Capitalism has made the United States of America the greatest economic power in the world, the foremost immigration destination in the world, and the place where the phone, the light bulb, the automobile, and the world’s most significant medicines have all been invented.
We are currently in a state of economic darkness, and that history is our light. However, those entrepreneurial traditions are doomed if business owners ever have to worry about the possibility that the government will completely shut them down indefinitely and that their revenues will dry up to zero literally overnight. If that were the case, there would be no reason for anybody to take the financial risks of ever even going into business in the first place.
Last week, Treasury Secretary Steve Mnuchin announced that the federal government will take ownership stakes in public companies deemed critical to national security that seek a share of $17 billion in virus-related relief. Not only that, the Treasury Department said in the 10-page loan application posted on its website late Thursday that the Secretary himself “may, in his discretion, accept senior debt instruments” or other financial interests from private companies. …OK, Supreme Leader Mnuchin, I’m not sure what that means, but it sounds decidedly un-American.
I’m afraid it sounds a lot like how the Chinese Communist Party operates. Unfortunately, I cannot think of anything cool that was ever invented in Communist China. Why would you toil like Thomas Edison did in Menlo Park for so many years to invent the light bulb if you weren’t ever going to see any reward from your labor? If you take out the financial incentive to be creative, you destroy America’s heritage of entrepreneurialism and excellence and instead resort to a culture of just doing whatever it takes to avoid undue attention.
Billionaire Leon Cooperman said it pretty well last week. “When the government is called upon to protect you on the downside, they have every right to regulate you on the upside,” Cooperman said. “So capitalism is changed.”
I have been thinking about that a lot. The fact is that I don’t think he’s wrong, and I definitely don’t think it’s good for capitalism and people who invest in businesses. The problem with Cooperman’s logic is that, this time, the downside was caused by the government, that people needed protection from shutdowns that were mandated. Our current situation is that the government can shut you down indefinitely, the government wants to take ownership stakes in your company, and the government won’t let you leave.
Fortunately, if you’re poor enough, they’ll give you $1,200.
If everyone is supposed to be prepared for the government to completely shut down your way of living, then there’s no reason for anyone to be in business at all, so there’s no reason at all for there to be a stock market. We may as well all just go back to the barter system-- here, I’ll trade you a face mask in exchange for a roll of toilet paper. We can get rid of the federal government, too, and just go back to sticks and stones.
As the remarkably insightful poster boy for entrepreneurialism, the prolific venture capitalist Robert Nelsen recently tweeted, “…Americans will self isolate for about 2 months max. Maybe 10 weeks. Then govt will need to choose between virus risk and loss of control. That means by mid may we need an app, testing capacity, mask orders, and ability to work again.” (sic)
Think we’re there yet? The answer is NO WAY, and we continue to recommend that clients invest accordingly. We expect further new jobless claims, we see new reasons to expect income tax increases in the near future, we continue to be dismayed at the amount of money other countries are willing to lend the U.S. for ten years at just 0.65%, we have a very difficult time trying to find any companies that are in a position to raise prices, and so on and so on.
This week of earnings reports will be enormously meaningful. While we’ve heard from big banks and big retailers in recent weeks, this is the week that will have the greatest impact on most investors. Amazon (AMZN), Facebook (FB), Apple (AAPL), Alphabet (GOOGL) and Microsoft (MSFT) all report this week. These companies make up more than 20% of the US stock market’s total market capitalization. We all own them. They’re in your 401K, your IRA, your kid’s 529 plan. They’re the most widely held stocks in the history of the world; this is the week of Q1 earnings reports that will matter the most. The good news is that we’ve been hearing that these companies have been doing reasonably well through this crisis period and that they all have lots of cash on their balance sheets.
I have some personal history in biotechnology and traditional pharmaceutical development, and I’m a believer in the industry. They’ll bring us a vaccine and the requisite testing. We just have to hope the whole country’s not on food stamps before they do it. We expect another drawdown in the market, just like we called for back in January, and this may actually be similar to January in that we’re a little early. However, this is just a short-term call, and we appreciate that betting against America for the long term has empirically proven to be sheer folly. We recommend sticking to your statistically quantified financial plan, avoiding unnecessary investment risks, and above all else, staying healthy.
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