are the ones crystallizing their resentment.

We could make this giving pledge not just an IRS thing but a very patriotic, very "proud to be an American" moment, too. With the right marketing I can see both liberal value people (sharing with those less fortunate) and conservative value people (hard work of your own) back it together and shame those who decide to change nationality at the end of their lives (which I don't think we can do much about except banning the heirs from setting foot in the US again).

 

Opinions? :)

I agree with a lot of what you say.

 

In my opinion a big problem is the different treatment taxation treatment between capital and labour. Basically if you have money you're a protected species and if you have to work then you're an inferior one. Sort of like the plantation owner and the plantation worker in the past. That's not right.

 

The prevailing view is that the current system is required in order to encourage/stimulate investment to create, build, innovate, etc. That's bullshit. I have been investing for a long time. In that time I have made a lot of money. I've also paid a LOT less in tax than a worker making that money because I'm a member of the protected species. Here's the thing though: I have never finances any new creation, building or innovation. None! I basically got the tax break for nothing. So do hoards of members of the protected species.

 

Here's another aspect. A lot of (most?) of the time the create/build/innovate thing is financed with debt, not equity. Yet debt does not receive preferential treatment whereas equity does.

 

Here's the thing though. I do agree that the create/build/innovate is valuable and beneficial to society. So you want to have as much of it as possible. Therefore it logically follows that you want to incentivize it. Governments do that through tax policy. But me sitting on my ass watching my BRK stock go up doesn't do any of that. Neither does a trust fund baby talking to his broker on his airpods about the performance of his Apple stock while Apple throws tens of billions back at its investors.  So here's an idea: incentivize investment in create/build/innovate. If our capital finances a new thing, IPO, etc, i.e. actual investment, then you get preferential tax treatment. If it doesn't you loose protected status and go back to steerage class. That should actually increase beneficial investment while also raising tax revenue.

 

But of course the members of the protected species will fight that tooth and nail because it will mean that in the end they will have less money. The plantation owners can also afford better lawyers and lobbyists than the plantation workers. They'll come in crisp suits armed with decks that explain in vague terms why such a thing is folly. Thankfully our society still has the franchise.

[Jurgis]

Good posts WayWardCloud and rb

[TwoCitiesCapital]

Super interesting and well balanced as always! Thanks for sharing.

I agree with his view on both tariffs and anti-capitalist sentiments (basically: good initial intention + over-simplistic understanding of actual world complexity = get destroyed by all the side effects you haven't considered).

 

I disagree however with his last remarks on taxation of the ultra-wealthy and the beer story is just plain ridiculous when you know that the mega-rich pay a MUCH smaller effective percentage rate on their income than the very rich, the rich and the upper middle class.

Here is my take on it for what it's worth, I call it: "human body finity meets math infinity" (to take back the name of the article).

 

There's only so much one person can do. Simply because we're restricted by having only one body, 24 hours in a day and so many years left to live. So even if you get immensely rich, let's say 1000 times richer than you were before, you're not going to start to eat 1000 times more food, live in a 1000 houses at once, etc. Sure, you'll have finer more expensive food and a bigger more expensive house and maybe one or two more for vacations, whatever: there's still limits to what's physically possible to consume. We live in a system, capitalism, where ownership of capital allows us to enjoy pieces of businesses that produce profits for us. Thanks to compounding, mathematically you can keep doubling your capital every 10 years or so on average. At some point you're going to reach a level where, no matter how extravagant your lifestyle, you'll still keep getting richer and richer and you will do so by a magnitude that eclipses everyone else's fortune who doesn't own capital (most people).

 

Given that so many people in our country are still suffering from poverty this just feels wrong.

But how do we share the pie better without creating disincentives for people to work hard, innovate, etc - because they are the ones who make the overall pie GROW?

 

Good news! We last for only a glimpse of time on Earth. Then we disintegrate and new people come over to live their own lives.

