Protecting Inequality

George Gilder

George Gilder

Gilder explains how changes in our financial markets, often with the intention of protecting small investors from risk have had an effect of increasing inequality.

In the ordinary history of Silicon Valley, no private company but Apple obtained anything close to a billion-dollar market cap. Intel, Microsoft, Oracle, Cisco, and other Silicon Valley stars only reached that level through IPOs that led into long years of appreciation of their stocks as public companies. Most companies, including the most lucrative high-tech names— firms like Linear Technology and Applied Materials, Oracle and Sun Microsystems, Cisco, Amazon, and Qualcomm— were happy to go public at a market cap of a few score million. Even Microsoft did not reach near a market cap of a billion dollars until its IPO. Apple, which turned out to be the best stock of the last hundred years, went public at a valuation of $ 1.3 billion and eventually was valued by Wall Street at more than five hundred times that amount. Adjusted for inflation, Microsoft gained a comparable multiple in the public markets.

The bulk of the appreciation from these Silicon Valley IPOs thus went to Main Street, which held its shares through Wall Street in the form of pensions and stock holdings. Venture capitalists did well, but the broad middle class captured a large share of the returns.

By comparison, Facebook had an $ 80 billion IPO, from which the U.S. Securities and Exchange Commission “protected” the middle class by barring all but “qualified investors” from pre-IPO markets. The thousandfold gains from Facebook were reserved for the officially certified rich, the fortunate few venture capitalists and investors “qualified” as sufficiently well-off to make such a “risky” investment.

Gilder, George (2016-03-28). The Scandal of Money: Why Wall Street Recovers but the Economy Never Does (Kindle Locations 1740-1752). Regnery Publishing. Kindle Edition.


Random Thoughts 05 31 2011

I hear a lot of ads advising investors to put gold in their IRAs or 401ks.  Seems like a terrible idea.  The big benefit if retirement accounts is to defer income. Gold generates no income, and actually incurs storage and transaction fees.  Gold can also be very volatile.  In the 1970s and 1980s we saw gold go from $35 to $800 and back down to $300. Gold did not have a net inflation adjusted gain for 25 years.   Gold may or may not be good investment but a retirement account is not the place to own it.  If it does go down and it is in a taxable account at least you can offset other gains with it.  If it goes up you may be able to get a capitals gains treatment.

Tax deferred accounts are the best place to put secure income producing investments.  It is even somewhat of a waste to put stocks with the intention of producing long term gains as along as those gains are taxed at a reduced number. High yield stocks are a different consideration.

Self reliance used to be a cherished American virtue.  Many today consider it synonymous to being anti-social.

Debbie Wasserman Schultz seems to be a liability for the Democrats.  Claims that the Republicans are anti-women and anti-immigrant are just old school demonizing. Only the sycophants drinking the party’s bathwater from a distant past do not see such statements as either silly or offensive. The independents seek solutions, sometimes poorly, and are likely to be put off by such caustic stereotypes.  At a time when the party should be steering center she is turning left.

Republicans seem to struggle to control the narrative.  Part of this is the inability to stick to a cohesive message stated clearly.  It does them no good to attack their own party members who are actually proposing adult solutions to long term problems.  The perfect is the enemy of the good.  Perhaps this primary process will coalesce into a winning strategy.

Democrats win more by solidarity than by popularity.  However much they may speak against an incumbent they will rally to their party when the final election comes.  Republicans are divided by an assortment of litmus tests that has destroyed their effectiveness and unity.  Whoever their candidate is they must be able to unite a very diverse party to be effective.

This early in the game polls are pretty worthless.

Gold Risks

With the dollar weakening, debt growing, and the global and domestic economy still sluggish there is pressure driving up the price of gold, silver and industrial commodities.  Forgive me if it just seems too obvious.  Endless ads selling gold, and gold buyers showing up in vacant strip malls makes me skeptical.  What could reverse this trend?


