He Suggests a Proven Approach to Reduce that Inequality
William
A. Ackman is a billionaire and founder of Pershing Square Holdings, which has
just released unaudited condensed interim financial statements. Included in those statements is a letter by
Ackman, part of which is shown immediately below.
The Current
Environment
I
write this letter at an extraordinary time in the history of the world.
Approaching one million people have died from the effects of the virus, the
global economy is suffering to a degree that was unheard of since the Great
Depression, and we are faced with a greater degree of political uncertainty in
the United States and globally as far back as we can remember. The economic and
health effects of the virus have and will continue to have a disproportionately
negative effect on the poor and disadvantaged in the U.S. and globally. Yet, we
find ourselves optimistic about the companies in our portfolio, which include
quick service restaurant and coffee companies, a hotel management
company/franchisor, a home improvement retailer, two residential mortgage
guarantors, a scientific equipment manufacturer, and a real estate development
company. What explains this dramatic seeming disconnect?
In
sum, we are entering an era in which we expect the dominant, well-capitalized,
great companies that comprise our portfolio to accelerate their growth in
market share and profitability over the long term as they effectively adapt to
the changes wrought by the virus. While many have been puzzled by the stock
market’s resurgence, in our view, it can be best explained by this phenomenon
writ large. Said differently, we have a corporate inequality phenomenon in
addition to an income inequality problem.
The
stock market is comprised of the biggest and strongest companies, and reflects
the present value of what is to come for these businesses. It is not
representative of the entire economy. If there were a stock market index of
private, small businesses, it would likely be down 50% or more. Small business
failures will make the income inequality problem even worse.
If
we are to avoid continued political risk and disharmony which create serious
risks to the sustainability of the capitalist system, we need to find a way for
those left behind to participate to a greater extent in capitalism, broadly
defined. This is an important problem that must be addressed, and it is
incumbent upon all of us, particularly those of us who are the greatest beneficiaries
of the system, to find a potential solution.
Despite
its faults, we are strongly of the view that, while far from perfect,
capitalism is by far the best system for maximizing the size of the economic
pie. One of the principal problems with capitalism, particularly as it has
functioned over the last several decades, however, is that wage growth has not
kept pace with long-term wealth creation, which has disproportionately favored
the wealthy and the upper middle class. This likely can be attributed to the
higher after-tax returns generated by investment assets compared with wage
growth over the same period. Without funds to invest for retirement –
particularly after the housing crash destroyed many Americans’ only other
source of long-term wealth creation – one has almost no hope to build wealth
for retirement, or to give the next generation a head’s start. In sum, the
American Dream has become a disappointment or worse for too many.
If
capitalism continues to leave behind most Americans as the growth in wages has
not come close to the more tax-efficient compound growth that has been achieved
by investing in the stock market, more and more Americans will seek changes,
potentially radical ones, to the current system, or seek an alternative system.
Like those who rent rather than own their homes and thereby have no love lost
for their landlords, Americans that have no ownership in the success of
capitalism, and who are suffering economically, are more motivated to turn
toward Socialism or other alternatives.
One
potential solution to the wealth inequality problem is to create a way for
those with no investment assets to participate in the success of capitalism. We
need a program that makes every American an owner of the compounding growth in
value of corporate America. Compounded returns over time are indeed one of the
great wonders of the world, and every day we wait to address this issue, the
problem looms larger.
There
are a number of potential solutions to this problem. Among them, the government
could establish and fund investment accounts for every child born in America.
The funds could be invested in zero-cost equity index funds, be prohibited from
withdrawal until retirement, and could compound tax free for 65 years. At
historical rates of equity returns of 8% per annum, a $6,750 at birth
retirement account - which would cost $26 billion annually based on the average
number of children born in the U.S. each year - would provide retirement assets
of more than $1 million at age 65.
Alternatively,
or hopefully in addition, corporations could be required to set aside a fixed
percent of salary or wages in a tax-free investment account for all workers
that would also be restricted from withdrawal until retirement, similar to the
approach used by the highly successful and popular Australian superannuation
system, which has created savings of scale for growing generations of its
citizens. Since the superannuation system’s launch in 1991, Australia now has
$2.7 trillion of superannuation assets – nearly twice the country’s GDP.
Remarkably, Australia has created the fourth largest pension system in the
world, in the 53rd most populous nation.
In
addition to helping all Americans build wealth for retirement, mandatory equity
savings accounts for all would encourage greater financial literacy, and, as
importantly, give all Americans the opportunity to participate in the success
of capitalism.
We
are not going to solve our country’s problems in a few short paragraphs, but we
highlight the above problems as they are critically important for the country
to address, and, like Covid-19, they present black-swan-type risks for
investors. These and other issues of global concern, like climate change,
create substantial unresolved risks and uncertainties, and we therefore
continue to remain extremely vigilant, cautious, and selective about our
approach to investing your capital.
We
are extremely grateful for your long-term commitment of capital that has
enabled us to generate the returns for which you are therefore entitled.
Sincerely,
William
A. Ackman
https://pershingsquareholdings.com/wp-content/uploads/2020/08/Pershing-Square-Holdings-Ltd.-June-2020-Interim.pdf
[pages 13 to 15]
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