Dear Valued Clients and Friends,
In a way, it is going to be very unfair for people to accuse me of this Dividend Cafe being “political.” In fact, it would be “political” if I didn’t write it, because not only would I have written it if Barack Obama or Joe Biden were President, but all of the people who will push back on me having written this would have been outraged had I not addressed it if one of them were President. In other words, market stories like this should be covered no matter who is President. If some people want to change their minds on vital economic issues (like government ownership of private businesses) based on whether or not they like the President in power, they have every right to do so. But I don’t have the right to cover or not cover matters of relevance to the Dividend Cafe based on people’s partisan shifts.
So yes, this week’s Dividend Cafe will objectively and diligently look at market ramifications of certain announcements recently made by the Trump administration that are relevant to all investors, regardless of their political leanings. There are also macroeconomic implications, as well as specific market implications, that warrant our analysis. The intent is less editorial and more market-sensitive. We’ll see how I do.
And if you find yourself agreeing with what I say but wishing I hadn’t said it, I understand. Such are the times in which we live. And if you genuinely disagree, no problem. I welcome it. But for those of you who agree, not because you dislike the administration, but despite the fact that you like it, kudos to you. It is not just that I believe such intellectual honesty is needed in our society today – but I also believe it will make for better investors. It’s time for me to make that case.
It isn’t a long one today – there is college football to prepare for. Let’s jump into the Dividend Cafe.
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What are We Talking About
The following announcements have hit the newswire in the last ten days:
- The United States federal government has taken a 9.9% equity stake in the Intel Corporation (ticker: INTC), acquiring 433.3 million shares of the company. The transaction also includes a five-year warrant, whereby the government can acquire up to 5% more of the equity in Intel at a strike price of $20 per share (the stock is currently trading around $25) if Intel’s ownership of its foundry business drops below 51%.
- Commerce Secretary Howard Lutnick announced this week that the government is exploring additional deals like this, including those with various defense and aerospace companies where the government is a significant customer of the company.
- National Economic Council Director Kevin Hassett announced this week that the government is considering many more deals like this “in other industries.” He referred to this deal as a “down payment” on a “sovereign wealth fund” that the administration wants to see the government develop.
The Easy Part
I am not going to do the chest-beating where I point out what many of my friends on the political right (where I reside ideologically) would be saying if these pronouncements were coming from a left-wing President, because every single person already knows what they would be saying. It helps us as investors not a bit to try and call people out for their inconsistencies. It all is what it is, and I don’t make a light of it, but the purpose of my piece is not to dunk on anyone. I cry about this stuff privately, but not in the pages of Dividend Cafe. But if you read the above section and thought, “I was under the impression public-private partnerships like this, or government ownership of the private sector, or injection of taxpayer money to favored companies or sectors were anathema to conservatives,” you’d be right. And count me in the list as one who hasn’t moved an inch on this.
Cash Advance on the Credit Card
It is easy to start with funding questions because plenty of us reading the Dividend Cafe have a certain fiscal prudence embedded in us. I get so many questions about concerns of excessive government indebtedness that I can understand the prima facie concern on these matters being how in the world we will pay for it all. Indeed, it is counterintuitive to talk of borrowing money to buy stock in public companies. If a person ever came to The Bahnsen Group and said, “I just took a large advance off my credit card and I would like to buy a stock portfolio,” we would say, “Well, how much are you going to invest?” – wait, just kidding!!!! – We would say, “Are you insane?” And then we would validate their parking. So, how exactly does a government with $37 trillion of debt (no typo) that is adding $1-2 trillion per year to the debt create a stock portfolio?
The way a government with $37 trillion of debt creates a stock portfolio is by adding to its stockpile of debt. What we call this in the real world is “through leverage.” Hedge funds borrow money to buy investment securities. But the total borrowings of every hedge fund in the world put together are about $5 trillion, soaking wet. 1 So I guess you can say that the United States government is now the most levered hedge fund in the world, only it is 7x more levered than EVERY other hedge fund, PUT TOGETHER. So why understate the case?
