Investors are famous for being worrywarts.
Day after day, we wring our hands about inflation, interest rates, commodity prices, currency fluctuations, economic growth, Fed policy, pending legislation, the business cycle and corporate profits, to name just a few.
Yet the greatest threat to the financial markets is none of these.
In my view, it’s growing populist movements on both the right and the left – but especially the far left – that threaten to kill the goose that lays the golden eggs: our amazing free market system.
Let’s do a quick review…
A couple hundred years ago just about everyone in the world lived at the level of present-day Bangladesh.
Poverty wasn’t the exception. It was the norm.
Backbreaking work – both at home and on the job – was how almost everybody spent their days to make sure their families had adequate food, clothing, shelter and warmth.
Life was hard. It was also short – and generally grim.
There were few luxuries. (Nobody thought about fresh-ground Colombian coffee or the thread count of their bedsheets.)
Yet things began to change dramatically a couple centuries ago – at least in the West – with the Industrial Revolution, property rights and the rule of law.
The real driver of prosperity was capitalism, a term that – in some quarters – is now synonymous with greed, selfishness and exploitation.
That is a total mischaracterization.
The beautiful thing about the profit motive is that it takes a universal quality – rational self-interest – and turns it into a societal good.
Unlike inherently coercive government, in the private sector you have to entice other people to work for you and trade with you. The more people you serve, the greater your economic success.
Capitalism says you can have whatever you want if you just provide enough other people with what they want.
The quintessence of capitalism – the private ownership of the means of production – is the stock market, where anyone who is willing to work, save and invest can own a fractional interest in any of thousands of the world’s most prosperous businesses.
Of course, companies, like the people who run them, are not perfect.
If a business breaks contracts, defrauds customers, mistreats employees or dumps its waste in the river out back, the transgressor should be punished.
Corporations need regulators the way basketball players need referees. Otherwise, the game would turn into a free-for-all.
However, just as no one wants to play in – or watch – a basketball game where the refs blow the whistle every time one player brushes another, markets can suffer from overregulation.
We’re already there.
Even with President Trump’s deregulatory efforts, the Competitive Enterprise Institute reports that the 2017 Federal Register contained 61,308 pages of new regulations.
(That’s down from a record 95,894 pages in the last year of the Obama administration.)
These regulations aren’t just difficult to follow. Most small businesses are massively noncompliant.
Few have the time, money or personnel to even understand how all these rules – issued and administered by unelected bureaucrats – impact their operations.
Complying with all these regulations raises prices – nowhere more so than in the healthcare industry – and acts as a hidden tax that costs the average household more than $14,900 per year.
Yet this is just one of two populist trends that threaten “the goose.”
The other is the federal debt, something that neither major party is willing to address in a serious way.
In the run-up to the 2016 and 2018 elections, the national debt – now more than $22 trillion – hardly even came up.
Sure, candidate Trump promised to pay off the entire national debt in eight years. (It’s still on his list, right after collecting that money from Mexico for the wall.)
But now the $1 trillion (and growing) deficit is an afterthought. At a recent press conference, Trump even bragged about how our government has “so much money.”
In that case, you might reasonably wonder why our national debt is now equal to our GDP.
Even worse are the democratic socialists – and even some former Blue Dog Democrats – who act as if our tens of trillions of dollars of debt is some kind of Fox News fantasy.
It’s not just that they aren’t offering solutions.
They’re doing the opposite, pledging bigger Social Security payouts, Medicare for all, free college tuition, a government jobs guarantee, universal basic income, paid family leave and a Green New Deal – estimated to cost more than $2 trillion – to get the U.S. economy entirely off fossil fuels in 10 years.
This is to be laid on top of our rickety entitlements structure, where the current unfunded liabilities for Medicare, Medicaid and Social Security alone top $122.6 trillion.
(To put this number in perspective, it’s equal to 1.4 times the entire planet’s GDP.)
How could we pay for all this?
Not by sticking it to billionaires. According to Forbes, the combined net worth of the nation’s 400 richest individuals is $2.7 trillion.
Confiscating their entire fortunes would hardly be a drop in the bucket. The top 1% of us will not be able to bail out the other 99% of us.
Of course, all these fantasy programs have zero chance of becoming law before the 2020 elections.
Polls show the tide is turning, as populists demand higher taxes, more regulations, greater redistribution and far more government interference in the economy.
This has not worked well in other countries.
The ones who’ve tried it – particularly in Europe – have anemic growth, stagnant living standards and fiscal outlooks that are downright scary.
They also have negative interest rates and stock markets that have gone nowhere over the last decade.
In short, the greatest threat to this long-running bull market is not a tightening Fed, higher valuations or moderating corporate profits.
It’s the growing clamor for regulatory and redistributive policies that will reduce innovation, lessen productivity and undermine the economy.
Investors’ new rallying cry should be “Save the goose!”