A thought on the US stock market

If I had to make a guess I would say that with the huge amount of US debt and the governments dependency on companies stocks must go up and common workers real incomes go down.

That’s because the debt is huge and must be paid by companies and common citizens because government members produce no economic goods and are the biggest consumer. It’s easy to make common citizens pay, the government either taxes them or prints money. Many have no idea that by printing money their savings are getting diluted and they are therefore getting poorer. It is worthwhile to read what Warren Buffett thinks of inflation:

The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislature. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation or pays no income taxes during years of 5 percent inflation. Either way, she is ‘taxed’ in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 120 percent income tax but doesn’t seem to notice that 5 percent inflation is the economic equivalent. — Warren Buffett

Common citizens mostly think taxes are the problem. In either case by printing or taxing or a combination of both they are transferring money to the government. Monetary and price inflation is the probable outcome and people get poorer because they hold less money in relation to the total amount. That said, the long term situation is not healthy, and the government should cut their expenses drastically in order to reduce their ever growing costs that just accumulates debt and takes a toll on the whole economy.

For the case of companies, they are also penalized by the printing of money (monetary inflation, not to be confused with price inflation). But the government can not suffocate companies via taxes because otherwise they will receive less by choking their total profits and risks having companies gone out of the country and establishing themselves in friendlier tax regimes or keeping their cash outside. Ensco, Rowan and Nalco Holdings, three companies I’ve bought moved to the UK, due to that I pay no taxes on the dividends received anymore. Also many of the companies I have maintain a huge cash hoard outside and if taxes get heavier they will try to make even more business outside or move altogether. Unfortunately US citizens cannot hide anywhere in the world because as long as they are US citizens they have to pay taxes to the USA and to the country they live too (double tax). That’s why some persons make the extreme choice to adopt another nationality. That has not happened yet much but what has drastically fallen is the immigration to the USA. Fewer immigrants is also a reason why the housing market took such a long time to recover. Unlike previous housing crises immigrants have not strongly supported the housing market this time. Back to companies: the government does everything possible to create an environment where companies are able to pay them well. The best environment is when they are internationally competitive and have big benefits. At least, like that, companies keep up with inflation and have decent profits from which the government and stock holders get benefited.

In simple words, money is transferred to the government or the benefited companies from common workers. So a good place to keep money is invested, better not too much cash due to the inflationary risk associated with the government debt; low interest rates; and treasury bonds bubble. That combined with the quality and strong balance sheet of US companies makes me think they have still a lot of potential to keep growing.

Risk is that US companies lose competitiveness. In many cases international companies are catching up, but in several sectors US companies are still top class, so a good investment choice should help.


About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at www.kuchita.com/view/sumo.php or you may learn more about me and my family by following the link "Author's site" from the menu above.
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5 Responses to A thought on the US stock market

  1. Olav says:

    Inflation is far worse than taxation and not only because it functions for most people as an “intangible and invisible” tax.

    Due to the Ricardo-effect (i.e., prices do not instantly adjust to additional supply of money, but only by individuals bidding up prices with this new money), wealth is transferred from one part of the society to another, and not just the government benefits. Everyone that buys goods and services with the new money, before prices and incomes have risen to reflect the newly injected money, benefits from this process. Simply put, the individuals and companies most related to government expenditure benefit at the expense of the rest of society.

    Also, inflation heavily distorts the relative prices in an economy. Prices don’t rise evenly. Due to inflation some sectors expand unjustly due to the increased monetary demand for their products. Nominal profits increase in some sectors of the economy leading to an investment boom and eventually the buildup of malinvestment. However, true demand has not changed. When relative prices are once again restored as dictated by true consumer demand, many investment projects that appeared profitable are now no longer profitable.

  2. jrv says:

    Thanks Olav, Great comment, it’s like hearing it directly from L. Von Mises :).

  3. Peter says:

    AWESOME!! I appreciate it… The content is AMAZING!! And yes I do agree with you in all aspects you mentioned over here….. For the growth better investment is required beside the BRAIN!!

  4. Lysle says:

    Thanks! I enjoyed this article. Inflation makes my blood boil for all the reasons you listed. Sometimes the topic feels like this: Kids do not know about it, because ties between tax and inflation are not made in school. Young people do not care to listen, the middle aged are too busy, and the old are too set in their minds in their understanding and opinions. It seems strongly tied to the increasing middle class gap, which the rich and poor alike should be concerned about because of what it means for today and tomorrow, but they don’t seem to be. When I was young my dad told me that history repeats itself: societies go through cycles of manipulation and revolution. I cringe when I think about topics like inflation and the increasing weath gap because they indicate to me that he might be correct.

  5. jrv says:

    Hi Lysle ! I think your father was right, it’s one of the reasons why I like studying history, in order to understand better current times. I also agree with what you say that old people are too set in their minds. It’s difficult to find adults with a flexible mind. That’s and advantage of being young, you can learn and shape easily your head and way of thinking.

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