Taylor Frigon Capital Management hosted an Open House with wine and hors d'oeuveres at our new offices in San Luis Obispo on July 12, 2012. If you were able to attend, these were the slides that were displayed on the circular walkway. If not, you can view them as a slideshow in the above window or by visiting this link.
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A response to Roberto Mangabeira Unger
Above is a video from Harvard professor and Brazilian politician Roberto Mangabeira Unger, containing his declamation against what he sees as the problems with the American economy and with both political parties, and his prescription for setting the conditions to allow "the voice of democratic prophecy to speak once again in American life."
Central to his critique is his allegation that one side in the US (the Republican party) threatens freedom and prosperity -- primarily through what he sees as a reckless reduction of taxation -- and that the opposition (the Democrat party) doesn't offer anything better but merely seeks "to put a human face" on the rapacious policies of the Republicans.
We have stated in many previous posts that our perspective here is for the investor, and not for one party or another -- see for example this previous post, in which we wrote:
He argues that this recipe is actually disastrous, because "inequality would become even greater than it is now."
Professor Unger's unstated assumption is that "inequality" is the primary evil that must be eliminated, and he seems to take it as a given that all of his listeners agree that the reduction or elimination of inequality is the primary criterion by which to judge all policy.
While it certainly would not occur to any politician to argue that inequality is good, and while at first glance it seems the reduction of inequality is something that we should all support, we believe it is important to examine that assumption carefully.
First, we would point out that in many countries -- including Professor Unger's home country of Brazil -- there is tremendous inequality, with a huge population of very poor and a tiny population of elites. This situation is extremely common worldwide, especially in tyrannies and in countries without the respect for the "rule of law" that the United States has traditionally enjoyed.
Under the "rule of law," the same laws are supposed to apply to everyone regardless of status, and we believe that in the US (however imperfect) this still takes place to a far greater extent than in most other countries on the planet. Inequality that has been created by forcibly stealing from or oppressing a large portion of the population is a great evil, and one that should be addressed (through the introduction of the rule of law and the elimination of different legal treatment for different groups).
However, if we were to imagine a situation in which the rule of law were perfectly applied (admitting that there is no nation today that is perfect in this regard, including the US), we could then ask ourselves, "is the elimination of inequality the primary goal to be pursued?"
Put another way, we might phrase the question by asking, "Should individuals be entitled to try to make as much money as they can legally make, given their talents, skills, and willingness to work?" If my talents and past hard work have made me into the world's greatest basketball player, should I be entitled to try to make as much money from those skills as I can legally make? Likewise, if my talents and past preparation have enabled me to become a highly sought-after writer, speaker, or actor, or if they enabled me to start a company such as Apple or Intel or Intuitive Surgical* (or to be an indispensable executive at one of those companies or at one of the thousands of other great companies in the world), should I be allowed to do so? If I am not incredibly talented but I simply work harder than another worker at the same company with similar skills to mine, should I be entitled by my harder work to seek better compensation?
If you think that individuals should be allowed to assess their talents and training and then try to find the place where those skills will be most valued -- and most well-paid -- then we agree with you. However, please note that if you take that position, it is inevitable that there will be "inequality." The harder worker may end up being paid more than his friend who doesn't work as hard. The basketball player who spent more time developing his skills when he was growing up -- or who also combined hard work with greater natural talent -- might be able to command a higher salary in the NBA than another player could.
However, if you believe that laws should be written that stop people from being able to make as much as they possibly can in this world (without using force to steal from people or using fraud to deceive people), then you are, in our opinion, siding against the rule of law.
We say that because laws that stop some extremely high achievers (whether they are CEOs, NBA stars, or venture capitalists) from making as much as they can make are laws that create a system where one group has different laws than another group. Presumably, those people who want to put a "cap" on the salaries of high-paid CEOs (or movie stars or athletes) do not argue that there should also be a "cap" placed on the salaries of restaurant busboys or hard-working but low-paid hair-stylists.
Why is it right for people to write laws which limit one person's ability to make as much as he can, while not limiting other people from trying to make as much as they can? The hair-stylist may be making as much as he can possibly make (he may have found the place where his talents are best applied), but because he is not making very much, the law doesn't apply to him. That path leads to different laws for different people, just based on how much they make -- how is this any better than corrupt countries where the ruling elites are "above the law"? It just reverses the system and creates a new unfair situation, where some people are deemed "below the law" and some are deemed "rich enough to be treated unfairly."
