The Bear’s Lair: Depressed billionaires are good news

“It’s a depressing environment” said billionaire investor Stanley Druckenmiller to MarketWatch, explaining that he is investing in Treasury bonds in the hope that short-term interest rates will descend to zero again. At first sight, that should be bad news for the rest of us. But when you examine the different financial universe in which billionaires live, you come to realize that Druckenmiller’s gloom may be a healthy sign – provided the Fed doesn’t follow his policy recommendations.

“What’s good for General Motors is good for America, and vice versa” famously said GM CEO “Engine Charlie” Wilson at his Secretary of Defense Senate hearing in 1953. That was undoubtedly true then. GM employed hundreds of thousands of people, its suppliers and distribution system employed millions, and Americans as a whole, in their jobs, their wealth and their consumption, benefited from the health of the great manufacturing companies of which GM was the epitome.

What was true for General Motors in the 1950s is much less obviously true for the major corporations of 2019, notably the FAANGS (Facebook, Apple, Amazon, Netflix and Alphabet/Google). For one thing, much of their business consists of manufacturing in emerging markets such as China. Thus if Apple’s sales zoom up, for example, it may merely mean the employment of another army of Chinese workers and a surge in profits parked in tax havens, with no obvious benefit for the U.S. economy at all.

If the interests of today’s large companies, especially in tech, are detached from those of the United States, the same is still more true of the billionaires who run those companies or invest in them. In particular, economic policies that benefit billionaires are mostly highly damaging to the interests of ordinary citizens and of the United States as a whole. Not only can billionaires benefit economically from policies that damage the interests of ordinary citizens, there is reason to believe that, at the present time, billionaire angst and gloom may lead to better times for the rest of us.

The principal policy that over the past two decades has benefited billionaires and damaged the rest of us is that of artificially low interest rates. Low interest rates benefit asset prices, of stocks, bonds and real estate, while artificially depressing the cost of borrowing. Billionaires obviously have more assets than the rest of us, not just as a truism, but also in the sense that a higher proportion of their income after expenses is derived from revenues from assets and fluctuations in asset prices, which are relatively unimportant for those mostly dependent on earned income and pensions derived therefrom.

Because of their wealth, billionaires also have access to more and cheaper leverage than the rest of us. This combination, of greater dependence on asset values and greater ability to borrow cheaply, gives them a double-whammy benefit from interminable periods of low interest rates. Their assets rise in price, increasing their wealth both in absolute terms and in relation to the rest of us more dependent on earned income. In addition, they can leverage at artificially cheap costs and thereby buy more assets.

The ability to take on cheap leverage has been especially valuable to two classes of billionaire: those investing in real estate and those engaged in money management through hedge funds and private equity funds. As a result, those sources of wealth have increased in importance in recent decades, overwhelming wealth from conventional businesses like oil and retailing, which dominated the “rich list” 30 years ago. However, real estate and money management billionaires are especially cut off from the rest of the economy; both can flourish while the economy as a whole stagnates.

For that reason, the Barack Obama years were an especially joyful period for such people and especially miserable for the rest of us. The economy stagnated, while interest rates were held artificially low for a decade. The additional refinement of “quantitative easing” and the policy of globalization made matters even easier for them; it produced new pools of money, from foreigners and financial institutions, which could be poured into real estate and market speculation, growing the billionaires’ asset pools still further.

It is now clear that artificially low interest rates damage the real economy, in which ordinary people work. They distort investment away from productive uses – productivity growth in all the countries with near-zero interest rates has been abysmal over the last decade. Only in the United States, where rates have been allowed to lift somewhat, has it recovered, though there has been no retrieval of the productivity growth lost forever in the stagnant Obama years. With asset prices artificially high, a crash, wiping out huge amounts of wealth, is utterly inevitable – Lord Liverpool foresaw and warned against this repeated cycle as far back as 1825. Everyone except billionaires is currently poorer for these policies; once the crash comes, even some of the billionaires will suffer as well.

There are a lot of forces tending to continue the billionaire bonanza. For example, the IMF earlier this year proposed a new dual currency structure, in which cash would be forcibly devalued against e-currency, stealing people’s savings, simply so that central banks could institute even more cuckoo policies of negative interest rates. It beggars belief that globalist bureaucrats, all careful and diligent readers of the Financial Times and the Economist, can come up with ideas as destructive as that, and then express surprise when a despised, tortured people vote for populists. It is incredible that they would impose all the costs of a second currency on the economy, deliberately discriminating against savings, so that some damn silly Keynesians can impose their leftist fantasy monetary policies on us. I would probably vote for Attila the Hun or Genghis Khan against those guys — at least one would enjoy the spectacle of a massacre of IMF economists while one’s savings were being looted.

Other policies favor billionaires at the expense of the rest of us. One is the charitable tax deduction. This allows billionaires to reduce their tax bills to infinitesimal proportions, which acquiring a spurious reputation as a generous donor – and getting all kinds of non-cash benefits in return. Since many of the charities themselves spend most of their resources lobbying for policies that damage the interests of the rest of us, their special privileges are doubly obnoxious.

Druckenmiller and President Trump, both billionaires, are united in one demand: they want lower interest rates as soon as possible. Their wish is entirely self-serving; lower rates will merely further prop up the prices of the assets that both men own, already hugely overpriced. Declines in the prices of high-end real estate in the major urban centers are already happening, ding the wealth of billionaires, and are thoroughly beneficial to those of us not owning high-end real estate. Someday, we may be able to afford to live in New York and San Francisco again (not that one would want to!) Declines in loss-making tech private equity investments, also beginning, will be good for the rest of us as resources are reallocated from these money pits into products that are genuinely useful and not bottomless chasms of endless operating loss, sucking resources from more beneficial innovation.

Declines in stock market prices may seem more equivocal, but you should remember that most middle-class people with stock market investments are continually saving for their retirements. A market decline thus increases the future returns on their investments, brings them a higher dividend yield and allows them to make new stock purchases at lower prices. A market that declines and then recovers, through the magic of dollar-cost averaging and higher dividend yields, will make a middle-class stock purchaser far wealthier than a market that stays overpriced throughout.

Because of those years’ extreme monetary policies, most of the billionaires of the last twenty years are creatures of the night, that will disappear amidst much shrieking and wailing if we can restore the economy’s genuine health. A sustained period of higher interest rates, wiping out all the excesses of the Obama period and before, is needed to achieve. Let us hope the Fed stops its ears to the low-interest rate sirens, from President Trump, Druckenmiller and all those whose wealth depends on the currently grossly distended economy. A 4% Federal Funds rate, extended over the next five years, will restore the health of the U.S. economy, to the point that what’s good for General Motors and its 2025 equivalent will genuinely be good for America.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)