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Do You Want to Know a Secret? Do You Promise to Re-tell?

Sigma Investment Counselors

July 2, 2012

(This ISN’T the secret, yet.)
My nephew once made the mistake of wearing his University of Michigan colors to the annual “grudge match” college football classic in Columbus Ohio, which pits the Wolverines against the Buckeyes of Ohio State. He is a large man, but he acknowledged that he felt quite vulnerable with the taunts and varying acts of aggression against him while wearing his “maize and blue.”

The advice in these matters, of course, is to keep quiet and not draw attention to ones-self. That advice also holds for capitalists/entrepreneurs, in a roundabout way.

How so? Let me explain.

I have been puzzled by those who puzzle over the economic malaise of the past three years. It seems obvious to me. The entrepreneurial class has been under attack by the “99 Percenters”, the media and political elites. The attacks come under the guise of “income inequality.” It is true that successful entrepreneurs tend to earn incomes above the median. Keep something else in mind before I go further though – not all entrepreneurs are successful. Those who fail often see a substantial diminishment of assets and typically end up with very average incomes.

So, on to that outsized income. What becomes of it? Does it translate into outsized consumption? Not in my experience as an investment advisor to mostly self-made successful people. They live well, but they are not conspicuous consumers. They tend to save a significant portion of their income – both for investing in their businesses, and for their eventual retirement. Their retirement income is projected as merely a continuation of their lifestyles afforded while working.

So, why the animosity? To that, I do not know the answer. What I can address is the fears they have, and how they address them. As their investment counselor, they confide in me and I keep those deliberations confidential.

They are alarmed by the attacks on their success. Clearly, they are part of the 1%, but virtually all of them earned their success – by spending countless hours working and by judiciously guarding and deploying their growing capital. How do they deploy capital? Some use it in their businesses – they take their “profits” and use them to either buy equipment or hire additional workers to maintain or grow their businesses. Either way, they are improving the prospects for hiring. But, keep in mind, they do not hire because they consider themselves employment agents. They hire because they think they are strengthening or growing their businesses.

When they become concerned about the future, or are under assault by politicians or the press, they begin to reconsider what they want to do in their enterprises. It would not be unrealistic to infer that many entrepreneurs are channeling at least a portion of their profits into currency or gold and placing it in their safe deposit boxes and vaults (as I blogged several weeks ago in “The Parable of the Talents”). The evidence?

The money supply has literally exploded over the past few years and yet the velocity of money (the actual turnover of currency used to facilitate transactions) has declined dramatically. Where has the increased money supply in circulation gone? Vaults and safety deposit boxes?

As we know, purchases of gold coins have literally skyrocketed too in the past few years (and, a Google search yields countless articles about the surge in gold sales). I believe this is clear evidence that the behavior I have personally observed is widespread.

Remember, hoarding cash and gold does nothing to improve the economy or employment. Nothing. It is the reinvestment into productive enterprises and projects that has this result.

So, the secret? These gold buyers are not on the street corner courting the media and politicians and protesting with signs and chants of “We are afraid of the actions of government, so we are transferring our wealth into cash and gold and putting it into vaults to protect our wealth.” Hence, their “concerns” are not heard.

No, they do not say anything because they do not want to attract attention. Like the Wolverine fan, they stay silent so as to not bring “harm” to themselves. But, this silence should be deafening and should prompt a rethink about what our government can do to promote job growth.

All comments and questions are welcomed.

Bob Bilkie, CFA

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