Finally, the simple fact of economics is that the best way to create prosperity for everybody is to enable greater economic growth. Real economic growth leads to greater "inequality" (as successful entrepreneurs create companies like Apple and thereby create groups of people with higher salaries than before), but it also tends to lead to the situation where general standards of living improve across the entire spectrum of incomes. This improvement in standards of living even at the lower income levels does not typically happen in places with low regard for the rule of law (including Brazil and many other Latin American nations), but it has taken place in the US, where large portions of those in the lowest income brackets can afford a better standard of living than the "middle class" could afford just forty or fifty years ago. Professor Mark Perry has published statistics on this phenomenon in the past on his economics blog such as here and here.
While Professor Unger argues against lower taxes and fewer regulations and less costly and restrictive governments, and identifies calls for such things the Republican position, we would argue that lower taxes and fewer regulations and less costly and restrictive governments are what actually work in the real world to create greater economic growth and prosperity (and freedom!), which means that people and politicians of all persuasions should embrace these methods. We previously linked to a video that provides ample evidence from history for this assertion -- see "Why can't we all just get along (on economic policy)?" from February 2010.
We would also point out that Republicans in the US have been guilty of cronyism and betrayal of these principles as well as Democrats.
We hope that Professor Roberto Mangabeira Unger will accept the reality that the rule of law is the real solution -- we would recommend to him the work of another South American thinker, Hernando de Soto, who champions the benign power of the rule of law on any continent, and with whom we heartily agree.
However, even if Professor Unger does not see the light, we hope that his 200,000+ YouTube viewers will not be misled by his faulty arguments.
* At the time of publication, the principles of Taylor Frigon Capital Management owned securities issued by Apple (AAPL), Intel (INTC), and Intuitive Surgical (ISRG).
Central to his critique is his allegation that one side in the US (the Republican party) threatens freedom and prosperity -- primarily through what he sees as a reckless reduction of taxation -- and that the opposition (the Democrat party) doesn't offer anything better but merely seeks "to put a human face" on the rapacious policies of the Republicans.
We have stated in many previous posts that our perspective here is for the investor, and not for one party or another -- see for example this previous post, in which we wrote:
We do not make these suggestions as representative of one political party or another -- we are speaking on behalf of investors, and for policies that we believe are good for overall economic growth, innovation, and the investors whose capital fuels that growth and innovation. After all, we actually are investors and professionally represent investors.However, we do feel that Professor Unger's video, which has received over 200,000 views as of this writing, requires a brief response, particularly in light of his statements in the first thirty seconds of the diatribe, in which he lays out his most important beef with the position of those who believe that "if only government became less costly and restrictive, with lower taxes and fewer regulations, economic growth would make up for inequality."
He argues that this recipe is actually disastrous, because "inequality would become even greater than it is now."
Professor Unger's unstated assumption is that "inequality" is the primary evil that must be eliminated, and he seems to take it as a given that all of his listeners agree that the reduction or elimination of inequality is the primary criterion by which to judge all policy.
While it certainly would not occur to any politician to argue that inequality is good, and while at first glance it seems the reduction of inequality is something that we should all support, we believe it is important to examine that assumption carefully.
First, we would point out that in many countries -- including Professor Unger's home country of Brazil -- there is tremendous inequality, with a huge population of very poor and a tiny population of elites. This situation is extremely common worldwide, especially in tyrannies and in countries without the respect for the "rule of law" that the United States has traditionally enjoyed.
Under the "rule of law," the same laws are supposed to apply to everyone regardless of status, and we believe that in the US (however imperfect) this still takes place to a far greater extent than in most other countries on the planet. Inequality that has been created by forcibly stealing from or oppressing a large portion of the population is a great evil, and one that should be addressed (through the introduction of the rule of law and the elimination of different legal treatment for different groups).
However, if we were to imagine a situation in which the rule of law were perfectly applied (admitting that there is no nation today that is perfect in this regard, including the US), we could then ask ourselves, "is the elimination of inequality the primary goal to be pursued?"
Put another way, we might phrase the question by asking, "Should individuals be entitled to try to make as much money as they can legally make, given their talents, skills, and willingness to work?" If my talents and past hard work have made me into the world's greatest basketball player, should I be entitled to try to make as much money from those skills as I can legally make? Likewise, if my talents and past preparation have enabled me to become a highly sought-after writer, speaker, or actor, or if they enabled me to start a company such as Apple or Intel or Intuitive Surgical* (or to be an indispensable executive at one of those companies or at one of the thousands of other great companies in the world), should I be allowed to do so? If I am not incredibly talented but I simply work harder than another worker at the same company with similar skills to mine, should I be entitled by my harder work to seek better compensation?
