Dear Valued Clients and Friends,
Investors have to care about the economy, and caring about the economy means having a point of view about the economy. This is more than having a descriptive point of view (“My analysis tells me that the job market is healthy,” or “my analysis tells me that there is a lot of concern for the middle class,” or what have you). Such descriptive points of view are important, and I use the Dividend Cafe to offer such analysis often. But investors ought to have a point of view about the economy that is prescriptive, too. How an economy ought to work can be even more important than how it is working. Indeed, the various things that sometimes are broken in an economy cannot be remedied without a shared vision for what ought to be.
I find that some of the biggest risks investors have today are byproducts of either apathy or amnesia about the major principles that underlie ideal conditions for prosperity and growth. Today in the Dividend Cafe, I will make the case for the ten non-negotiable components of an economic worldview that optimizes conditions for growth and prosperity. We are living in peculiar times. Extremist economic ideas are experiencing electoral success. Partisan lanes and political alliances have broken down. Populist urges are leading to an unpredictable future for economic thinking in this great country of ours. And investors ought to care.
So today I will do my best to focus on what those major priorities of care ought to be. Dividend Cafe is not super concerned about political agreement or harmony. I have my views, and I care about them, but to the extent the views are not material to investors (either clients of ours or not), I don’t really care about those things in the Dividend Cafe. But the preconditions that optimize economic growth and prosperity are relevant to investors, whether they touch political lines or not, and therefore have a place in the Dividend Cafe. So let’s jump in and come up with ten things we can agree to fight for, not just for our portfolios, but for the well-being of our kids and grandkids.
Let’s jump into the Dividend Cafe …
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#1 – Private Property
At its core, free enterprise and a market economy can be reduced in many ways to an economic ideology centered around private property. It gives me extraordinary joy to see how our founders, in writing the Declaration of Independence, declared that all men were “endowed by their Creator with certain unalienable rights, among them are life, liberty, and the pursuit of happiness.” Here, the founders took the natural rights John Locke wrote about in his Second Treatise of Government in 1690 – “lives, liberties, and estates, which I call by the general name, property,” and broadened it. They presupposed that property was necessary for liberty and that the greater aspiration behind private property was “pursuit of happiness” (what we call “human flourishing” in my tradition). Just weeks before the Declaration of Independence was written, George Mason had codified in the Virginia Declaration of Rights that “the enjoyment of life and liberty, with the means of acquiring and possessing property” were predicates to “pursuing and obtaining happiness and safety.” The founding fathers were not waxing and waning philosophically – well, they were not only doing that – they were expressing the lived experience of the settlers in the new world. I will go down too deep in the weeds of this if I start sharing William Bradford’s observations in Of Plymouth Plantation, but the lived experience that served as the bedrock of our nation was one of private ownership driving incentives, of communal ownership discouraging productive work, and one where resentment was inevitable when rewards were equal, but effort was not. Communal ownership of property had failed in practice, and as Bradford reminded us, it failed in practice because it was first a failed theory:
“The vanity of that conceit of Plato and other ancients, applauded by some of later times – that the taking away of property and bringing in community into a commonwealth would make them happy and flourishing – as if they were wiser than God.”
There are a million applications in modern investing life of how important this is. There are also, dear readers, a million opportunities for “exceptions” – the casual dismissal of private property rights because it feels emotionally satisfactory to do so. Not every violation of private property rights is seizing Grandma’s house just because a bad guy wants to; sometimes it is a well-meaning “public servant” telling a company they can’t buy back their own stock or pay a dividend. But believers in private property need to believe in private property, or else they need to quit believing in private property … (yes, I meant to say that).
Private property is a natural right that flows from our ability to earn, hold, possess, retain, and manage the fruits of our own labor. It produces responsibility, stewardship, and abundance that align with human nature. And I wouldn’t trade it for anything in the world.
#2 – Profit Motive
When I was a younger man, my dear friend, Larry Kudlow, popularized the idiom that “profits are the mother’s milk of stocks.” His fundamental point has always been that market prices reflect a net present value of future expected profits, and it is, more or less, incontestable corporate finance. That earnings are the ultimate driver of stock prices has always been true, even if sentiment and liquidity become short-term factors along the way.
