Posts Tagged ‘John Mauldin’

Lots and lots of people seem to have opinions on “capitalism” these days. I think that’s a positive because I think there are some things that warrant discussion. The problem is that many who have rose to prominence right now, especially on the political left, have not a clue what they’re talking about and probably haven’t read anything that ever challenges their small minded understanding of what capitalism is, or could be. You even see it with some on the political right which I often find a lot disconcerting.

The reality is, we have nothing right now that even remotely resembles “laissez-faire capitalism.” The market is not free. Price discovery is on life support in many industries. Capitalism hasn’t failed, hell we barely have it in this country right now.

There’s a new book out by Jonathan Tepper called The Myth of Capitalism: Monopolies and the Death of Competition. Tepper is a Rhodes scholar, and off the charts brilliant.

I’m yet to read the book, but I’ve read a couple of other books by the author. Tepper has been all over much of the financial media I follow, and I’ve heard him interviewed a couple times. He makes a compelling argument, but I’m concerned what solutions he may propose. I need to read the book to establish a better understanding and opinion.

Here’s the summary of the book:

The Myth of Capitalism tells the story of how America has gone from an open, competitive marketplace to an economy where a few very powerful companies dominate key industries that affect our daily lives. Digital monopolies like Google, Facebook and Amazon act as gatekeepers to the digital world. Amazon is capturing almost all online shopping dollars. We have the illusion of choice, but for most critical decisions, we have only one or two companies, when it comes to high speed Internet, health insurance, medical care, mortgage title insurance, social networks, Internet searches, or even consumer goods like toothpaste. Every day, the average American transfers a little of their pay check to monopolists and oligopolists. The solution is vigorous anti-trust enforcement to return America to a period where competition created higher economic growth, more jobs, higher wages and a level playing field for all. The Myth of Capitalism is the story of industrial concentration, but it matters to everyone, because the stakes could not be higher. It tackles the big questions of: why is the US becoming a more unequal society, why is economic growth anemic despite trillions of dollars of federal debt and money printing, why the number of start-ups has declined, and why are workers losing out.

I’ve mentioned John Mauldin multiple times in my writing. He’s probably my favorite financial writer, and one of the smartest people I’ve ever read. (Tepper has co-written two of Mauldin’s books). His weekly Thoughs From the Frontline is alwas a must read for me. I don’t think I’ve missed one in over five years now.

The Soviet Union’s collapse and spread of semi-free markets through Eastern Europe seemingly ended the socialism vs. capitalism argument. Capitalism had won. Collectivist economies everywhere began turning free. Even communist China adopted a form of free market capitalism although, as they say, with “Chinese characteristics.”

The fruits of capitalism: millions of people freed from abject poverty and a few who got rich indeed. Nor is this a recent phenomenon. Capitalism in the last three centuries, with all its faults and problems, with all its contradictions, generated the greatest accumulation of wealth in human history. From a few hundred years ago when the vast majority of the people of the world lived below the poverty line, barely above subsistence levels, today we have less than 10% doing so and that number is shrinking every year.

Yet now, perhaps because this prosperity is so easily taken for granted, some on the left are again embracing socialist ideas and irrationally high tax rates. What drives this thinking? One problem is “capitalism,” in practice, does indeed provide many points for justifiable criticism. It is, to paraphrase Winston Churchill, the worst of all systems, except for everything else.

Today’s capitalism has a contradiction that is increasingly hard to ignore: lack of competition in key markets. That’s a problem because competition incentivizes producers to get more efficient and reduce prices for consumers. Without competition, you end up with bloated monopolies that may be highly profitable for the owners, but don’t serve the greater cause of economic growth.

My good friend Jonathan Tepper, with whom I wrote Code Red and Endgame, has an excellent new book on this: The Myth of Capitalism: Monopolies and the Death of Competition. He and co-author Denise Hearn explain why this is a serious problem with world-shaking consequences. I highly recommend the book and today I want to give you a brief taste of it, plus a few more thoughts afterward.



My wife and I were watching Surviving the Cut on Netflix recently. If you have not seen it, I encourage you to go take a look. It is a reality TV show that follows soldiers in various military branches as they attempt to make it into the elite ranks of their respective service. It is incredible to watch these young men pushed to the complete edge of human endurance.

Why do these men do this? Because they believe they are the best in their respective branches, and they want to prove it. I have an amazing respect for men like this. During the second episode they follow members of the Air Force as they try to become members of the Air Force Pararescue. One of the training test involves men having to stay under water for a significant period of time. This is after hours of other training tests and little sleep. One of the men passes out under the water during the training and has to be dragged from the pool. The guy stops breathing and turns blue. Once he finally comes to, his first concern is whether or not he is going to be eliminated from the selection process. Not am I all right, but am I still able to continue enduring incredible physical pain.

