The Capital Note: Individual Investors, Inflation & the Invisible Hand | National Review

Vlad Tenev, co-founder and co-CEO of investing app Robinhood, speaks during the TechCrunch Disrupt event in Brooklyn, N.Y., May 10, 2016. (Brendan McDermid/Reuters)

Welcome to the Capital Note, a newsletter (coming soon) about finance and economics. On the menu today: The Role of Robinhood, Inflation-Adjusted Capital-Gains Taxes, and Shakespeare’s Influence on Adam Smith.


Financial commentators have chalked up recent stock-market exuberance to individual investors’ gambling on their favorite companies. With bars and golf courses closed, what better way to pass the time than buying call options in Tesla? Individual-investor activity soared in March and April, a period during which retail brokerage Robinhood added 3 million new accounts.

Now, as states begin to roll back lockdowns, newly minted day traders are going back to their old hobbies. Goldman Sachs estimates that retail volume is down 70 percent over the past two weeks alone. In the options market, too, where the spike in day trading was especially pronounced, retail activity has likewise fallen since its July high.

Even before the decline in day trading, individual investors made up a relatively small portion of the overall market. The idea that guys with Robinhood accounts were moving markets was always a bit farfetched, even if their choice stocks, such as Tesla, have had incredible runs of late. Now that the day-trading boom appears to be receding, resilience in the stock market undercuts the hypothesis that retail activity contributed significantly to valuations.

That can change, of course. A stock-market decline in the coming weeks, especially in the names preferred by retail investors, would thicken the plot. But as it stands, the “boredom-markets hypothesis,” as Bloomberg’s Matt Levine calls it, looks to be weakening.

And while day traders may not be moving markets overall, they could be influencing the prices of individual stocks. Individual investors comprise more than 30 percent of trading volume in Under Armour, Occidental Petroleum, and Gap, for example, an the portion of individual investors in options markets is even higher.

Which might explain why investors like to track the holdings of Robinhood users. Unfortunately, as of last week, they can no longer do that. Robintrack, which compiles Robinhood’s data, was forced to shut down after the brokerage platform stopped providing it with data:

“They said the reason they’re doing this is because ‘other people’ are using it in ways they can’t monitor/control and potentially at the expense of their users,” he wrote in a message to Bloomberg News. “They feel it paints Robinhood as being full of day traders when they say most of their users are ‘buy and hold.”’

I for one am excited to see what Wall Street devises as a replacement for Robintrack.

— D.T.

A Fairer Capital Gains Tax

If there is to be a capital gains tax at all — I have my doubts — it should at least be levied on “real” gains; i.e. it should only be measured on gains after taking account of inflation (probably for, simplicity’s sake, the CPI). The most important reason for this is simple fairness. Why should people be taxed on gains that are purely illusory? There is also another point: We are forever being told of the importance of long-term investing. Well, the longer an investment is held, the greater, in all likelihood, the damage done to returns by the cumulative effects of inflation. Think too of the effect on a small business owner who may have built up his or business over decades and sells on retirement.

In 2018, the Tax Foundation looked at just how damaging this “inflation tax” can be:

For example, say an investor put $5,000 in the stock market in the year 2000. Under the current law, if that $5,000 generously turned into $8,000 over those 18 years, they would be taxed on the $3,000 gain, resulting in a tax liability of $450.

The problem is, in 2018, that $5,000 from 2000 is equivalent to roughly $7,100 today. Inflation accounted for $2,100 of that gain. This means the investor only really made $900, not $3,000.”

Taxing those “real” gains of $900 as if they amounted to $3,000, leads to an enormously high effective rate of capital-gains tax — exactly the opposite of what should be done if we want to encourage investment. It is worth adding that those were years characterized by relatively low rates of inflation. Now imagine that we see a return to the far higher rates of inflation that we have seen in the past…

And, to make an obvious (but important) point:

Even worse, if an investment doesn’t make more than the rate of inflation, the investor is taxed on gains that are not even gains at all. If that investor who invested $5,000 in 2000 sold the investment for $7,000 in 2018, the asset was actually sold at a real loss. However, under current tax treatment, the investor would still have a positive tax liability.

So, it was heartening to read this in Bloomberg this morning:

President Donald Trump said he’s “very seriously” considering a capital gains tax cut, a move he decided against last September after saying it wouldn’t do enough to help the middle class.

“We’re looking at also considering a capital gains tax cut, which would create a lot more jobs,” Trump said Monday at a White House news conference.

The president can’t unilaterally cut the 20% long-term capital gains rate without Congress, but some advisers tell him he could issue an executive order that would slash tax bills for investors when they sell assets. The move, known as indexing capital gains to inflation, adjusts the original purchase price of an asset when it is sold so no tax is paid on appreciation tied to inflation.


Revamping capital gains taxes through a rule or executive order likely would face legal challenges, a concern that reportedly prompted former President George H.W. Bush’s administration to drop a similar plan.

And (via the New York Times):

Doing so, however, would defy a 1992 legal opinion issued by the Office of Legal Counsel under President George Bush.