If you think that individuals should be allowed to assess their talents and training and then try to find the place where those skills will be most valued -- and most well-paid -- then we agree with you. However, please note that if you take that position, it is inevitable that there will be "inequality." The harder worker may end up being paid more than his friend who doesn't work as hard. The basketball player who spent more time developing his skills when he was growing up -- or who also combined hard work with greater natural talent -- might be able to command a higher salary in the NBA than another player could.
However, if you believe that laws should be written that stop people from being able to make as much as they possibly can in this world (without using force to steal from people or using fraud to deceive people), then you are, in our opinion, siding against the rule of law.
We say that because laws that stop some extremely high achievers (whether they are CEOs, NBA stars, or venture capitalists) from making as much as they can make are laws that create a system where one group has different laws than another group. Presumably, those people who want to put a "cap" on the salaries of high-paid CEOs (or movie stars or athletes) do not argue that there should also be a "cap" placed on the salaries of restaurant busboys or hard-working but low-paid hair-stylists.
Why is it right for people to write laws which limit one person's ability to make as much as he can, while not limiting other people from trying to make as much as they can? The hair-stylist may be making as much as he can possibly make (he may have found the place where his talents are best applied), but because he is not making very much, the law doesn't apply to him. That path leads to different laws for different people, just based on how much they make -- how is this any better than corrupt countries where the ruling elites are "above the law"? It just reverses the system and creates a new unfair situation, where some people are deemed "below the law" and some are deemed "rich enough to be treated unfairly."
Finally, the simple fact of economics is that the best way to create prosperity for everybody is to enable greater economic growth. Real economic growth leads to greater "inequality" (as successful entrepreneurs create companies like Apple and thereby create groups of people with higher salaries than before), but it also tends to lead to the situation where general standards of living improve across the entire spectrum of incomes. This improvement in standards of living even at the lower income levels does not typically happen in places with low regard for the rule of law (including Brazil and many other Latin American nations), but it has taken place in the US, where large portions of those in the lowest income brackets can afford a better standard of living than the "middle class" could afford just forty or fifty years ago. Professor Mark Perry has published statistics on this phenomenon in the past on his economics blog such as here and here.
While Professor Unger argues against lower taxes and fewer regulations and less costly and restrictive governments, and identifies calls for such things the Republican position, we would argue that lower taxes and fewer regulations and less costly and restrictive governments are what actually work in the real world to create greater economic growth and prosperity (and freedom!), which means that people and politicians of all persuasions should embrace these methods. We previously linked to a video that provides ample evidence from history for this assertion -- see "Why can't we all just get along (on economic policy)?" from February 2010.
We would also point out that Republicans in the US have been guilty of cronyism and betrayal of these principles as well as Democrats.
We hope that Professor Roberto Mangabeira Unger will accept the reality that the rule of law is the real solution -- we would recommend to him the work of another South American thinker, Hernando de Soto, who champions the benign power of the rule of law on any continent, and with whom we heartily agree.
However, even if Professor Unger does not see the light, we hope that his 200,000+ YouTube viewers will not be misled by his faulty arguments.
* At the time of publication, the principles of Taylor Frigon Capital Management owned securities issued by Apple (AAPL), Intel (INTC), and Intuitive Surgical (ISRG).
Taxes you already pay for things that you do not buy
It's been almost a week since the Supreme Court handed down their ruling on the constitutionality of the Affordable Care Act (aka "Obamacare"), and we're still digesting the impact of the ruling.
One acquaintance of ours whose opinion we respect has pointed out an observation that we don't believe is widely understood, which is that the majority opinion -- which declared the penalty on the individual mandate to be a tax and hence within the bounds of the legislative powers given to the federal government by the US Constitution -- serves to highlight the egregious nature of many other acts of Congress stretching back for decades.
In other words, he believes that one "silver lining" to the majority opinion may be the fact that if this decision makes the electorate angry about being taxed as a penalty for not buying something (in this case, health insurance), then perhaps they will wake up and become angry about the many other egregious taxes and penalties which legislators have been writing into laws for decades in order to "encourage" various types of behavior among the citizenry.
Taking this idea and running with it a little ways, we'd like to point out that the government in the US has a long history of imposing taxes and other financial penalties on people who don't do things that the government wants to encourage. There are all kinds of laws already on the books (at the federal, state, and local levels) which tax people for "not buying things," just as this new law proposes to do to people who do not buy health care.
For example, the tax code has for many years given a very generous tax writeoff to citizens who choose to buy a house or condominium to live in and who take out a mortgage, rather than buying it outright ("with cash"). This can be thought of as the federal government saying, "We want you to mortgage your real estate. If you do not, we are going to make you pay taxes which those who mortgage their real estate will not have to pay. You will pay a higher level of tax than they will. In other words, mortgage your house or pay a 'non-mortgage tax' as a penalty for not doing what we want you to do." This has been going on for decades.