If there is any significant slowing in the growth of China, the demand for commodities will suffer.  Corrections are often steeper than the increases.  Markets can remain illogical for long periods, as we have certainly learned.

When interest rates climb, the holding costs for gold which pays no interest or dividend, goes up and the value declines.

I recall how many in the late 1970’s bought gold at $800 an ounce, thinking that runaway inflation was inevitable. It wasn’t and many lost 75% of their investment. Depending on whether the new Congress has the balls to truly address our problems, gold may indeed be a worthy investment. But do not ignore factors which could easily drive it in the other direction.

Avoiding Political Influence in your Investment Decisions.

While I share the great concern about her destructive economic policies of this administration, I am getting a contrarian tick about the dollar and gold.

Every right wing talk show and business TV show is flooded with adds selling gold to consumers.  “The dollar decline is inevitable” the pitchmen warn, “Gold is the only safe money.”

When there is this much noise and whenever anything is inevitable it is time to be cautious.

I remember during the seventies when inflation seemed inevitable. The doomsday newsletters like Harry Brown and Howard Ruff had middle class investors buying gold coins, opening us accounts in Swiss banks and investing in Swiss Franc CDs.  Gold reached over 800 dollars an ounce.

And then the inevitable did not happen.

Volcker and Reagan wrestled inflation out of the system, the dollar soared and gold plummeted. Silver which ran as high as $50 an ounce came crashing down to under $5. The real reason for its rise and spectacular bubble was not the desire for sound money but the manipulations of the notorious Hunt brothers.

Middle class investors who bought into the fear and invested heavily in foreign currencies and gold were badly damaged.

It is challenging enough to get accurate information about domestic stocks. Understanding the factors affecting currency values and foreign markets are far beyond the scope of middle class investors (and most professional investors as well.)

Interest rates are near zero. They cannot go down any further, and given the deficit will likely go up.  When interest rates go up the costs of holding a non interest bearing asset like gold goes up, and this puts down ward pressure on the price of the metal.

While the dollar may seem vulnerable its value on world markets are relative to other currencies. As we see the Dubai fantasy teetering on the brink of bankruptcy and countries like Greece nearing default, the dollar may start looking better if for no other reason than other countries are looking worse.

The amount of uncertainty multiplies greatly when you leave our borders. If you are concerned and want some gold limit your exposure to 10% of  your assets and even dollar average that to avoid buying at a top. Consider gold stocks like Newmont or Goldcorp that you can sell easily and quickly if the market turns against you.

Do not put gold in your 401k or retirement account. The tax protection is better suited to income investments, even low yielding but secure Treasuries. If you think interest rates are going up (I do) avoid long term bonds of any nature. Bond face values drop as interest rate rise.

Successful investing requires controlling your emotions.  Anger and fear over this administration’s policies can easily influence your investment decisions.  Rarely does such emotional influence lead to better decisions.

Investing Odds

Is this a good time to buy?

Yes and no. The contrarians are salivating but one can not discount the real risk in this market. Obama’s policies are so radically different on so many different levels that there is a chance that the game may be changed for a decade.

It would be foolish to expect a rapid resurgence in prices. It will likely be a long slow slug from current levels. One should not be testing bottoms here without a lot of patience.

But it would be a good time to begin to buy the strongest players in the weakest industries; especially steel, cars, and banks. A more conservative play would be to starting frequent buying of low cost index funds, especially if the market continues to fall.

Here is my gut risk assessment of this market. There is a 50% chance that we are less than a 1000 points away from a bottom. While 1000 points seems like a wide margin it is small considering the 6,000 drop in the last 9 months. Even if we do bottom above a 6,000 Dow the time frame could be long. This is no time for impatient investors.

I see a 20% chance that the market could drop far beyond 6,000 to say 4,000 and a 10% chance it can go beyond that. I see a 10% chance that we could rebound significantly and rapidly from near current levels. I see this last probability largely because of the massive monetary infusion. The market may benefit from inflation.

Cash and patience are king, but opportunities are available that we may not see again in our lifetimes.