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Stewart Cowley: Manchester United 1 – Capitalism 0

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Stewart Cowley: Manchester United 1 – Capitalism 0

There has been a lot written about inequality recently, much of which I don’t understand.

Inequality is a bad thing that has to be eradicated we are told. But my problem with this is that inequality is being confused with happiness.

The pursuit of happiness

For instance, I have a friend who is a Buddhist. She leads a life full of contemplation and reflection without many material possessions but is, by her own admission, 'happy'. She certainly seems to have a grin on her face most of the time.

I, by contrast, am a fund manager which affords me a highly material lifestyle cluttered by possessions, financial assets and I look pretty grumpy most of the time. But, despite it all, I would classify myself as 'happy'.  

If we were to live in our own two-person country the inequality gap between us would be enormous. And yet our national Happiness Index would be stratospheric.

In other words, a materially unequal society per se doesn’t tell us very much about how people feel. In fact inequality has been our main source of entertainment for about 100,000 years – differentiating and being unequal is part of being a human.

It is what propels us most of the time. To rob us of it would be against our human rights. 

Much of the discussion around inequality appears to have been kicked off by the publication of Thomas Pikkety’s book, Capital in the Twenty First Century, which has become an unlikely number one bestseller on Amazon.

I admit to not having read it but I have read several things about it, including interviews with Pikkety. He has collected data going back over many hundreds of years charting the inexorable concentration of wealth into the hands of a powerful elite. This is worth a Nobel Prize, I understand.

But to me all he has done is re-discovered the equation for compound interest and the case for holding investments over the very long-term. Mathematics tells you that if you do this then your wealth will increase exponentially and a gap will open between you and those who don’t or can’t do it.  

Some have extrapolated from Pikkety’s work to say that there is a socialist revolution just around the corner – a sort of societal encampment outside St Paul’s Cathedral, forever. I think the eventual reaction may be somewhat more mundane than that; one day there will be a call for an eye-watering level of inheritance tax that redistributes wealth via the state.

Income tax could become the rallying cry – something that UK Labour leader, Ed Miliband, should pay attention to – but the globally mobile super-rich would merely trip the light fantastic should anyone try to impose it. 

Besides, you can think of the inequality gap as being the result of the growth of debt in society. As the wealth gap has increased so have our debts, both public and private. Karl Marx equated all profits as being the result of someone somewhere in the system paying for them by borrowing.

Closing the gap

The increase in debt is merely the vehicle by which capitalists transfer wealth into their hands.

So if we want to close the financial inequality gap then we need to do several things; 

  1. Both the public and private sector need to stop borrowing and halt the transfer of profits to the wealthy via debt
  2. The returns on investment must be lower than corporate earnings growth
  3. The return for working must be higher than returns on investment  

In other words the world needs a massive pay rise, with a far greater proportion of company profits distributed to the workers and not the investment risk-takers.

The Man Utd model

All companies should look like Manchester United; it makes nearly no money because it gives all its earnings to its workers and invests the rest in renewing the means of production whilst keeping its creditors happy.

Essentially, all financial theory, as we have known it, must be turned upside down to fulfill this new societal model. 

For investors (and by that I mean pension funds and ordinary savers primarily) this is a grim prospect. Interest rates will be below economic growth and even inflation, bond yields ditto and equity markets will grow neither in capital terms nor will there be sufficient dividends to distribute.

Cash will more than likely return less than inflation. All this will be a function of supply and demand – too much capital lying around doing nothing suppresses returns. 

Arguably, something of this sort is going on as we speak. There is a pronounced antipathy towards public borrowing whilst the self-inflicted wound of increasing capital needs on banks globally is reducing both the ability and propensity to lend and borrow.

Workers are increasingly aware of the need to make good the sub-inflation pay awards they have experienced since 2007 whilst there is public distaste for the notion that companies should turn a profit, especially utilities.  

But, to me, these notions, as usual, are going down a track that is 180 degrees away from where we should be going. This is the time that we should be embracing capitalism with all its faults.

Fortunately, there are signs we are gradually dragging ourselves out of the sand; low-grade credit cycles (propelled by companies investing and small institutions lending) have started in the US and UK even as Europe implodes in front of us.

But, having said that, if long-term interest rates in developed markets reached 5% in the next couple of years then bonds will be a 'buy'.

Citywire + rated Stewart Cowley runs the Citywire Selection Old Mutual Global Strategic Bond fund, which has returned 5.6% in the three years to March.

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