MONEY GOES WHERE IT'S TREATED BEST

     Money is difficult to control. It is one of the purest factors in our human existence. The more you attempt to force it or control it, the more it rebels against you, normally in equal and opposite reactions. The more governments and self-appointed intellectuals attempt to control money, new technology and the parity enabled by capitalism now enable capital to quickly flow to where it's treated best.
     Historically, this rule has applied to the flow of investments between stocks and bonds. Amateur investors and journalists have always made absolute assumptions about how over-valued, or under-valued, stock prices were compared to historical valuations, e.g. Price-to-Earnings multiples (P/E). Yet, the P/E multiple is only appropriate as a relative indicator to current interest rates (Bonds). If bond rates are low, as still now, then professional investors will "pay up" for stock dividends and take on more risk for growth (a rising stock price causes the dividend rate to shrink closer to the lower interest rates on safer bonds). But as interest rates rise, as they eventually will, stocks' relative valuation will decrease because investors can then earn higher risk-free interest.              Therefore, the only valuation ratios which really matter are the ones in relation to the alternatives. Today people and capital have options, and when oppressive governments and oligopolies attempt to manipulate the economics, capital will seek freer and better treatment.
     The Securities and Exchange Commission (SEC) cannot seem to understand why no one wants to run a public company anymore. The number of public companies in the U.S. has fallen from 8,000 in 1997 to fewer than 4,000 today, a 50% drop in the last two decades! I bet you had no idea. In 2016, private companies raised nearly 5x the equity capital as in Initial Public Offerings (IPO's) for public companies. Oppressive regulations, bureaucracy, and never-ending lawsuits for public companies repel capital (money).             Our initial study for taking our small investment company public a few years ago estimated an annual expense increase of nearly $4 million per year in compliance, personnel, reporting, and legal line items. Interestingly, while public companies have been cut in half, the word count in SEC public filings have doubled over these two decades. All we are doing is paying more attorneys to file more paperwork instead of creating jobs for American citizens.  Today, staying private makes much more sense.
     TNB Bank recently created a novel business model and received approval from Connecticut bank regulators. But, they cannot seem to get the Federal Reserve Bank (the Fed) to open their master account in order to begin depositing their customers' balances at the current Fed deposit rate of 1.95%. Why? TNB plans to pay its customers the majority of this 1.95%, while Bank America, Citi, and JP Morgan are only paying their savings account customers 0.1% (95% less). The banks are making billions on the difference between what the Fed pays them and what they pay us. Remember, the Fed, the SEC, and all of the "banks too big to fail" swap employees and directors every year to ensure that everyone stays on the same page. But, don't worry, the money will find a way.
     California's State Legislature recently passed a law, now sitting on Governor Jerry Brown's desk for his signature, requiring California companies to appoint one woman to its board of directors, requiring a five-member board to have two women, and mandating that a six-member board must include three women. Extra compliance reporting has been added with a $100,000 fine for failing to file, plus another $100,000 fine for failure to meet the quota, and another $300,000 fine for any subsequent violations. The great part of living in America is that at this very moment one of our JAM Views post readers is saying, "It's about time!" and another post reader is yelling, "Has everyone lost their minds?!" For the tricky companies listing their state of incorporation as Delaware, the legislators thought ahead and identified any company with "principal executive offices" in California. But, to make it easier to comply, they defined a female as "an individual who self-identifies her gender as a woman, without regard to the individual's designated sex at birth." I swear I do not make this stuff up! Nevada and Arizona Chamber of Commerces have canceled all employee vacations until further notice, because they are about to be very busy! Follow the money.
     Finally this week, let's not forget about Bitcoin. I am not smart enough to know if it's a good investment now, or if it will even be around in five years, but I do know that Bitcoin is the pure manifestation of money seeking freedom, going where it's treated best. Bitcoin is a currency which is not controlled by any government or single entity, and the blockchain platform further decentralizes accountability, or lack thereof. This is terrifying to governments and the elites, as everything is about the money. Let's reiterate this: Everything is about the money. Generations ago, Rothschild summed it up by instructing his sons that he did not care which governments controlled which countries. He only wanted to ensure they controlled the money. Whether Bitcoin is the big success, or one of the other cryptocurrencies, or possibly a confluence of all of them or something else entirely, all money will eventually be democratized. It is a universe inevitability, as money goes where it is treated best. Bitcoin is likely just the first "one small step for mankind."
     A nation's currency rises because investors want to take advantage of higher interest rates and better investments (better treatment) in that nation, and investors believe that the risk-reward tradeoff for holding that currency makes sense. Conversely, Venezuela, Argentina, Turkey, and Iran can offer uber-high interest rates but the investors don't know if the government will seize their investments tomorrow, or simply decide not to pay them back. Therefore, those currencies keep going down and will continue their descent until someone's money believes the return is worth the risk.
     Money is like a beautiful woman. You must respect her and never try to artificially control her. You must add value to her, and you must give her freedom. Otherwise, you will most assuredly lose her.

"It's a hell of a thing to say you should have seen 13 years ago risks nobody else saw." - Percy Barnevik, ABB

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* As always, thank you to my friends at the Wall street Journal for the economic statistics and updated events.
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