We have also pointed out in previous posts that the US government has imposed sugar tariffs on imports of foreign sugar virtually non-stop since 1816 (which would make this a bi-partisan policy if there ever was one). Because of this, citizens in the US pay higher prices for sugar than those in the rest of the world. By imposing these sugar tariffs, the federal legislature has essentially been saying to citizens, "We want you to buy domestic sugar. If you don't buy it, we will impose a tax on you." Again, the decision of the Supreme Court last week highlights the fact that the government has been imposing taxes intended to coerce citizens into certain types of behavior for almost the entire history of the Republic (although no doubt the pace of such social engineering has increased since the beginning of the twentieth century).
One more recent example and one that should be familiar to many readers is the institution of "high-occupancy vehicle lanes" or "carpool lanes" in many freeways around the country (one such freeway is pictured above). These lanes are open to those who carpool (sometimes defined as two or more people in one vehicle, and in other places defined as three or more people in one vehicle), as well as to certain other types of vehicles that governments want to encourage, such as hybrid vehicles, flexible-fuel vehicles, and motorcycles. Other drivers are not allowed to use these lanes (and if they try to do so, the government will stop them by force in the form of a police officer).
In this example, the government is saying to citizens, "We want you to buy certain types of vehicles, and if you don't, we will penalize you. We will make you pay taxes for the construction and upkeep of freeways, and we will make some portions of those freeways off limits to you, while allowing others (who do buy those types of vehicles) to use them. We will similarly tell you to carpool -- a behavior we want to encourage -- and if you do not, you will be in the same boat of paying taxes for something that others use but which you may not use."
In other words, the government is already taxing people for not buying things, as well as for not following behaviors that the government wants to encourage in its citizenry. In light of this, perhaps it is correct that the solution is not for the Supreme Court to shoot down such laws but rather for the people to realize that such government engineering always causes inefficiencies, malinvestment, and economic dysfunction, and for the electorate to demand that their legislators stop engaging in such practices.
What does all of this mean for investors? We are under no illusion about the fact that the lawmakers in the US are not likely to stop creating tax incentives and penalties to encourage various behaviors (and to help various constituencies at the expense of others). It is (remotely) possible that the recent Supreme Court decision will help voters wake up and realize how many ways the government already taxes them for things they do not buy or for actions that they do not take, and that this wake up call will have an impact on future elections.
However, in light of the fact that such behavior will continue to go on, and in light of the fact that the Affordable Care Act for the time being remains on the books, we think the most likely result that investors should be aware of is the certainty of future inflation of the currency as part of the price tag for a system that will prove to be anything but affordable. Inflation is in many ways the cruelest and the subtlest tax of all, as we have explained in previous blog posts such as "Stand still, little lambs, to be shorn!"
Because of this assessment, we would say that investors have no choice but to continue to look for innovation and opportunity wherever it can be found.
The United States of Europe? Not!
It seems not a day goes by that we are not hearing of some new "alphabet soup" (EFSF, ESM, EU, ECB, IMF...) of entities that are having a "summit" on how to bailout Greece, or Spain, or Italy, and so on. So much has been made of this fiasco and yet it is really not all that complicated.
For years the European welfare state, present in just about every European country including Germany, has been promising citizens what it cannot deliver: cradle to grave security and an easy life of limited work and long vacations. This came in the form of perks like early retirement on full pension and health benefits, for life, leisurely guaranteed five week vacations, and more typically nine weeks at many large companies! It all sounded great until the bills started coming due. Europeans, especially those along the Mediterranean, have run out of money to pay for such excesses.
Some are in better shape than others. Germany, for instance, had a much lesser party than Greece, for instance, and is particularly annoyed at the prospect that they could be saddled with the debts of those to their south who have "lived it up". While Germans have not been completely innocent of embracing the welfare state, they are a very hard working and productive people who absorbed their own profligate son (East Germany) within the last twenty years and managed to do a pretty good job of it.
Eventually, this drama may come to a head in a much different way than most expect. The "Grexit" as many in the media have dubbed it (Greece's long awaited exit from the Euro) may give way to the "Gerxit"! That's right, it may be that Germany is gearing up for a Euro exit which, while painful for Germany in the short run, may be the best solution for all concerned.
Frankly, while so much was made of the Greek election this past weekend, the more important election in Europe was in France, where the French have gone "all in" for the welfare state with the convincing election of Francois Hollande and his Socialist government. This ends any possibility of coordination between Germany and France on greater Euro issues. It is notable that Hollande campaigned on reversing the move to change French public workers' retirement age from 60 to 62. France's finances are incapable of avoiding the inevitable day of reckoning but Hollande will have to face that reality, which will come crashing in on the French one way or another, and deal with the consequences accordingly.
