In the three weeks following the Thanksgiving holiday in US, investors were subjected to a rough ride.
Some might call it frustrating. Others maddening. And still others don’t bother themselves to fret over the vagaries of near-term oscillations in stocks, either because they’re Warren Buffett (i.e., too rich to care about 10% here or there, but also too wise to care about ephemeral swings in a mercurial asset) or because they, like the majority of Americans, don’t own any stocks to speak of. Stocks are an asset that’s overwhelmingly concentrated in the hands of a tiny fraction of society.
A reader recently suggested that latter point (about the concentration of equities) has become an “interminable” discussion. In all likelihood, almost all readers are, to a greater or lesser extent, weary of it. Let me explain why we need to keep having it.
If you’re an investor, that probably means you’re a semblance of financially stable, the growing presence of young, debt-saddled speculators notwithstanding. You probably entertain the equities concentration discussion on the unwitting belief that doing so absolves you of the “sins” associated with being capital in an economic system where nearly everyone is labor.
You too are labor, you just don’t realize it, but let’s pretend you’re capital. Reading another article lamenting unequal equity concentration is like saying a Hail Mary or going to Confession. Once you do it, you’re free to go right back to enjoying your position at the top of the societal pyramid, free from guilt.
Your tithes paid, you can indulge in the usual daily condescension, unconsciously stereotyping every African American twentysomething who pulls up next to you at a traffic light playing music you can’t relate to (“God, please just turn green!”), debating how much is too much to give the Hispanic woman who details your SUV at the full-service carwash (“I mean, all I’ve got is a twenty. Obviously I can’t give her a twenty.”), writing off the fortysomething wearing a Trump hat in Walmart as irredeemable despite not knowing the first thing about him (“There’s the problem, right there.) and berating call center employees while simultaneously giving them backhanded compliments (“You said your name is Kimberly, right? Ok, well thanks for working on a Saturday night, Kimberly, and I know this isn’t your fault personally, but somebody has to explain to me why my cable was pixelated for seven minutes this afternoon. You do know Michigan was playing, right?).
What that kind of behavior misses is the fact that, increasingly, nearly all of us are destined for economic irrelevance. Even if we die before the upper-middle class becomes just as irrelevant as the poor, our children will almost certainly live in a world where the societal pyramid crumbles and gives way to a bifurcation in which a few thousand people have everything, and the rest of humanity has absolutely nothing, relatively speaking. (And yes, I’m aware of the paradox inherent in using “relatively” with “absolutely” in the same sentence in reference to the same thing. That’s one of the many joys of reading my longer articles. Paradoxes, oxymorons, double entendres and self-deprecation hide in plain sight.)
No one wants to admit the upper-middle class and, over time, even the “merely rich,” are destined for irrelevance. There has to be a societal pyramid. In a totally bifurcated society, the term “upward mobility” has virtually no meaning. You can aspire, but your aspirations will be confined to higher levels of relative poverty. Yesteryear’s upper-middle class status symbols will lose meaning as indicators of wealth, while real status symbols will be unattainable or, at the least, completely impractical, even for the “merely rich.” The discerning among you will immediately note that in many respects, we already live in such a society.
The equity concentration discussion is a microcosm of these dynamics. Writing it off as “interminable” is just a psychologically convenient way to avoid the larger discussion about mass irrelevance in the face of exponential wealth creation. Better to skirt that uncomfortable reality by suggesting that debates about various manifestations of the exponential process that creates it are overused, hyperbolic talking points.
Imagine someone with a $1.5 million portfolio, comprised of retirement savings and, say, a half-million in actively-traded securities. That person likely counts himself (or herself) as a rich trader. In some respects, that’s accurate, but in the context of this discussion, it’s wholly laughable. Of what real consequence is that person’s portfolio? The top line sum is itself a pittance, never mind the actively-traded crumbs.
I know dozens of such people. And while some are humble and outwardly describe themselves as “minnows,” (as opposed to whales) they fail to connect the only dots that really matter. Without exception, they’re oblivious to the fact that due to the skewed distribution of financial assets, gains don’t accrue in linear fashion, but rather exponentially. They scoff at the notion that they don’t understand such a simple concept, but understanding the math and internalizing the ramifications are two entirely different things.
Even if you make a leveraged bet with the entirety of a $1.5 million portfolio and it plays out to perfection, your gains would represent but a tiny fraction of the minute-by-minute swings in the on-paper fortunes of the world’s richest people. The concentration is so skewed that even the bravest and the luckiest of traders could never hope to vault into the ranks of the elite. For all intents and purposes, such a leap is a mathematical impossibility.
Crucially (and this can’t be emphasized enough) that becomes more true with each passing day. Every day that the distribution remains skewed is another opportunity for it to become even more skewed in the event the assets in question increase in value. With each such turn, the prospects of altering the dynamics become more and more remote. How many meme stock-esque lottery tickets does someone with $50,000 to bet have to buy, and subsequently hit, to become Elon Musk? What will that number be five years from now? And so on.
There’s perhaps no more poignant example of this than the juxtaposition between David Einhorn and Musk. The two men have, of course, engaged in a petty, public war of words for years. When the drama started, David was Goliath. Fast forward a few years and their roles have completely reversed. In fact, the juxtaposition between the two men is so stark as to render comparisons nonsensical. One has $3 billion on a good day and likes to play poker. The other could lose $3 billion in his couch cushions and enjoys building spaceships.
There are innumerable ways to illustrate inequalities in the distribution of financial assets, and particularly stocks. One can spend days slicing and dicing the numbers in order to point out all manner of disparities along demographic lines (see this article from The New York Times, for example). I’ve subjected readers to countless such charts over the years.
Here, I’ll make the point using just one chart. The figure (below) is extremely simple. Anyone can understand it, despite the concept it illustrates being hard to fathom.
The middle class in America owns essentially no stocks, relatively speaking. The top 1%’s share is up to 54%, a record high. Note that the “middle” class goes all the way up to the 89th%ile.
My point in all of the above is that within 20 years (and perhaps much sooner), visuals depicting the share of financial assets owned by several dozen people versus the share owned by everyone else (from the David Einhorns of the world all the way down what used to be a pyramid) will look the same, or, in all likelihood, much more skewed than a chart showing the disparity between the 1% and the middle class in America today.
Unfortunately, this dynamic will continue because it has to. It’s assured. It’s mathematically ordained. Legislation can’t stop it, nor can the most draconian wealth tax. The only way to short-circuit it is to dramatically alter the distribution of assets, or else create new ones, like cryptocurrencies, but the concentration discussion is (at least) as relevant to some cryptocurrencies as it is to traditional assets.
How should we conceptualize of ourselves given the above? Well, that’s a question I can’t answer. Everyone who’s ever made any real money knows “it’s never enough,” so to speak, but now even the most fortunate among us are left to ponder the surreal prospect that “it’s” not just “not enough,” it’s actually nothing. And it won’t ever be anything, because for every $100,000 you make, a god makes $5 billion. And that very disparity means the imbalance will be even larger on the next turn. And so on, and so forth until eventually, you, me and David Einhorn have more in common with the poor than we do with the rich. At least when it comes to where we show up on charts showing the distribution of wealth.
Of course, that doesn’t make you and I poor and it doesn’t make Einhorn middle class. But in a perfect world (i.e., if there’s a silver lining), our shared irrelevance will compel us to realize that social hierarchies and class structures were always artificial anyway. It wouldn’t be the worst thing in the world if the pyramid collapses.