Postcards: The Final Stake Through Your 401K's Heart

If you thought Sarbanes Oxley crushed the public markets, wait until you see the impact of Washington in the last four years. ͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­͏   ­ Forwarded this email? [Subscribe here]() for more You are a free subscriber to Postcards from the Florida Republic. To upgrade to paid and receive the daily Republic Risk Letter, [subscribe here](. --------------------------------------------------------------- [Postcards: The Final Stake Through Your 401K's Heart]( If you thought Sarbanes Oxley crushed the public markets, wait until you see the impact of Washington in the last four years. Aug 29   [READ IN APP](   Market Update: Well, that was surprising to most people. NVIDIA beats earnings… markets sell… and then we wake up to a market that screams higher. Gold, silver, and crypto are having great days as the march of monetary inflation moves higher. --------------------------------------------------------------- Dear Fellow Expat: I took my daughter to her first kid’s soccer game a few years back. She was four at the time. The field had about 12 players on the field. Most kids waved to their parents as the ball rolled through their legs, oblivious to the game. My daughter didn’t wave to me. She instead ran into the goal and sucked her thumb. Then she leaned down and started picking flowers. I couldn’t help but notice the dandelions growing on the field. Soon, another seven children picked flowers, too. The coaches blew their whistles, telling them to run. The kids just kept stopping and picking flowers. The coaches rounded up the players. The kids gathered again at the half-field mark… The whistle blew. The same outcome followed. Flowers distracted them. The joy of picking flowers was an incentive… one pulling them away from the game. Running and exercise. They were disincentives. It was too nice of a day to bother kicking a ball. Who was left to score the goals? Who’d entertain the parents? Who’d bother to play the game? [Upgrade to paid]( What Matters Most Looking at the markets today, I see plenty of similar problems… only it’s not the children at the helm… It’s the lack of public companies and the continued disincentives to be a public company. The United States needs public markets to attract capital and reward investors for risk-taking. But equity markets - common stocks - are one of the great field-playing levelers in the world. Ordinary people can own stock in great companies and take advantage of a public company’s growth stage. It’s not just for the uber-rich. Investors need to be engaged—watching the game—and players (public companies) need to boost the economy and score the goals for the engine or American team’s success. Yet… it’s clear that our ongoing cohort of leaders in the White House, Congress, and the offices of financial regulation don’t understand how they’re leading so many players to pick up the game ball… and simply walk away. It Starts With Sarbanes Oxley Enron became the ideal corporate scandal in the wake of the 9/11 attacks. The government was caught flatfooted. So, when Enron—a darling of the Dot-Com era—went bankrupt spectacularly, the outrage turned to Wall Street greed rather than a monstrous national security failure. What followed was the usual: a call to “[Do Something]( to reduce corporate greed and accounting fraud in the future. In 2002, Congress introduced the Sarbanes-Oxley Act, a monstrous financial regulatory law that has done far more harm than good. Sure, this law increased transparency and accountability. However, this was largely outweighed by the compliance costs and regulatory burdens—especially Section 404, which mandates internal control assessments. These costs are substantial. Since Sarbanes Oxley was enacted, the number of public U.S. companies has been cut in half. While it’s easy to note that corporate mergers and bankruptcies have helped fuel the decline, one has to note that the number of new companies going public has waned. In 2000, about 300 IPOs happened a year. By 2017, that number was 50% less, [according to Andreessen Horowitz](. And it will get worse… much worse, with the SPAC frenzy of the 2020 bubble now over. America doesn’t just face Sarbanes Oxley as a prime deterrent to going public. You see, there’s a triple-headed monster poised to keep even more players out of the public game. What’s Killing Public Companies? So… what is this three-headed monster? Let’s look at each part. No. 1 — SEC Policies The SEC's ruling to force all public companies to track their carbon emissions is the most absurd public policy of the last five years. It doesn’t matter where you sit on climate change. It’s a problem that we now must force CFOs to be experts in navigating Sarbanes Oxley (for which they could be found liable on accounting problems) and experts in tracking carbon emissions. Do you think the salary of a CFO is high now? Just wait… In March 2022, the SEC proposed a rule requiring publicly traded companies to disclose information about their climate-related risks, including GHG emissions across Scope 1, 2, and, in some instances, Scope 3 emissions. Here’s the breakdown: - Scope 1 Emissions: Direct emissions from sources owned or controlled by the company. This includes emissions from company facilities (e.g., boilers, furnaces) and company vehicles. Essentially, it covers emissions directly generated by the company’s operations. - Scope 2 Emissions: Indirect emissions from the generation of purchased electricity, steam, heating, and cooling consumed by the company. Although these emissions occur at the power plant or another external facility, they result from the company’s energy use. - Scope 3 Emissions: All other indirect emissions in a company’s value chain. This includes upstream and downstream emissions, such as those from the production of purchased goods and services, business travel, waste disposal, and the use of sold products. Scope 3 is often the largest and most complex scope, as it encompasses emissions across the entire value chain that the company indirectly influences but does not directly control. Scope 3 is freaking insane. How does one measure Scope 3 emissions properly? Well, the answer is to hire pricey consultants who are currently selling books on