Almost instantaneously I thought of the difference between men like this, and the worthless cowards that make up of the majority of our politicians in Washington, DC. These clowns make 6 figures and do not have a job that is 1/1000th as difficult as our special forces. I realized in that moment that I am fundamentally done with most of them, and I am beginning to wonder at what time you will be, too.

Especially when you take this into effect. From my favorite economist, John Mauldin, on the recent fiscal cliff deal.

Pork Barrel #1: Tax Breaks for Offshore Loans. Section 322 of the bill provides an “Extension of the Active Financing Exception to Subpart F.” “Active financing” is a fancy phrase that allows manufacturers and banks to defer taxes when they engage in special types of financial transactions. In short, it rewards firms to loan money to foreigners instead of American companies.

For example, the active-financing exception permits big banks like Morgan Stanley to avoid the 35% corporate tax rate on interest income from money lent overseas. Multinational companies with financing arms, such as Ford and General Electric, will benefit from this exception to lower their tax bills.

The exception is worth a mountain of money to a handful of corporations. It even has its own lobbying coalition – the Active Finance Working Group – which serves as a prime example of how important the 20 or so companies that benefit from the exception consider it.

Pork Barrel #2: Tax Breaks for Offshore Jobs. The fiscal-cliff deal gives huge tax breaks to American companies that sell their products through overseas affiliates.

Called a “pass-through” exemption, this loophole allows American companies to set up a new corporation in a tax haven, like the Cayman Islands, and to sell that new offshore company its valuable patents owned by the US parent company.

The royalties on overseas licensing of that patent that are earned would then be subject tono taxes.

Pork Barrel #3: Luxury Condos for Wall Street. Section 328 of the bill extends tax-exempt financing for the “Liberty Zone,” the area around the former World Trade Center, for another year. This tax break is supposed to help fund reconstruction after 9/11, but some have found that the bonds have mostly helped finance new luxury apartments, not to mention the construction of Goldman Sachs’ new headquarters.

Pork Barrel #4: Boxcars of Free Railroad Money. Section 306 of the fiscal-cliff bill gives a juicy tax credit to railroad companies to provide maintenance on their own lines. This credit costs about $165 million per year and will survive another year.

Pork Barrel #5: Thank you, Hollywood. The fiscal-cliff bill renews “special expensing rules for certain film and television” productions.

Movies and television studios can deduct up to $15 million of their costs if more than three-fourths of a project’s production takes place in the United States. The incentive will cost an estimated $266 million in 2013.

Pork Barrel #6: Tax Breaks for Hedge funds and Private Equity. The mainstream media characterized Mitt Romney as an evil, job-killing private-equity pirate and loudly criticized the favorable tax treatment -called “carried interest” – that he enjoyed on his Bain Capital profits.

The bottom line is that hedge fund and private-equity moguls will continue to be taxed relatively lightly after the new fiscal cliff legislation.

The profits from investing other people’s money – AKA carried interest – will continue to be taxed as long-term capital gains for hedge fund and private-equity managers.

Pork Barrel #7: The Answer, My Friend, Is Blowing in the Wind. It is no secret that the Obama White House is very friendly toward the green-energy industry, so it should not surprise you to learn that there is a big tax credit for the wind power industry. The fiscal-cliff deal gives wind producers a 2.2-cent tax credit for every kilowatt hour they generate in their first 10 years of operation. In broad terms, this credit is worth about $1 million for every large wind turbine.

Those are just the most egregious pork recipients, but the list is a lot longer and includes:

  • Mine rescue team training credit (Sec. 45N)
  • Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (Sec. 168(e))
  • Election to expense mine safety equipment (Sec. 179E)
  • Temporary increase in limit on cover-over of rum excise taxes to Puerto Rico and the Virgin Islands (Sec. 7652(f)); and
  • American Samoa economic development credit (Section 119 of the Tax Relief and Health Care Act of 2006, P.L. 109-432, as modified).

These giveaways of taxpayer money make my blood boil, as they should for you too. We’re at the endgame of the government’s wasteful spending, and they have yet to address it. Washington’s debts are going to explode and crush our government; they’re also going to distort the free markets for years to come. [My emphasis added]

I see nothing wrong with most of these projects and support them. Who isn’t for mine safety? And expensing of development costs makes sense. I am all for fixing railroad lines. But why on tax-payer money? Why isn’t my business given special tax treatment? Or yours? Aren’t the jobs I create valuable jobs? At what point do we stop subsidizing income for those who are politically connected, and leave the rest of us to catch as catch can?

