My column for Citywire this week is in part based on an interview with Liberum’s excellent strategist Joachim Klements. The column mainly concentrates on the arguments around mean reversion, value investing, and stagflation. But Joachim and I also talked about our favorite topic – the S in ESG, aka Social governance.

Both Joachim and I bang on incessantly about the importance of social investing metrics. My particular focus is on a) encouraging employee satisfaction b) trade union recognition and c) evening up the imbalance between capital and labor as one of the  ‘factors of production’.

Joachim’s focus is more practical than mine and in his social checklist he looks for the following as an investor:

  • Diversity of opinion otherwise known as cognitive diversity. It’s important to note this cannot be reduced to just gender diversity or racially based equal opps policies but is much more all-embracing.
  • Employee turnover. The lower the better, on average
  • Employee health and safety – businesses should strive to zero
  • Cyber security and data breaches – again businesses should strive for zero

I’d endorse these concepts and make a broader assertion. If you are a serious ESG and sustainability-based investor, then you need to take embrace a worker-first agenda. What do I mean by this? It means regarding employees as major stakeholders in your business and treating them as, arguably, your most valuable asset. More practically it means paying valued and trusted employees MORE money.

More generally the relentless growth of capital’s share of the national income – the remorseless increase in profits – needs to be regarded with some caution. Sure, its helped push up share prices, helped along by quantitative easing, but it also created some very obvious inequalities which are in turn powering populist politics which in turn have created greater fragility in the political economy.

None of this works to the favor of those of us who believe in capitalism. I’m much less concerned about the issues of wealth and income inequality than some, but even I tend to accept that growing inequality has two very obvious implications: rising political volatility and depressed consumer demand.

The latter point needs explaining. If you have a lopsided distribution of the income and wealth with a smaller number harboring ever greater wealth and income and a larger number having very little, you end with a savings mismatch. The wealthy tend to save vast quantities while the poorer working classes and lower-middle classes have little or no savings.

I usually don’t have much time for Thomas Piketty and has detailed musings on inequality but it is worth checking out a long old essay called Long Love Participatory Socialism which makes the claim that a new kind of socialism can emerge from the wreckage of the failed communist experiment. I don’t buy his analysis because its not clear why his shiny new socialism will work when all the other versions have miserably failed.

Where he’s on stronger ground is resurrecting an idea that Gordon Brown tried – and failed. His idea is enable greater circulation of power and ownership. Here’s Piketty’s suggestion:

“[a] ….proactive solution in the form of a minimum inheritance for all, which could be on the order of 120,000 euros (about 60% of average wealth per adult in France today) or $180,000 (about 60% of the average wealth per adult in the United States today) paid out at the age of 25. Such an inheritance for all would represent an annual expenditure of around 5% of national income, which could be financed by a mixture of an annual progressive property tax (on real estate, financial, and professional assets, net of debts) and a progressive inheritance tax. What I have in mind is that this minimum inheritance for all (which can also be referred to as a “universal capital endowment”) should be financed by a combination of annual wealth taxes and inheritance taxes and would constitute a relatively small part of total public expenditure”.

I think the quantum of wealth here is totally unrealistic, but the idea of giving everyone in society enough capital to get by and buy a home and begin to fund training is not a bad idea. Brown had a minimal stab at it with his child trust fund idea.

As investors we should embrace ideas that do implement sensible, affordable redistribution of wealth to a wider pool of citizens – for purely selfish, practical reasons. If more and more money accumulates in the offshore bank accounts of the very wealthy, we’re in effect deflating the real economy by withdrawing funds and putting into the world of financial capital. If some of that money was to be redistributed then we’d all benefit from increased consumer spending and increased GDP growth.

Liberum’s Klements puts it well:

“We know empirically that people with higher income have higher savings ratios. In the United States, the top 10% of the country by income saves about 21.1% of its income, while the bottom 50% have a savings rate of just 1.5%. That is a large difference and this difference increases as income inequality increases. If the top 10% have higher incomes, their savings rates increase as well. The research estimates that the top 10% by income have increased their savings to the tune of 3% to 3.5% of US national income since the 1970s as more and more income has been concentrated in their bank accounts and investment portfolios. And this increase in inequality neatly explains why there is a ‘savings glut’ since the 1970s and why the natural real rate of interest has declined so much….Going forward, this also means that as long as income inequality remains high, the natural real rate of interest should not rise. It requires a substantial ‘levelling up’ and reduction in income inequality to push the natural real rate of interest up significantly in the long run. And I for one, don’t see this kind of reduction of income inequality happening in the next couple of years.”

Macquarie’s Viktor Shvets puts it another way in a Linked Post HERE:

Disagreeing with Klements on the one narrow point that there are no excess savings,  Shvets says “there is plenty of evidence that GFC and COVID have massively raised inequalities. Today, in most countries, the top 1% own 25%-40% of net assets and top 10% as much as 75%. However, bottom 50%-60% own absolutely nothing, but must be encouraged to continue borrowing and consuming. Essentially, assets of the top few are represented by the liabilities of the bottom 60%. It is highly disinflationary – rates must keep falling with CBs underwriting this inverted pyramid as the top accumulates assets at a faster pace than they can consume them.”.

If even the IMF, the paragon of the Washington Consensus accepts that increasing inequality is a problem, then I think we investors have to accept that the current model isn’t quite working. None of these points above are designed to make moralistic claims about the rights and wrongs of inequality, which as I’ve said before I think is an educated middle class hobbyhorse compared to the wider interest in social mobility.

I make these observations because the greater redistribution of wealth might 1) boost GDO growth b) drain the disinflationary pool of capital and c) benefit us as investors. Also, more specifically businesses that focused more on employee welfare and improving employee pay might end up being a better long-term investment proposition.

The impossible carbon tax sell

John Halpin of the US-based Liberal Patriot website has an excellent piece today on why polling says carbon pricing is a nonstarter. The analysis is based on TLP’s ongoing examination of vital multinational survey data conducted with more than 22,000 respondents globally by YouGov and Global Progress ahead of the G20 summit in Rome and the COP26 climate negotiations in Glasgow.

The survey presented respondents with two statements and asked them which one comes closest to their own view, even if they don’t fully agree with either one:

  • We should tax carbon so those industries and consumers who pollute the environment most are forced to pay for this.


  • We should provide subsidies and incentives to business and consumers to make it cheaper and easier to provide and use environmentally friendly goods and services.

Here’s the killer stat:

“By a 55 percent to 34 percent margin overall, citizens across these 20 countries prefer subsidies and incentives for environmentally friendly goods and services over carbon taxes for polluters. As seen below, only those citizens globally who describe their political ideology as “very left wing” choose carbon taxation as their preferred approach to global warming. Pluralities or majorities of all other ideological groups from “fairly left wing” to “very right wing” favour clean energy subsidies and incentives when forced to choose.”

So, here’s the challenge. A wide consensus of elite opinion – including me – says carbon taxes are a great idea. But a clear majority of ordinary people are adamantly opposed to the idea. I’ve mentioned before the political opposition to carbon taxes but even I was stunned by these numbers. Carbon taxes are, currently, politically impossible. No sensible politician will try and introduce a comprehensive carbon tax though that won’t stop the European Union from trying.

This suggests that a whole bunch of disruptive technologies based around the revenues from a carbon tax like carbon sequestration will be challenging in the extreme. Instead, they’ll have to get their funding mostly from the government which also means higher taxes.