We haven’t really touched on the economy in a while, so I’ll briefly hit some of the latest news and invite your discussion in the comments.
First up is the state of the markets. Many Berean readers know that I’m suspicious of the markets, and have been for years, since valuations by most conventional measures are on the very high side. I have attributed this primarily to the low interest rate policies of the global central banks (not just the Fed–the ECB, BOJ, etc., are all printing money like crazy), and with this easy money cycle likely ending over the next year, it seems even riskier. Further, we’re at the long end of the business cycle, which suggests that profits could go down in the future. But Mr. Market isn’t buying these fears, and major stock indices are rising higher and higher. So what’s driving it? Well I still am not a buyer, but I do think the latest move up is entirely appropriate and rational. What convinces me of this? Well, I recently reviewed my chapter on finance in that wonderful free book No Free Lunch (how’s that for a shameless plug!) and I re-read my section on capital and the entrepreneur. One of my most important lines is that
Capital assets only truly become capital when they are embedded in an entrepreneur’s plan for production.
So capital becomes more valuable when its in a better entrepreneurial plan of production. There seems to me to be no doubt that business optimism is rising, and the regulatory weight and certainly the direction of regulation is decreasing. This means entrepreneurs have more opportunities to use capital more productively–this to me is the likely reason for the recent rise in market valuations. Since I’m still concerned about what happens when the liquidity drys up over the next year, I’m not a buyer–but I do understand why IF IF you thought the markets weren’t overvalued 6 months ago, you can justify the recent rise.
Second up is vote last week at the Nissan plant in Mississippi, where the UAW soundly lost. This is great news from my perspective for workers, since monopolistic unions forcing wages above competitive prices are a primary driver for the manufacturing job loss in the rust belt areas. Nissan workers in the U.S. are still making on average of $44/hour in wages and benefits (as of 2015 w/raises since then), with most Nissan plants in lower cost of living areas in the south (e.g., TN and MS). 62% said “no thanks” to the UAW’s effort to “help” them (like the UAW helped all the big three auto manufacturers).
Finally, Crony Capitalism is alive and well. We’ve talked about Elon Musk before, since he is the epitome of the Crony Capitalist. An op-ed over on The Hill asks when we can wean Elon off public subsidies, which is a really good question.
A study published two years ago by The Los Angeles Times revealed that just three of Musk’s ventures – SolarCity Corp. (which manufactured and installed solar energy systems before its 2016 merger with Tesla Motors Inc.), Tesla Motors Inc. (which manufactures electric vehicles), and Space Exploration Technologies Corp., known as SpaceX (which builds rocket ships) – had received $4.9 billion in government subsidies to that point in time. By now, Musk’s various ventures have sucked well over $5 billion from government coffers.
Without these subsidies, none of his ventures would survive, IMHO. Why is it that very rich elites get a $7500 tax credit to buy their Teslas? Rather than taxing the rich more, why not just give them less?
Here’s the question I hear when I’m talking to friends in Georgia who ask me to explain Washington to them: “Why should those guys in Washington take my hard-earned tax dollars and use them to lower the price of an electric car for some movie star in Hollywood?” That’s a good question. Given that the average household income of a Tesla Model X owner is $503,000, that the average household income of a Tesla Model S owner is $267,000, and that we can only assume the average household income of a Model 3 owner will be somewhere in six-figure territory, it’s a tough question to answer.
Mr. Trump, would you please drain the swamp?