Regardless, this may clear a path for Germany to say goodbye to the Euro and go back to the stability of the Deutschemark (DM). The DM would immediately strengthen against the Euro (or more likely the Euro will collapse), giving an out to the Greece's of the world who desire devaluation so they can inflate away their debts. Ultimately, it would free Germany from the responsibility of propping up those profligate members of the EU who have been unable to control their finances.
While we recognize this may be considered a long shot, we note that this is being discussed in other circles, as can be seen here, and here.
Over twenty years ago, we wondered about the "United States of Europe" as many were promoting its promise. Could there be monetary union without political union? Apparently not.
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For years the European welfare state, present in just about every European country including Germany, has been promising citizens what it cannot deliver: cradle to grave security and an easy life of limited work and long vacations. This came in the form of perks like early retirement on full pension and health benefits, for life, leisurely guaranteed five week vacations, and more typically nine weeks at many large companies! It all sounded great until the bills started coming due. Europeans, especially those along the Mediterranean, have run out of money to pay for such excesses.
Some are in better shape than others. Germany, for instance, had a much lesser party than Greece, for instance, and is particularly annoyed at the prospect that they could be saddled with the debts of those to their south who have "lived it up". While Germans have not been completely innocent of embracing the welfare state, they are a very hard working and productive people who absorbed their own profligate son (East Germany) within the last twenty years and managed to do a pretty good job of it.
Eventually, this drama may come to a head in a much different way than most expect. The "Grexit" as many in the media have dubbed it (Greece's long awaited exit from the Euro) may give way to the "Gerxit"! That's right, it may be that Germany is gearing up for a Euro exit which, while painful for Germany in the short run, may be the best solution for all concerned.
Frankly, while so much was made of the Greek election this past weekend, the more important election in Europe was in France, where the French have gone "all in" for the welfare state with the convincing election of Francois Hollande and his Socialist government. This ends any possibility of coordination between Germany and France on greater Euro issues. It is notable that Hollande campaigned on reversing the move to change French public workers' retirement age from 60 to 62. France's finances are incapable of avoiding the inevitable day of reckoning but Hollande will have to face that reality, which will come crashing in on the French one way or another, and deal with the consequences accordingly.
Regardless, this may clear a path for Germany to say goodbye to the Euro and go back to the stability of the Deutschemark (DM). The DM would immediately strengthen against the Euro (or more likely the Euro will collapse), giving an out to the Greece's of the world who desire devaluation so they can inflate away their debts. Ultimately, it would free Germany from the responsibility of propping up those profligate members of the EU who have been unable to control their finances.
While we recognize this may be considered a long shot, we note that this is being discussed in other circles, as can be seen here, and here.
Over twenty years ago, we wondered about the "United States of Europe" as many were promoting its promise. Could there be monetary union without political union? Apparently not.
Is the world economy heading for another "Lehman Brothers moment"?
The markets have been reacting to widespread unease over Europe's economic woes, and the oft-repeated concern that the "debt crisis" there will spark another "Lehman Brothers moment," initiating a new 2008-style calamity that will engulf the US and bring on another recession (or worse). Meanwhile, every economic report showing signs of slower growth is heralded as confirmation that such fears are about to come true.
We have written many times that we do not make our living by predicting ups and downs in the economy. That said, we believe these fears are overwrought and that investors would do well to take a skeptical view of comparisons in the financial media to the Lehman Brothers collapse of 2008. For a sober discussion of why the world is probably not on the brink of another "Lehman moment," we would recommend this recent article from retired economist (and prolific blogger and thinker) Scott Grannis, author of the "Calafia Beach Pundit" blog.
In that article, published last week, Mr. Grannis (referring to an article by Asia Times columnist David Goldman) notes that the significant differences between the problems in Europe today and the panic that brought down Lehman in 2008 are numerous. Most importantly, the panic in 2008 was over liabilities that nobody knew how to value, and whose losses had not happened yet (it was the fear of future losses that started the whole vicious circle), while the full extent of the liabilities and losses in Europe are well known, and have already occurred. As Mr. Grannis explains:
back then the market found it almost impossible to value the thousands of often obscure and arcane mortgage-backed securities that were tied to many millions of homes whose prices were tumbling at different rates all over the country. With the PIIGS crisis, we are dealing with only a handful of borrowers who have issued fairly straightforward debt securities.
We recommend all investors read the blog post by Mr. Grannis (linked above) and the article he links in that post.
