Over the last 25 years, the Federal Reserve’s monetary policy directive has been mostly an expansive one. The money supply has soared to all-time highs, while interest rates have fallen to historic lows. The U.S. central bank has pumped trillions of dollars into the economy, fueling the booms and busts of the business cycle. Those at the top typically get first dibs on the freshly printed money, and the rest of the public receives the crumbs as the dollars lose their value traveling through the economy. This explains why equities accelerate during periods of accommodation, such as what you are witnessing right now.
Why does this matter? Goldman Sachs recently published a fascinating analysis that examined stock ownership between the wealthiest and everyone else. The report found that since 1990, the top 1% purchased $1.2 trillion of equities and mutual funds and the bottom 99% sold on net $1 trillion. In total, the top 1% of U.S. households possess 56%, or $21.4 trillion, of equity ownership; the bottom 90% owns 12%, or $4.6 trillion, of corporate, non-corporate, and mutual funds.
Can the Bull Bear It?
One conclusion made in the study is that the affluent buy stocks on their ascent and then sell them to retail investors who want to accumulate stocks. Unfortunately, the retail traders scoop up the stocks on the brink of a recession. This is an important point because the wealthiest of investors know when to buy, sell, and hold stocks. They do not panic when there is a sea of red, nor do they buy when stocks are tremendously overvalued.
There is an adage in finance that if your grandmother or the busboy at your local restaurant is buying the latest hot stock, then you know there is a market bubble.
Indeed, the smart players were supplied with a healthy dose of cheap money by the Fed. It may not be great to say, but these men and women on The Street knew what to do with the cash. Investors took a bite of the FAANGs, jumped into the initial public offerings (IPOs) since the last recession, and seemingly the super-rich are hitting the pause button on stocks and acquiring tangible assets. Perhaps the rich are successful because they believe in the concept of patience being a virtue.
A Buffett of Newspapers
A few years ago, it was said that only billionaires are buying print newspapers. Jeff Bezos acquired The Washington Post, John Henry purchased The Boston Globe, and Warren Buffett bought 30 daily newspapers and several dozen weeklies. Despite the numerous challenges the industry faces, Buffett defended papers and put his money where his mouth is. The gamble failed to pay off.
Berkshire Hathaway agreed to sell its newspaper division to Lee Enterprises Inc. The deal is worth $140 million, a fraction of what they cost him. and Buffett’s firm also will serve as Lee’s primary lender, extending $576 million at a 9% interest rate. It will include the Omaha World-Herald, Buffalo News, St. Louis Post-Dispatch, and Richmond Times-Dispatch. Lee’s total number of daily papers will rise from 50 to 81. The transaction is anticipated to close in the middle of next month.
Analysts called the move unusual since it is rare for Buffett to put an entire operating business on the chopping block. Did Buffett finally realize that print newspapers are dying? Or does he expect something more devastating in the general market?
Years ago, Buffett popularized the Buffett Indicator, a stock market capitalization-to-gross domestic product ratio. It is used to determine if the market is overvalued or undervalued compared to a historical average and the overall economy. The most recent reading came in at 145.6%, just shy of the all-time high of 148.5%, which suggests that the U.S. market return could plummet to -2.3% over the next eight years if it returns to the mean level of 80%. Perhaps Buffett did not want to overleverage Berkshire Hathaway prior to the financial crisis and is aiming to shield the company from something as hemorrhaging as a newspaper.
A Dell Sings
Representative Alexandria Ocasio-Cortez (D-NY) recently embarrassed herself when she told an audience that billionaires only “take a billion dollars.” Her remarks were given some credibility when former Labor Secretary Robert Reich retweeted Rep. Ocasio-Cortez’s statement and claimed that the only way to make a billion dollars in the U.S. today is by profiting from a monopoly, insider-trading, fraud, inheritance, or political payoffs.
Their polemics may sound like wisdom to a socialist who has never read an economics textbook and is still living in his dad’s basement. In the real world, the idea that billionaires are only successful through unscrupulous means suggests bitterness, detachment from reality, and ignorance on the subjects of business, economics, and finance.
Michael Dell, the founder and CEO of Dell Technologies, replied with a simple tweet: “You are incorrect.” Brian Shin, an investor and entrepreneur, went a little more in-depth on Twitter:
“Dell was built with diligence and innovation and minimal outside capital. Super scrappy and constantly looking for ways to improve efficiency. A just-in-time manufacturing pioneer offering one of the first dynamic e-commerce configurators #nojoke #startups.”
Moreover, many of the billionaires today started from humble beginnings. Bezos’ mother was a teenager and his father owned a bicycle shop – his stepfather was an Exxon engineer. Sergey Brin, the co-founder of Google, grew up impoverished in the Soviet Union. So, neither man inherited anything.
For the most part, it can be hard to make a few billion dollars through fraudulent means. If you are successful, you eventually get caught by the authorities (ask Bernie Madoff). In a free market, even without law enforcement, consumers would get wise to a fraudulent product or service and either no longer frequent the business or file a lawsuit. So, you make some quick cash through this route, but not nine figures.
Insider-trading? This is another difficult way to make a billion dollars without detection by the government. It can only get you so far; perhaps into the millions. It is hard to believe that Bill Gates or Google co-founder Larry Page made their fortunes using this tactic.
Political payoffs are a more realistic possibility. The technology sector is known for spending tens of billions of dollars on lobbying Washington and currying favor with politicians. The purpose is to influence the legislative process, garner lucrative contracts from the state, or enact laws that might hurt smaller competitors. Perhaps a publicly-traded company can generate a multi-billion-dollar market cap through this strategy, but it still needs to sell a product or service that satisfies consumer demand.
And then there is the monopoly angle, a fear that a single company will control 100% of the market for doughnuts, crude oil, and toasters. There are plenty of myths about monopolies, and most of the consternation surrounding them is unjustified. In a free market, which is what Ocasio-Cortez and Reich oppose, there is no monopoly. The only time there is a threat of one is when there are government interventions and privileges, which is exactly what Reich and the New York congresswoman promote. Cable news networks are given exclusive television licenses, the steel industry has protectionist tariffs imposed in its name, and the big automakers were extended huge taxpayer-funded bailouts. The free-enterprise system historically does not produce monopolies, though theoretically, natural monopolies can be created.
So, no, billionaires do not “take a billion dollars,” but they do help bake a greater pie so everyone can get a slice and become wealthier. You know what confiscates a billion dollars? The government.
Read more from Andrew Moran.