This, by the way, is the bill that Rep. Graves failed to vote on. I called his office after the vote and asked why he missed it. I was told the Congressman was really sorry and doesn’t like to miss votes. I’m sorry, I send you there to vote on this crap, preferably AGAINST it. Too much to ask, I guess. It does make my blood boil, especially when you contrast what these individuals continue to do with what our elite servicemen do on a daily basis. An Air Force Pararescueman is expected to stay awake for days during training sometimes getting only an hour or two sleep a night, but it’s too much trouble for my congressman to make sure he votes on important legislation at 2 AM (or whatever time that vote happened, I know it was early in the morning.)

The good news, I think, is that America may be starting to get tired of it. A recent Rasmussen poll showed that only 32% of people think their member of Congress deserves reelection. Usually, in polling, people often have a significant dislike of congress, but still think their member of Congress is just fine. I was this naive a couple years ago.

Yes, Congressman Graves, I’m talking about you. I’m done. 

I was pretty quiet about this last year. I did vote against Graves in the primary, and I fully intend to do so in 2014. I still voted for him in the general, but I no longer defend him, to anyone. As far as I’m concerned, he is just another politician like the rest of them. The only positive thing I think he is capable of doing is ensuring my second amendment rights. That’s it, I have no confidence that he will represent anything of principle. As for Roy Blunt, who by the way, has pretty much the same rating as Graves on the FreedomWorks Key Votes, I am completely done with him in both the primary in 2016 and the general election. We only need to hold one body of congress from the socialist-democrat-communist horde.

I’ll leave you with this closing thought from the conclusion of George Friedman’s book The Next Decade. 

I genuinely believe that the United States is far more powerful than most people think. Its problems are real but trivial compared to the extent of its power. I am also genuinely frightened, not about America’s survival, but about the ability of the United States to keep the republic by its founders. The demands and temptations of empire can easily destroy institutions already besieged by a public that has lost both civility and perspective, and by politicians who are capable of neither the exercise of power nor the pursuit of moral ends.

Four things are needed. First, a nation that has an unsentimental understanding of the situation it is in. Second, leaders who are prepared to bare the burden of reconciling that reality with American values. Third, presidents who understand power and principles and know the place of each. But above all, what is needed is a mature American public that recognizes what is at stake and how little time there is to develop the culture and institutions needed to manage the republic cast in an imperial role. Without this, nothing else is possible. The situation is far from hopeless, but it requires an enormous act of will for the country to grow up.

I love John Mauldin. He is probably one of the smartest economic minds alive today. If you like economics I suggest you subscribe to his newsletter at Mauldin is brilliant because he is capable of synthesizing a large amount of theory, statistics, and research into a cohesive whole. He was one of two economists to call the collapse of 2008 months before anyone else (while all the “experts” were convinced there was no top to the market.)

In his newsletter from July 23, 2012 Mauldin shared the Hoisington Quarterly Review. Two paragraphs that you must read if you don’t have the time to check out the whole thing:

“Three recent academic studies, though they differ in purpose and scope, all reach the conclusion that EXTREMELY HIGH LEVELS OF GOVERNMENTAL INDEBTEDNESS DIMINISH ECONOMIC GROWTH. In other words, DEFICIT SPENDING SHOULD NOT BE CALLED “STIMULUS” as is the overwhelming tendency by the media and many economic writers. While government spending may have been linked to the concept of economic stimulus in distant periods, such an assertion is unwarranted, and blatantly wrong in present circumstances. While officials argue that governmental action is required for political reasons and public anxiety, governments would be better off to admit that traditional tools only serve to compound existing problems.” 

“Reinhart, Reinhart and Rogoff dealt with the idiosyncrasies of countries of different sizes and their abilities to engage in different policy actions (such as devaluations and subsequent inflation) by limiting their samples to advanced countries. In the second study “Government Size and Growth”, Bergh and Henrekson found that to the extent there are contradictory findings of the relationship between the size of government and economic growth they are explained by variations in definitions and the countries studied. The Swedish economists focused their study on the relationship in rich countries by measuring government size as either total taxes or total expenditures relative to GDP. Using a very sophisticated econometric approach under this criterion, they revealed a consistent pattern showing government size has a significant negative correlation with economic growth. Their results indicate “an increase in government size by ten percentage points is associated with a 0.5% to 1% lower annual growth rate.”

Dear politicians and Obama supporters, read the above two paragraphs until you actually understand them.