The Long PM’s Short Stock Trade Continues…

It’s looking pretty bad for the buy and hold investor who scoffs at commodity investing and precious metals here as the 1970′s trade continues to march higher — namely go long silver and gold and short stocks… Sadly, this trend has a lot of fundamental reasons for continuing and the short termism of the Federal government is a main cause of such a scary trade.

All in all, I have been light on posting here, mainly because I don’t want to talk myself out of this “trade.” In any event, the merits of holding gold and silver appear valid even wth the end of QE being priced in — gold is up 50% since 2007 while the max drawdown on the metal was much lower than that of the stock market. Additionally, gold serves as a hedge against bad spending and central planning decisions as well as bad corporate governance and business decisions.

Sadly, the economic stimulus we enacted was not pro-proletariat but pro technology executive, pro commodity speculator, pro government employee, and pro vulture capitalist while being very bad for the average American. We pushed the stock market buy and hold trade without changing the corporate governance, fraud, conflict of interest, agency conflict, too big to fail, state sovereignty, or employment picture at all… In other words, we cried wolf and bailed out the rich but really have done zilch for the poor. Expecting fortune 500 companies to save the out of work poor is naive and also out of line with the goal of American corporations which is increasing shareholder value. The drive to increase shareholder value has been boosted by technological advances such as cloud computing which has created an automated supply chain and no need for human employees. Yes, this is the Sky-Net “innovation” bubble where we have outsourced our jobs, but not to China — the jobs are now done by machines on “the cloud.”

In the end, the only way to fix our problems is through a holistic approach which involves taxing companies at different rates based on revenue per employee. The higher the revenue per employee at mega corporations, the higher the tax burden should be as there is a zero sum effect that comes from automation and streamlined business models. Companies that have employees should be taxed less than companies that are fully automated and need zero labor to earn fat profit margins.

I love the venture cap space and also the private equity business, but I also realize that you can downsize and cost cut your way to growth for the overall economy and the push toward higher margins is driving the stock market more than even Bernanke’s unprecedented stimulus. The jobs picture is not just a problem for those who are out of work and it does seem like most of the employed feel the unemployed are simply not fit for survival let alone a job. It is the streamlined business model, the lack of a middle man, the lack of a need for person to person sales, etc… that have brought the job market and as a result the housing market to its knees. Too much priority is given to letting rich people at fortune 500 companies grow their profit margins and CEO pay while zero consideration is given to the ground level worker.

When Warren Buffett himself urges for higher tax rates and Bill Gross is calling for a higher corporate tax rate, true “liberals” should be listening. It seems, however, that current policies are neither liberal nor stimulative but more than anything embrace a trickle down approach which does not work in combination with a weaker dollar. We can export inflation but in doing so we also export wealth, jobs, and the capital needed to start new businesses. Clearly, supporting the largest companies and asset managers has not helped fuel a recovery for the middle class American.

What needs to change is that the big guns who hire very few workers need to pay their fair share of taxes into the system — IE Gross is correct that corporate taxes should be raised, not lowered. Boosting asset prices without fundamentally changing and leveling the playing field will simply make the situation much worse for the middle class.

One comment

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