In light of that opinion, Treasury Secretary Steven Mnuchin has been skeptical about how he could go about indexing capital gains without congressional action.

If litigation ensues, any change would (I assume) be frozen, but at the very least this would trigger a long-overdue debate.

There is related, also-necessary debate to be had about taxing interest income. Rates are low enough as it is, without the current reality that being “asked” to pay tax on interest income that is in real terms negative is…questionable.

— A.S.

Around the Web

To follow up on something we mentioned yesterday, it now seems that the administration is taking steps towards delisting Chinese companies that do not meet adequate accounting standards. This move will, I assume, be welcomed by those “socially responsible” investors who insist that companies meet certain ESG (environmental, social and governance standards). Good accounting would seem to be a fairly obvious element in any determination of good governance.


U.S. Treasury Secretary Steven Mnuchin on Monday said companies from China and other countries that do not comply with accounting standards will be delisted from U.S. stock exchanges as of the end of 2021.

Mnuchin and other officials recommended the move to the U.S. Securities and Exchange Commission last week to ensure that Chinese firms are held to the same standards as U.S. companies, prompting China to call for frank dialogue.

Mnuchin told a White House briefing the SEC was expected to adopt the recommendations. “As of the end of next year … they all have to comply with the same exact accounting, or they will be delisted on the exchanges,” he said.

It’s all Mnuchin all the time today, but he is also right about this:

The New York Post:

US Treasury Secretary Steve Mnuchin said Monday a state control board should take over New York City’s shaky finances amid a stalemate between the White House and congressional Democrats over a new COVID-19 stimulus package.

Mnuchin, one of President Trump’s top negotiators in crafting the latest pandemic rescue package, said on CNBC’s Squawk Box, “Look, I understand New York has problems and, you know, I wish they didn’t have financial problems.

“I think that perhaps the state should put in a financial control board over the city because the city is really going in the wrong direction and it reminds me of the 70s. I want to see New York City succeed.”

Meanwhile, reverting to the topic of ESG, we could not help noticing this from Reuters:

BP will need to invest tens of billions of dollars over the next decade and may have to accept lower returns than it can get from oil if it is to meet its target of becoming one of the world’s largest renewable power generators….

European oil firms are under pressure from activists, banks, investors and some governments to shift away from fossil fuels and are trying to find business models that offer higher margins than the mere production of renewable energy would generate…

It will be interesting to see how shareholders—BP’s owners (to be old-fashioned about this) come to see this transformation.

Random Walk

More Adam Smith. Yesterday we looked at the (possible) abduction of Adam Smith as a small child, drawing, amongst the sources, on work by Stuart Kells of La Trobe University.

Writing last year for Smithsonian Magazine, Kells examined the connection between Adam Smith and… Shakespeare.

Today, we mainly remember Smith for his landmark work of political economy, The Wealth of Nations, and we regard him first as an economist and second as a philosopher. But during his lifetime, ‘economics’ existed neither as a profession nor a discipline, and he saw himself among other things as a serious literary scholar. He helped pioneer the academic study of English literature; he lectured on the arts of writing and rhetoric; and he took his most powerful rhetorical device—one that became his catchphrase and the most overused metaphor in economics—from Shakespeare

Smith was born precisely a century after the publication of Shakespeare’s First Folio, the first authoritative collection of the Bard’s plays, including the occult play Macbeth. It’s from here that Smith found the phrase “invisible hand,” now inextricably tied to markets and capitalism.

Macbeth? Adam Smith?


Here’s Macbeth talking to his wife, and it seems, in rather a gloomy mood:

Be innocent of the knowledge, dearest chuck,
Till thou applaud the deed. Come, seeling night,
Scarf up the tender eye of pitiful day;
And with thy bloody and invisible hand
Cancel and tear to pieces that great bond
Which keeps me pale!



The Wealth of Nations also contains other allusions to Macbeth. In an important discussion of the division of labor, for example, Smith compares the types of people to the breeds of dogs: ‘By nature a philosopher is not in genius and disposition half so different from a street porter, as a mastiff is from a grey-hound, or a grey-hound from a spaniel, or this last from a shepherd’s dog.’

In act 3 scene 1 of Macbeth, Shakespeare similarly compares the varieties of people and dogs:

Ay, in the catalogue ye go for men;
As hounds and greyhounds, mongrels, spaniels, curs,
Shoughs, water-rugs and demi-wolves, are clept
All by the name of dogs: the valued file
Distinguishes the swift, the slow, the subtle,
The housekeeper, the hunter, every one
According to the gift which bounteous nature
Hath in him closed; whereby he does receive
Particular addition, from the bill
That writes them all alike: and so of men.

I could quote from just about every line in this article, which reports on other connections between the two men, but I will conclude by noting that according to a nineteenth century biographer of Smith:

Smith quoted “with apparent approval Voltaire’s remarks that Hamlet was the dream of a drunken savage”, but on another occasion he defended the play as being “full of fine passages.”

So, there we are.

— A.S. 

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