The U.S. became the world’s richest country, not because of government intervention, benevolent CEOs seeking to serve all stakeholders, or by investors allocating capital on the basis of what they believe is right. Nope, America became great because of free-market capitalism, or at least the closest thing to it.
Today, American capitalism is being bastardized. You have a central bank that believes its job is to prevent any and every economic downturn at any cost. During the COVID-crash this spring, the Fed started buying private assets. They started with corporate bonds including high-yield debt. It is illegal for the Fed to buy either, but by way of a special purpose entity seeded with capital from the Treasury and leveraged 10 to 1, the Fed was able to do just that.
“Hooray,” some may say, “it was an emergency.” We say, watch what happens in the next downturn. We would be shocked if the Fed doesn’t again intervene in the corporate bond market. And with Janet Yellen set to become Biden’s new Treasury Secretary, only one-term removed from serving as Chair of the Fed, the Fed may also buy stocks. Yellen has advocated for the Fed to have that authority. In other words, Yellen advocates nationalizing private companies to prevent an economic recession.
The Great Reset and stakeholder capitalism are further bastardizing capitalism. You can read more about the Great Reset here.
But it isn’t just CEOs in Davos who are distorting capitalism. Investors are doing the same. One of the hottest trends in the market this year is ESG investing. ESG ETFs have gathered over $27 billion in assets in 2020.
What is ESG investing and are you missing out if you aren’t investing in ESG?
To answer the last question first, no. ESG stands for environmental, social, and governance. Investors in ESG funds seek to avoid practices they believe are not environmentally friendly or socially responsible. For example, ESG funds may track an index, but leave out all oil and gas companies as well as gun manufacturers. Everyone should be free to choose how they invest their own money, but if your goal is to maximize investment returns, ESG investing targets the wrong indicators. For capitalism to work best, capital should be allocated on the basis of returns measured in dollars not carbon credits or diversity rankings. And Ironically, the more investors allocate capital to ESG firms without regard to return on capital, the higher returns will be to non-ESG firms.
Investors interested in social causes would be better served using the returns from their investments to contribute to their favored charities.
American capitalism would be better served as well. Michael Wursthorn reports in The Wall Street Journal:
Asset managers have launched 31 ESG-related ETFs so far this year, nearly double last year’s sum and bringing the total number of products in the U.S. to more than 100, according to Elisabeth Kashner, director of ETF research at FactSet.
BlackRock Inc. BLK 0.33% has been among the most prolific, recently rolling out ETFs that are based on the S&P 500 and other indexes but exclude companies involved in the fossil-fuel, tobacco and weapons industries. Other asset managers, including Gabelli Funds, plan to introduce additional funds.
Read more here.