But beyond the investing lesson of profits and their connection to asset prices, might I suggest that, in an economic way of thinking, the profit motive is sine qua non? Adam Smith’s lesson about self-interest and the things that drive the baker, brewer, and butcher to produce our dinner is essentially the same lesson as that of the profit motive. It is not a lesson of selfishness – it is a lesson of incentives, human nature, and ultimately, social cooperation. When any politico denigrates the profit motive, they are, first of all, merely advocating for the alleged moral superiority of their own power motive over the baker’s, brewer’s, and butcher’s profit motive – and you will forgive me for being unpersuaded. But they are also undermining the driver of economic activity. The laborer is working for “profit” when they seek a wage, a bonus, a growing wage, or vertical mobility. The risk-taker seeks a profit when they deploy equity capital towards an opportunistic endeavor. The entrepreneur seeks a profit when they hire people to produce goods and services. And any economic framework that undermines the profit motive undermines the very bedrock of a free society.
#3 – Division of Labor
One of the miracles of classical economics – of the hockey stick economic growth we have seen the last 250 years – is the non-accidental results of a division of labor. When human beings are not demobilized, not held captive, not limited in their pursuits, finite limitations become infinite possibilities. We are all made with such tremendous diversity of talent, interests, skills, passions, and paths that an economic framework that cultivates a wide division of labor and specialization of skills will optimize human potential. Forcing every generation to stay in one business or lane is a great way to stultify economic progress. Allowing human beings to specialize in their respective fields of interest and passion creates scale, efficiency, and satisfaction. Mobility and dynamism are to be celebrated, and the classical school’s recognition of the division of labor as a core tenet of economic opportunity should be preserved at all costs.
#4 – Innovation and Progress
From the agrarian moment of the founding, to the urbanization that Alexander Hamilton celebrated in America’s great cities, to the eventual Industrial Revolution that changed the world, to the digital revolution that changed it again, the testimony of history is one of innovation leading to progress. Attempts to resist innovation – even if well-intentioned or connected to a tempting nostalgia – run counter to economic growth. Reasonable debates exist about what cultural conditions are needed to optimally engage innovation, but resisting innovation simply because it represents change is Malthusian and Luddite, and I couldn’t possibly mean that more prejoratively than how I just said it.
#5 – Capital and Labor Enhance One Another
A great civilizational sin was defeated in the 19th century (slavery), and a great civilizational sin was introduced (Marxism). At its core, the fundamental flaw of Marxian thought was the tenet that capital and labor are locked in mortal combat, and that ultimately the proletariat (laborer) must and will fight back against the capitalist. It was a 19th-century philosophy of class struggle and class envy that deeply misunderstood the human person and, consequently, led to a 20th century of bloodshed and failed revolutions. Today, it exists in intellectual form in faculty lounges all over the country.
Capital is a kindling for ideation, risk-taking, and creativity. It fosters work and endeavor and allows for a virtuous cycle where capital is made more profitable by labor and where labor is made more profitable by capital. Dovetailing these two in the harmonious virtuous cycle where they belong is the need of the hour. Modern populist sentiments that seek to posit capital and labor as at odds with one another harken back to a failed 19th-century ideology that did not end well. Many would be wise to resist the cheap catnip of class resentment rhetoric and embrace the symbiotic relationship between capital and labor that a market economy makes possible.
#6 – Laissez-Faire
I respect the need for reasonable discussion of prudential regulation necessary to maintain ordered liberty. I do not respect the need to have 114 commissions, agencies, and bureaucrats to tell us which paper towels we should buy and from whom. I can’t dive into a comprehensive assessment of limiting principles around regulation here, but I can say that they all involve trade-offs. And the governing principle or presupposition of “hands off” is to be preferred to a nanny state. The overton window has moved way too much.