best practices. It’s a freaking racket. Especially when there might be thousands of these suppliers in the supply chain. How is this worth anyone’s time except for a massive shareholder check? This is another deterrent for public companies, and they must comply or go private. Good riddance. No. 2 — New Tax proposals Vice President Kamala Harris’ proposal to tax 25% unrealized capital gains on individuals who own more than $100 million in assets is also a massive deterrent. Tech investors have little reason to keep companies public due to the potential impact on their companies. Since the stock market reflects constant swings, it remains to be seen how certain tech founders would need to expunge assets to meet certain obligations. Would such sales reduce their stake in the companies, impacting their voting share? And suppose they instill ways to maintain their voting control as Mark Zuckerberg did on Facebook/Meta or the founders of Snapchat. How will that impact the morale of investors in the company (or investors indirectly who own index funds like retirement fund CalPERS)? These are very messy issues to address at the policy level, and the reality is that many founders might be better off just staying private. Finally, remember that the $100 million figure will decrease over time. Or it will impact everyone when almost every American has $100 million due to hyperinflation—which is possible in the 2040s). Don’t discount the Fed’s ability to make everyone billionaires in the next 30 years. But the No. 3 - and Most Important Reason: Private Capital. Believe it or not, the financial markets continue to do great, and so does the economy. But it’s not because of Fed policy or interest rate management. It’s largely linked to the private capital markets that continue to disrupt traditional business. [Joshua J. Myers, CFA, points out today]( the world has shifted due to the 2008 financial crisis. Ongoing liquidity disruptions, a reduction in traditional banking influence, and the dislocation of expectations from traditional economic indicators. As he notes, the private credit markets - which includes private equity, venture capital, private equity, real estate, and infrastructure credit - have swelled by threefold in the last decade. These are forms of direct capital - about $15 trillion - compared to the roughly $50 trillion in the equity markets (which have seen a swell of passive investing vehicles compared to new IPOs). “Rolling bank crises and public market volatility have allowed private capital markets to take market share by offering more stable capital to borrowers and earning outsized returns for their investors by charging higher rates for longer-term capital,” Myers writes. The result is the ability for private companies to remain private for longer. And the more influence this side of the credit world swells, the harder it will be to justify going public completely. Many companies may just choose to sell while still private. How Does It Impact You? This is good news for the monied-class. They’re accredited investors who benefit from the expansion of private credit and alternative investments. But it’s bad news for traditional investors. I’m talking about the people who aren’t accredited and can’t get access to these forms of capital. There are five clear elements that will impact retail investors. Fewer Opportunities to Access Growth Fewer IPOs mean fewer opportunities for traditional investors to invest in new, high-growth companies. This limits the pool of investment options available to retail and institutional investors in the public markets, potentially leading to a less diversified portfolio. High-growth sectors, particularly in technology and biotech, have seen a trend of companies staying private longer. They’ll likely do so with more private capital and fewer incentives for an IPO. This situation limits traditional investors' access to these dynamic sectors, historically significant drivers of overall market returns. Weaker Long-Term Gains Many traditional investors participate in the market through retirement accounts, which rely on the growth of public equities to build wealth over time. Reducing the number of high-quality public companies would inevitably lead to lower overall returns, impacting the growth of retirement savings for millions of investors. Increased Wealth Concentration As companies remain private longer, the wealth generated during these critical growth phases is concentrated among a small group of private investors, venture capitalists, and insiders rather than being shared with the broader public investor base. This exacerbates wealth inequality and limits broader participation in economic success. It’s insane that people don’t recognize this in Washington - but for all I know, this is part of the plan. Retail Pays a Premium If and when companies go public, they’ll do so at much higher valuations. That’s bad news for traditional investors who now pay a premium, increasing the risk of poor returns if the market corrects these valuations over time. More Liquidity Concerns Finally, fewer public companies can reduce overall market liquidity and depth, leading to less efficient markets. With fewer players and less frequent trading, price discovery can be impaired, and market volatility may increase, making it more challenging for investors to enter and exit positions at fair prices. This is a walking nightmare as the current liquidity cycle is expected to peak in late 2025. We may see more violent swings in asset prices, with fear pulsing through the veins of retail investors who haven’t experienced these forms of volatility in the past. These public policies are all driven by a desire to buy votes or protect Americans from themselves. In the process, they’re destroying the single greatest financial wealth engine for traditional Americans and fueling an even greater concentration of wealth at the top. Again… perhaps that’s the plan. Stay positive, Garrett {NAME} Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. Under company rules, editors and writers cannot recommend their positions. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.   [Like]( [Comment]( [Restack](   © 2024 Garrett {NAME} 548 Market Street PMB 72296, San Francisco, CA 94104 [Unsubscribe]() [Get the app]( writing]()