So let people become billionaires by their own doing and cheer for them along the way AND make the Buffet/Gates giving pledge into a LAW (and hunt down any loop-hole ferociously) with a hard cap on max inheritance ($10 million per kid? whether it's in stocks, real estate, fine art, anything counts). I bet that's enough to finance healthcare and education for all, paying down the debt, or whatever you fancy. I just think the idea that any kid should be born with a huge fortune thanks to no quality of their own is old-Europe nobility and very anti-American (plus it's detrimental to the actual person's character building).

 

That might be me being hopeful, but I get a different read from (most) anti-capitalist declared young people than Marks. I think they see the difference between self-made men (Ask them if they look up to people such as Elon Musk or Steve Jobs) and trust-fund kids and that mostly the latter are the ones crystallizing their resentment.

We could make this giving pledge not just an IRS thing but a very patriotic, very "proud to be an American" moment, too. With the right marketing I can see both liberal value people (sharing with those less fortunate) and conservative value people (hard work of your own) back it together and shame those who decide to change nationality at the end of their lives (which I don't think we can do much about except banning the heirs from setting foot in the US again).

 

Opinions? :)

 

This. As a libertarian, I'm generally against the idea of taxation of wealth. I have no problem with people being billionaires because generally it means they've created billions in value for millions/billions of people.

 

That being said - their kids didn't create that value. Their families didn't create that value. So I don't think that value should just be allowed to transition to the next generation who didn't earn it. They'll be well off enough from having the benefits of a super-welathy family their entire time growing up.

 

In other words, I'm ok with billionaires and don't want to tax them while they're living.  But I do generally support an excessively high estate tax with lower limits as to when it kicks in and less loppholes to get around it like various trust structures.

[JRM]

The problem is if the threshold is set too low for the estate tax then family farms and small family businesses cannot be passed on to the next generation.  The kids cannot afford to keep the farm/business, and it must be sold.  The threshold for the estate tax should be correspondingly high not to include most small business and wage earners (who were already taxed on those earnings), but rather capture the billionaires who accumulated wealth through businesses and other tax favorable ventures.

[TwoCitiesCapital]

The problem is if the threshold is set too low for the estate tax then family farms and small family businesses cannot be passed on to the next generation.  The kids cannot afford to keep the farm/business, and it must be sold.  The threshold for the estate tax should be correspondingly high not to include most small business and wage earners (who were already taxed on those earnings), but rather capture the billionaires who accumulated wealth through businesses and other tax favorable ventures.

 

I don't disagree, but limiting it only to billionaires is too limited in scope. After all, the guy who has $250 million St his death didn't get by operating the local corner store that now can't be passed onto his kids....

 

Sure, make the estate cap in excess of 10, 15, or even 25 million - wherever you want to draw the arbitrary line of "disadvantaging the advantaged" or what qualifies as a "small" business - but targeting only billionaires is too limited in scope for an argument intended to support small business.

 

Further, for family members inheriting a successful operation - it wouldn't be too hard to finance to pay the taxes and then use cash flows from the business to pay off the financing. Will you be as rich as your old man when you're done? Probably not - but that's because your old man built it from the bottom up and you inherited a permanent job with a built in consumer. I don't think that's too unfair.

[K2SO]

 

Further, for family members inheriting a successful operation - it wouldn't be too hard to finance to pay the taxes and then use cash flows from the business to pay off the financing.

 

Depends on the business. What if it is also highly levered? What if the estate tax comes due at a time when credit is hard to come by?

 

I agree with the principle that inheritances and generational wealth transfers should be taxed at some level, but in a perfect world we would tax only passive assets. Actively owned and managed businesses should be exempt, as taxation could impact the business, employees, suppliers, etc.

 

[Cigarbutt]

In his memo. Mr. Marks lists the reasons behind a country's preeminence in the world (page 9). I think he could have included institutional governance.

https://www.transparency.org/cpi2018