Have you practiced the nudge lately? Washington is full of nudgemasters. Richard Thaler and Cass Sunstein, two prominent Swamp figures, wrote a book about the subject, titled Nudge: Improving Decisions About Health, Wealth, and Happiness. The concept is about pushing the public into whatever the government deems critical to a prosperous life. The United States has become so accustomed to state intervention in every aspect of our lives that the answer to everything in life typically involves the government. From mandates to taxes, the left and the right – and everyone in between – come up with proposals to solve life’s complex and trivial problems. Wall Street is a victim of this mentality, despite the consensus that politicians and bureaucrats do more harm than good.
The latest interventionist scheme? A nudge into the stock market.
Bill Ackman Proposes State Solutions
Bill Ackman, the billionaire hedge fund manager who recommended shutting down the entire U.S. economy earlier this year for a month, has cleaned up in this bull market. The head of Pershing Square Capital Management has made so much money that he is desperate to invest up to $7 billion in a private company. Imagine having that many banknotes to throw around.
As he touted the success of his hedge fund and the largest-ever special purpose acquisition company (SPAC), Ackman also put forward a public policy proposal. He wrote in a letter to investors that the government needs to push broader access to the stock market, going as far as extending a taxpayer-funded account for every child born in the United States.
“We need a program that makes every American an owner of the compounding growth in value of corporate America,” he wrote. “Americans that have no ownership in the success of capitalism, and who are suffering economically, are more motivated to turn toward socialism or other alternatives.”
It is estimated that a little more than half of U.S. adults possess some form of stock ownership. With more Americans diving into the equities arena during the coronacrisis earlier this year, using popular trading platforms like Robinhood, this figure could be a lot higher. Ackman does make a point that many citizens are missing out on a stock market that generally rises over time. The financial markets might be bastardized due to the Federal Reserve’s policies, but you could still be better off holding shares in Walmart or McDonald’s than leaving a few thousand dollars in a zero-interest savings account.
But while it is smarter and more prudent to invest in Corporate America, should the government nudge the population? Moreover, should taxpayers subsidize giving the New York Stock Exchange money?
Propaganda vs. Subsidies
In China, the state-run media have routinely pushed citizens into the stock market, promising massive returns on their investments. The propaganda has led to immense gains on the Shanghai Composite Index. If the United States adopted Ackman’s proposal, the Dow Jones Industrial Average and the S&P 500 would also enjoy spikes because individuals are getting “free” money to buy stocks. When you have this kind of multi-billion-dollar injection, equities will inevitably rise. The leading indexes are touching all-time highs thanks to multi-trillion-dollar fiscal and monetary stimulus, despite the economy still in a pandemic and millions out of work. Indeed, an enormous cash injection on a societal level would certainly prop up the stock market at an artificial pace. Plus, how would this be constitutional?
An Exodus of Capital?
Ackman is a smart guy. He is worth billions for a reason. So, the timing of this policy recommendation is suspect. One of his billionaire colleagues recently told CNBC that he thinks stock market returns could be disappointing for years to come as this year’s enormous rally is impacting future gains. Leon Cooperman, the founder of Omega Advisors, explained to the business news network:
“The overall market, we’ve been pulling a lot of demand forward. I would expect that future returns will be relatively unimpressive for a long time.
“We came into 2020 with a full employed economy, yet we were running a trillion-dollar deficit. And now we’re piling a lot of debt on top of that. And so I would have to say I have a conservative view. What’s driving the whole thing is interest rates. What people have to understand is that the Fed is pursuing this zero-interest-rate policy not because things are good in the economy. They’re pursuing a zero-interest-rate policy because things are bad in the economy.”
To sustain this market or to push up asset prices, you are going to need a fresh supply of investors. A quasi-Ponzi scheme, if you will. One way to achieve this is to subsidize Americans’ bullishness.
The ultra-rich made a lot of money when they bought U.S. equities in March. Now that these investments have either fully recovered or hit all-time highs, the affluent are taking the money and running to their mansions, yachts, and secluded islands. A myriad of reports in recent weeks highlights this trend, with wealthy investors thinking that this bull market is running out of gas. As long as the Fed is pumping money into the market, there might be some more room for new gains.
Glorified Welfare Assistance
The U.S. stock market is the envy of the world for plenty of different reasons. You can make a killing by taking advantage of information, seeing trends form, and executing trades when the timing seems right. At the same time, the power players are quasi-insured from their losses whenever the going gets tough. Whether it is a taxpayer-funded bailout (see: 2008) or the Fed buying corporate debt (see: 2020), Wall Street repeatedly receives a life raft when the ship is sinking. Despite a lot of the head honchos exclaiming free-market principles on CNBC or Bloomberg, many of these folks are the first to extend their hands for financial aid from Uncle Sam. A government-funded account to play the stock market is glorified welfare assistance.
Read more from Andrew Moran.