With a short-term mentality practically paralyzing individuals and corporations, the U.S. should extend the capital gains tax holding period from one year to three years and gradually reduce the rate over time for investors who hold onto their investments for progressively longer time periods, Black Rock CEO Larry Fink told the Council of Foreign Relations today.
Traveling around the planet and meeting with CEOs and others in various countries, Fink took away several conclusions. "There is a sense that things are not right," he said.
Ironically, many CEOs report that their business is doing a little better than they had expected. But the pervasive sense of pessimism is holding them back, just as it is with individuals, and so cash keeps piling up.
Part of the reason behind the pessimism among individuals is a widespread belief that government promises of a secure retirement will be broken. Much is made of the shortfalls in various defined benefit plans, yet the average defined contribution plan is underfunded by 40%.
Of equal significance, there is also an inability to look beyond the headlines.
Fink noted that the fixation on the short term is blinding many societies. In America, the average CEO serves for five years, a fact that may discourage many of them from seriously considering long-term capital investments that could produce huge potential advances.
The great aging phenomenon is another paradox driving global insecurity. Living longer should be seen as a great blessing but people are naturally worried. Financing longer life spans inevitably requires more detailed investment strategies, though that is hardly a bad thing.
Look at the oldest nation, Japan. It is starting to experience an unprecedented transition from a nation of great savers to net withdrawals. That portends major changes for the global economy.
Creating jobs is becoming a global challenge. Fink believes it will require more cooperation between governments and business, an idea many would challenge. But he believes nobody should be surprised by unrest among the planet's youth, whether it be the Arab Spring or Occupy Wall Street.
We are experiencing a perfect storm of aging, deleveraging, social and technological change and income inequality. Everywhere Fink goes, he is asked by people what should they do with their money. They should get money off the sidelines and put it to work, he responds.
While Fink, who earned his stripes creating the mortgage-backed securities market and initially built BlackRock as a fixed-income specialist a la Pimco, says he is close to 100% equities himself, he acknowledged that this allocation wouldn't suit everyone's risk profile. But the disparities between the equity and bond markets are glaring. Verizon stock yields 5.3% while its bonds offer investors about 3.7%. That is taking risk aversion to extremes.
CEOs who let cash keep piling up on their balance sheets are sending a signal they are basically clueless [my words, not Fink's]. Ultimately, they "will lower their P/E ratios," he said.
He sees the same mentality hurting individual investors. Most nations need to turn short-term savers into long-term investors, he remarked.