Of course, hedge fund borrowings are secured. There is collateral against them. The United States is sort of secured – not by assets, per se (like your mortgage debt is secured by your house) – but by its taxing authority. That is actually pretty good security, as they can arrest people who fail to pay their taxes. But just in pure financial terms, all I just said is that you are the collateral of their borrowings.
Intel’s new largest shareholder is the most levered financial actor in the world.
But Everyone’s Doing It?
One of the arguments in favor of a sovereign wealth fund is that other countries, such as China, Singapore, Saudi Arabia, and Norway, have already done so, and why wouldn’t we want to do what they do? I can give the benefit of the doubt here and assume that I don’t have to actually answer the question as to why some things these countries do are not the “American way,” if you know what I mean. But let’s stick to this topic at hand: Is an American sovereign wealth fund comparable to what the aforementioned countries do?
No, no, no, and finally, no.
Singapore, not to be confused with the Malaysian sovereign wealth fund, which financed such critical national security projects as the Leonardo DiCaprio movie, The Wolf of Wall Street, and had $4.5 billion stolen from it for yachts, Vegas parties, and other endeavors I can’t put into a family investment newsletter, seeds its sovereign wealth fund with budget surpluses. For you American readers, a budget surplus is when a government “spends less than it brings in.” Think of it like a Loch Ness monster, only much, much, much less real than that. Singapore’s sovereign wealth fund is entirely funded by the reserves that come from its frequent budget surpluses.
China, on the other hand, is no stranger to “state-owned enterprises” (see: Communism) and funds its sovereign wealth investments from its massive foreign exchange reserves. These reserves are, of course, a by-product of its huge trade surpluses as a goods-exporting powerhouse, whereby it receives the currency of other countries to settle current account deficits. These reserves are used to fund sovereign wealth projects.
Saudi Arabia funds its sovereign wealth fund with oil and gas revenues. Norway does the exact same. They control the means of production for that vital national industry and use the revenues to control more of their own economic sector. In Norway, only the real return of the sovereign wealth fund can be used for national budget purposes.
The United States government is talking about using deficit-financed policies to become an equity owner in American businesses, and of course, to attach these things to other policy interests.
But Other Than That, is a Good Idea?
If the United States were not financing these things with borrowed money, would it be a good idea? In other words, is investment selection a core competency of our political ruling class?
Oh, you wanted me to answer that question?
I would like to think it goes without saying that the answer to that question is no, but allow me to be gracious enough to explain why. It is not merely for the obvious reason that the government is not where top-tier stock pickers and portfolio managers generally go to work (though, yes, I would suggest there is a talent differential between Wall Street and government). There is also an entirely different incentive structure. A core tenet of classical economics is the relevance of incentives in driving economic behavior. Jude Wanninski referred to this as “the way the world works.” A big reason many top investors try to invest well is because they benefit economically from good investment (you are welcome to share that sentence with anyone you want, and I will waive my trademark on it). The objectives of government investment are never “return on investment” but rather extrinsic policy aims. Some of these aims we may like (I highly doubt it), but whether or not they are good policy aims is immaterial: They are separate from the normal return objectives that drive optimal portfolio management.
We have a funding problem and a competency problem so far, and now we have to address the real problem.
The Unspeakable Misallocation of Capital This Represents
There is no way on God’s green earth that any company whose largest shareholder is the United States federal government could, would, or even should allow commercial concerns to be the primary driver of their decisions. The need to attention the obvious political elephant in the room will, always and forever, either marginally or substantially impact decisions and activities. This compounds over time. And it misallocates capital. The economic arguments for certain decisions have to be harmonized with the political preferences of their largest shareholder, who you may have heard is also their regulator, taxer, and overall parent. From investment decisions to hiring decisions to capital decisions to general business priorities, the commercial gets tainted by the political. And I cannot say enough about (a) how obviously unavoidable this is, and (b) how destructive this is.
But I believe we have to look past Intel (and the other companies that end up in Uncle Sam’s leveraged portfolio) to understand how significant the reality of capital misallocation is here. The pressure this puts on companies to transact with government-owned companies, even if their products or services are not the best choice, is massive. Whether trying to avoid the punishment or retribution that not using the government’s preferred vendors will involve, or trying to curry favor by using these companies, the incentives become flawed, the criteria for decision-making altered, and the results sub-optimal. Always.
