Dear Fellow Investor,
In my September President’s report, I wrote about the threat to our modified capitalism* presented by excessive government interference in the economy (“Too Big to Fail” Is Failing Capitalism).
The trigger for my column was the announcement that the Federal government had taken a 10% stake in Intel and that President Trump intended for the country to take an ownership position in more companies.
This Intel development was presented to the country as a big win. But this was from the same people who have been telling us that tariffs are paid for by the exporting country rather than the importing customer and that government tariff revenue isn’t just another form of taxation. My point is, there’s reason to be skeptical.
NOTE: As always, my comments are about investing and economics. Not politics. I realize these areas often brush up against each other, and in our highly partisan culture, people can and do mistake the former for the latter. My job—and our expertise at Cabot—is to help you be a better investor, not tell you how I think you should vote.
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In countries like Russia and China, where they don’t have the pretense of practicing capitalism, success and riches go not to those who have the best product, the best technology, or the best business practices.
Those rewards go to the well-connected and those who are most effective at playing the great game of politics.
The cost is borne by citizens through higher prices due to inefficiency and lack of competition, lost utility from lack of innovation, and reduced choice.
And investors are on an uneven playing field, where some players have advantages not available to others, and the rules are subject to change with little to no notice or input from stakeholders. That is not close to the capitalism I cherish, and that people around the world rely on for solid, safe investing.
As I noted in my earlier article, the “too big to fail” companies have been able to privatize their gains while they’ve socialized their losses when the government has stepped in to prop up a failed business. And to further pervert the system, every dollar of revenue for the bailed-out business is a dollar that its better-managed competitors don’t get.
Now we have the government taking a stake in Intel. To what lengths will the government go to protect that investment? What competitor is disadvantaged as a result? And does Intel gain unfair advantage through advance notice of or enhanced input into new or changing policies?
At the end of my previous article, I asked you for your thoughts on this assault on our (modified) capitalistic system.
Here’s a selection of the comments I received:
Ed:
I like how you characterized our economy as modified capitalism. And that approach has been a strength of our economy, as you pointed out. Unfortunately, there are politics involved. And I understand you are not commenting on politics. …
I can add to your list of concerns (1) the growth of private capital investment, which circumvents the transparency of publicly traded stock, (2) the growth of crypto, which will bypass transparent reporting of transactions and therefore taxation, and (3) the shrinking of the IRS, which had always demonstrated that investment in enforcement more than pays off.
Arthur S.
P.S. - Today … from Trump: “If these Tariffs ever went away, it would be a total disaster for the Country”. I know you don’t believe this, nor does the market. But where is the outrage from the business community to have a president say these things !!
Thank you, Arthur. And as I’ve written previously, there is a broad consensus among economists that other than tightly focused and short-term instances, tariffs are friction on the economy, slowing growth and reducing standards of living.
In a capitalist economy, too big to fail is an awful excuse to bail out a failing company. There is always an alternative that is waiting to capitalize on the failure no matter how much the population cares about the company going under. Let capitalism work and only the fittest survive as it should be.
R. Petty
As I noted in my previous article, like most things government deals with, these issues are complicated. There are almost always legitimate concerns and fears, the answers to which are often mutually exclusive or at least highly incompatible.
That doesn’t mean we should stop trying to learn and do better. The lack of accountability by companies and their executives (for greed, corruption, or simple incompetence) who get bailed out by taxpayers is a real slap in the face to the rest of us suckers who seek to play by the rules and effectively manage risk.
Finally, Ken T. sent this short note:
I agree 100% with this report. And if you start a movement to stop or modify these practices, I would be anxious to join you.
Ken T.
Thank you, Ken. For 55 years this month, Cabot Wealth Network has been in the business of helping individual investors be more successful. We’ve done this by providing excellent research, education, insights, and recommendations. We are not an advocacy group. That’s not our area of expertise or what our customers pay us for.
As always, I welcome your comments and suggestions. Please feel free to email me at support@cabotwealth.com with your thoughts.
For your investing success,
Ed Coburn
President and Publisher
Cabot Wealth Network
* I say “modified capitalism” because while there may be disagreement about the desirable extent of regulation, the vast majority of Americans seem to be comfortable with some interference in “pure” capitalism. There’s support for the idea that the role of government is to ensure that we do not endure an excessive level of health and safety risks, that extra measures are desirable to protect children, that we are protected from misrepresentation and fraud at some level, and many other areas where a strict capitalism would say “let market forces work.” By the way, this writer is not aware of ANY pure capitalism among the established economies in the world.
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