Schmidt vs. Thiel – Silicon Valley Showdown

Eric Schmidt (Google) and Peter Thiel (Facebook, PayPal, Clarium) engaged in a lively debate at Fortune’s Brainstorm Tech conference last week. For a full transcript follow this link.

A Renaissance view of Deleveraging – Part 2

 

Looking Forward

People are habitually guided by the rear-view mirror and, for the most part, by the vistas immediately behind them.

– Warren Buffett in Fortune, December 2001

Politicians are afraid to make the necessary decisions to ensure the long-term economic well-being of our country because of the political fallout that may occur; it is wishful thinking to believe that we will magically grow out of our debt like we have been able to in our not so distant past.  They are akin to CEO’s of publicly traded companies that make terrible decisions for the profitability of the company over the next thirty years because their bonuses are based on quarterly results.  This is a call to action.  The economy should be viewed as a business that belongs to every citizen and policies should be made in ways that will help that business grow sustainably. Policies that cause this business to stagnate should be halted.   Similar to the growth that pulled the world out of the dark ages, we need our own renaissance.  Below are a few ideas.

One policy that would promote growth would be a complete overhaul of the tax code.  It is interesting that the IRS defines “wealthy” differently than the rest of the world.  Usually when people discuss someone that is wealthy it is based on that individuals’ total net worth.  Rarely is there a mention of how much an individual made in one particular year or quarter.  Moreover, some of the richest people in the world amass fortunes but pay themselves very small salaries.  Some even donate these mega fortunes upon their death skirting the IRS altogether.  Take for instance the low incomes of Mark Zuckerburg, Warren Buffett and Bill Gates relative to their Net Worth.  Each of these individuals have pledged their Net Worth upon death to the Gate’s Foundation skirting taxation entirely.  It would seem a pro-growth tax code would be one that minimized annual taxation and maximized the taxation on wealth amassed during one’s life.  Allowing business owners and entrepreneurs to utilize their assets during their careers would be a pro-growth measure.  Similarly, taxing large fortunes that now go completely untaxed and are often donated in a way that helps foreign countries would be a pro-growth initiative for the United States.  Such a tax policy when coupled with a consumption tax would spur investment and savings and would have the added benefit that the government would be an equity partner in the growth and ingenuity of its citizens versus its current role where it is viewed by many as one of the biggest road blocks in business.

Policy makers should also take steps to reduce regulation and red tape; regulation not only slows business it adds to the fixed costs in starting and maintaining a business.  Reducing barriers in business should be the goal.  Tax incentives in the form of payroll reductions should be given to businesses that are seen as high growth such as information technology, nanotechnology, clean fuel, bio technology, etc.  It is possible that innovation is highly mis-valued by politicians.   As recently as 1995-2000 technology turned deficits into surpluses.  Technology may also offer economic growth and qualitative changes that are yet to be fathomed.  It is highly possible that even though we live in the age of technology advancement has not been at the pace it could be.  The legendary technology investor Peter Thiel’s Founders Fund (early investor in Facebook) has a tagline of “We wanted flying cars, instead we got 140 characters.”  This tagline is designed to show the complete disconnect of what people once believed could be the trajectory of technological advancement and what actually became reality (140 characters describing the character limits in twitter).  Perhaps we don’t have too much debt but rather not enough technological advancement.  It often seems that politicians work ferociously to maintain the status quo.  Instead policies should be made to stir up the status quo; indeed disruptive technologies need policies that promote disruption. 

In the process of reducing government road blocks to business, policy makers would reduce the size of government and reduce the budget deficit.  While this will be a good start, further cuts are critical.  The Military, administrative departments, and entitlement benefits all need to be scrutinized.  Deep cuts are necessary but the question is, where will they come from?  Nobody wants cuts. Either to what has been promised or to programs they take advantage of.  Discussions about where to make cuts are highly sensitive and even politicians, who are paid to make these tough decisions are not having an open dialog about how to make the situation sustainable.  So I pose this question to politicians and their constituents, both of whom have interest in the long-term well-being of our nation:  How could our current fiscal policies particularly regarding Military, Government Programs, and Entitlement Benefits be reformed to promote sustainable growth?

Investible Themes

We now live in an era where policy makers directly impact investment returns. Sovereign debt in developed economies looks to be very questionable when one takes into account the rate or return for the risk being taken. Globally, interest rates on the debt of developed economies would give the appearance that these securities hold little risk. My analysis above shows how the United States will have a very difficult time making the necessary policy changes to avoid default on its debt. Other developed economies appear to be in a similar situation with many even in a far worse predicament. Investors should weight their holdings of developed country debt proportionately to the level of sustainable actions being taken by policy makers. Similarly, on a longer-term basis, the credit spreads between the debt of emerging markets and developed economies appears to be too wide and we would predict these spreads to narrow overtime without sustainable policy response; as the market comes to value risk more appropriately emerging market credit will be priced with a lower risk premium than it does today and developed economies with a higher premium. When it comes to a ten-year treasury bill yielding 1.58%, and policies that promote the status quo, we can only say buyer beware.

White House proposed budget (pg 210)