And who now has a leg up to attract investment capital: The dynamic, innovative companies that could create a maximal return on invested capital but are perceived as “non grata” because they are not governmentally favored; OR, inferior companies with less compelling competitive advantages, but are known to be in the governmental orbit of power and influence? The incentive this creates for capital to migrate to less attractive options is horrifying.
As Scott Lincicome has said:
“All this undermines the risk-taking and innovation that have made American technology companies global leaders, replacing free-flowing, market-based allocation of capital with second-guessing and brute politics.”
Cronyism by Any Other Name
There has always been only one way to minimize both the reality of cronyism and the perception of it: To have as few tentacles as possible connecting the public and private sectors. Some connectivity is unavoidable, but that connectivity is optimally minimized by limiting principles and by recognizing that wherever a connection is considered necessary, it still comes at a cost (“there are no solutions; only trade-offs” – Thomas Sowell). Governmental ownership of the private sector, where one company is picked and another not – where the government uses public funds not to merely put its finger on the scale but to sit on the entire scale and roll around a bit – is not just sliding closer to cronyism; it is codifying and entrenching it. The cost is the misallocation of resources I spoke to in the preceding paragraph, but also the re-prioritization in American commercial life of political power, privilege, and access over meritocratic performance.
For those who say “we have always had this,” I can only say: “Yes, but haven’t we always been opposed to it?” Leaning into these things so explicitly codifies the most anti-market sentiments that pass for public thought these days. And in a time that our economy needs growth more than anything else, we hamper growth on the margins with moves like this, even if it takes time for that to be felt.
At Least Dividend Growth is Immune?
Anyone who believes great dividend-paying and dividend-growing companies will be able to stay such with the United States government as their capital partner would be better off believing in high-speed rail coming to fruition in California. It is not going to happen. At the slightest hint of economic distress, wage pressures, union fights, political turmoil, world events, or whatever else could provide a politically challenging optic, capital return to shareholders becomes toxic. This is not to say that the government would ban or influence dividend payments in good times … it is to say that the risk of government ownership serving as an impediment to optimal dividend policies at some point in the future is exponentially higher. We will pass, thank you very much.
Conclusion
I would be very careful to avoid companies just because the government has taken an equity interest in them. Brian Szytel and Kenny Molina, my comrades on our Investment Committee (see what I did there) have sat in countless meetings with various Emerging Markets equity managers over the years, wanting to dig into their exposure to state-owned enterprises, recognizing that such companies were inherently exposed to the risk of distortion and misallocation I discuss herein. We instinctively knew when it came to Russia, China, and many others that “state-owned” might mean that market share was robust, but it was hiding an embedded inferiority that would come out eventually. American flirtation with this activity is hardly lacking proof (“government-sponsored enterprises” in mortgage finance, for example; I won’t get into automakers, Amtrak, or Solyndra, because they are TOO easy).
But not only would I suggest that governmental ownership is not a case for ownership, I would further suggest it is a case for divestiture. Not only is the dividend issue a non-starter for us, there also exists the basic fact that public considerations inevitably lead to non-commercial interests and social (political) agendas crowding out the “main thing” that companies do best. This is unacceptable.
My criticism comes no matter what uniform the administration is wearing, and is rooted in first principles devoid of partisan commitments. But it is also not merely out of concern for individual portfolio holdings impacted, but also the macro impact across a wide, diverse, and complex economy, which now has more intervening forces impeding growth and efficiency than it did ten days ago. We have to consider this as we invest.
To this end, we work.
Quote of the Week
“A government that robs Peter to pay Paul can always depend on the support of Paul.”
~ George Bernard Shaw
* * *
I have no idea what Dividend Cafe will bring next week, but I do know this weekend will bring a trip back to the Los Angeles Memorial Coliseum, the restoration of college football across our land, and some truly joyous moments. The only thing that could dampen my love of college football is government ownership of it. All in due time, I guess.
Fight on,
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
thebahnsengroup.com
This week’s Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet
(1) Source: Bloomberg, Paul Davies, July 9, 2025