#7 – Incentives
At the core of the supply-side movement is the belief that disincentives to the production of new goods and services should be removed. Reasonable discussions of the appropriate marginal tax rates are needed, but they should include an understanding of what they incentivize and what they disincentivize. Believing incentives matter in economics requires an understanding of how God made the human person (as a rational actor with reason and agency). Taxes are not the only incentive/disincentive that alters economic behavior. Regulation (#6) is, too, and I have recently argued (for example) that the legal system in which we live is, too. The issue that we have to remember is that incentives matter in economics, and when we have a good reason to do or not do something in economic policy, it behooves us to also evaluate what that policy may or may not do to incentives.
#8 – The Knowledge Problem (or the Fatal Conceit)
I try very, very hard to know as much as I possibly can about the things that matter to decisions I make in my business. I have the right incentives (see #7) – the right “skin in the game” – if you will. If I make good decisions for clients, I benefit; if I make bad decisions, I suffer. I do not have client money invested in anything I am not personally invested in. (“Don’t tell me what you believe – show me what is in your portfolio” – Nassim Taleb). The argument for a free enterprise economic framework has always been rooted to incentives, but also knowledge. The Hayekian lesson in the 20th century was that central planners lacked the knowledge to guide and manage a complex economy where knowledge was so broadly dispersed. In my business, I have had to constantly re-evaluate what I can know and what I cannot know, and seek to remedy for the dispersion of knowledge problem with as much specialization, decentralization, and humility as possible.
In economics, this matters because the fatal conceit happens when we dare to attach power to a knowledge that doesn’t (and can’t) exist. Economic decision-making is best left to where knowledge can be optimally procured, obtained, and applied. This puts the focus on local, proximate, experienced, real-life situations and less in the domain of special interests and disinterested third parties. Knowledge through real-life experience applied through a lens of wisdom is powerful. Power, absent the knowledge that comes from “time and place” experience, is dangerous. And it makes for utterly atrocious economics. It even makes some people think they know how to run a grocery store.
#9 – Addition & Multiplication vs. Subtraction & Division
If I could summarize my belief about economic opportunity into one point, it would be this: Prosperity is never created by redistribution or confiscation – there is no reason to ever be content with zero-sum thinking – sustainable economic growth is, always and forever, a matter of the wealth pie expanding. This societal obsession with how we slice up the total wealth stock versus how we can optimally create more of it is one of the most depressing realities of our day.
Economic theories that focus on subtracting and dividing miss the opportunity to do what the profit motive, what optimal deployment of capital and labor, what the division of labor, what innovation and progress all do best: to add and multiply. You will notice at The Bahnsen Group that we simply do not do investing that is zero-sum (one party wins and one loses) – all investing is, one way or the other, tied to addition and multiplication. You will find economic growth to be more sustainable and rewarding with this mantra held in high priority.
#10 – Work
The verb of economics – the actual breath behind all of the ideas expressed above – is work. I obsess over the labor participation rate because, at the end of the day, what activates economic growth, what animates capital, what moves ideas into action, what sparks innovation, what actualizes all of the theories that matter in economics, is mankind, made in the image of God, working. All economic ideologies that focus on trying to allow mankind some liberation from the torture of work are, well, doomed. Work, always and forever, brings life and transition to ideas. It produces. It generates. It serves.
And it is the core of economics, and always will be.
Conclusion
You can think over these ten economic concepts and their application to modern investing conditions, however you would like. I think about them all day, every day. And I promise you the battle is not going to get easier any time soon. But no investment advisor worth their fee is setting the table completely if they do not position the investment realities, decisions, tensions, risks, and calculations we face in the context of an economic worldview. And for me and my house, these ten things written about today are the indispensables. To all ten of these ends, we work.
Chart of the Week
Just sayin …
Quote of the Week
“America’s still-multiplying embarrassments are rank weeds fertilized by the manure of populism. And by populism’s inherent, aggressive disdain for the importance of character in politics.”
~ George Will
More to Chew on
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Next week’s Dividend Cafe is going to be a really personal one. I have to drop my daughter off at college the week following, and I am going to write a letter for her before I do. I am going to share it with all of you next week. Lucky for me, I have a great daughter. I hope the message will be useful for some of you. In the meantime, have a wonderful weekend, and reach out any time.
With regards,
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
