I spent last Friday at what is probably the biggest extravaganza in the world of finance: the Twenty-First Annual Baron Investment Conference in New York City. It's a bizarre, bombastic mash-up of investment infomercial, economic prognostication and entertainment spectacle. How extravagant? For this confab, Baron Capital, one of the more successful companies in the mutual-fund business, rented out almost all of Lincoln Center, including Alice Tully Hall, the David H. Koch Theater (home of the New York City Ballet), Avery Fisher Hall (home of the New York Philharmonic) and, for the main events, the Metropolitan Opera House. How entertaining? The featured performers are never announced in advance, and this surprise element is the main lure that attracts investors from around the country. This year didn't disappoint: Joss Stone, Kelli O'Hara, Kristin Chenoweth and even Harry Connick Jr. were merely warm-up acts for the headliner, the one and only Celine Dion. Vegas at Lincoln Center!
I can't even begin to imagine how much all this cost Baron, since it didn't cost me or any other participant anything. If you had even a modest $10,000 investment (as I do) in one of the 12 Baron mutual funds, you got free admission. As much as I enjoyed the event, I think I would prefer having lower management fees on my investment.
While waiting to see who the surprise performers would be (I was hoping for Frankie Valli but I have really retro tastes), we got the chance to hear presentations from the chief executives of several corporations in Baron portfolios, fast-growing companies such as United Natural Foods and Under Armour (which seemed to me to be just a Nike wannabe), and also from Baron's fund managers. The climactic speaking slot, just before the surprise headliner finally came out, went of course to the impresario of the whole event: Ron Baron, the founder and CEO of Baron Capital and a legendary stock-picker.
As enchanted as I was by Harry and Celine, Ron was the one I found most interesting. "I promised my wife I wouldn't talk about politics," he said, but with the election less than a month away, he couldn't resist. His purpose was to convince the assembled investors that they should put more money into the stock market, and he acknowledged that who won the White House could have a big impact on the investment climate. When a picture of President Obama was flashed on the big screen behind Baron, there was a smattering of applause. When Mitt Romney's image appeared, almost the entire hall roared its approval. If you have any doubt that Romney is the preferred candidate of the wealthy investor class, you should have been at the Metropolitan Opera House last Friday.
Baron refused to reveal his choice for president (there was that promise to his wife), but he dropped major hints that he thought his customers were not seeing things the right way. First, he noted that while many of his wealthy friends voted for Obama in 2008, most were switching to Romney this time. He seemed puzzled by that because, as he showed in a chart on the video screen, the stock market has gone up more than 60 percent during the Obama years, making Baron's wealthy friends a lot wealthier. Baron gave Federal Reserve Chairman Ben Bernanke credit for keeping the economic recovery going. Romney, in contrast, has said he would replace Bernanke when the chairman's term expires in 2014.
Let me elaborate on what Baron was saying, put it into historical context and offer my own interpretation. In the past few decades, the U.S. has seen an enormous concentration of wealth and rampant financial speculation. The last time there was such concentration of wealth and speculation was in the 1920s. After the stock market crashed in 1929, the economy sank into the Great Depression. Economic historians agree that restrictive Federal Reserve policy and President Hoover's tepid response deepened and prolonged the slump. Even Roosevelt's New Deal, while a major move in the right direction, didn't provide enough stimulation to make the economy robust again. Only World War II would do that.
In 2008, at the end of the Bush years, there was another financial crash and downturn in the economy, and only Bernanke's forceful easing of monetary policy and Obama's fiscal stimulus kept the recession from turning into another depression. The rate of recovery has slowed, though, because the Republicans took back the House of Representatives in 2010 and refused to provide any more stimulus. Romney's solution to the slowdown is more cuts in tax rates that will disproportionally help the wealthy. He says the cuts will not benefit the wealthy because he intends to also close tax loopholes used by the wealthy, but he hasn't specified the loopholes or explained how the math will work. If the Romney tax cuts turn out to be like the Bush tax cuts, they won't be offset in any way. They'll just give the wealthy a bigger share of the pie and balloon the federal deficit.
While he didn't say it, what I think Ron Baron was hinting at is that the policies long advocated by Republicans -- relentless tax cuts, massive reductions in government spending and tight monetary policy -- are not good for the economy or business. The wealthy don't need more tax breaks. There's only so much stuff they can buy. While they are indeed big spenders, they spend a much smaller percentage of their income than the middle class does. The problem with our economy is a lack of demand from the middle class because it doesn't have enough money. The middle class is being severely squeezed. Republicans argue that tax breaks for wealthy job creators will benefit everyone; Democrats deride that as trickle-down economics. The Bush tax cuts are still in place, but the "job creators" have not created many jobs since there is not enough demand for the products of industry. Democrats have usually been better at expanding the middle class and stimulating demand. As President Clinton pointed out in his speech at the Democratic Convention, recent Democratic presidents have presided over much more job creation than Republican ones.
While Republican economic policies gave the wealthy tax breaks, they also hurt the wealthy by derailing the economy and crashing the stock market. Those policies hurt business by lowering demand. On balance, those policies probably hurt most of the people in the audience at the Opera House last Friday. They are just too dumb to see it. Would it be better for them to get more tax cuts or to benefit from a growing economy and rising stock market, as we've had during the Obama years? I think I know how Ron Baron would answer that.
But what about the federal deficit, you ask? What about the risk of inflation? Those are good questions. The fact is that in the last few decades, bankers and governments have issued so much bad debt that we are in a very deep hole, like in the 1930s. Probably the only we can get out of that hole is to slowly reflate our way out of it -- to make the debt worth less. A faster rate of inflation than we have now is probably inevitable. Baron said he sees that coming, and he is not afraid of it. He spoke of how his parents bought a house in the 1940s for $5,000. Inflation has always gone hand in hand with a growing American economy and a rising stock market. Inflation can get out of control, of course, but we are not even close to that situation.
I think fear of inflation is behind much of the opposition to Obama. People don't want to see the value of their savings eroded. But there's really only one kind of people who benefit from government austerity and overly rigid monetary policy. Those are the people who have so much money that they don't need to hold a job or run a business -- so much money that neither their children nor grandchildren nor any of their descendants will ever need a job. These people don't need to create wealth any more. They can just sit on it. And they don't want the value of their wealth eroded. To protect that wealth, they are more than willing to donate to Republican super PACs.
Keeping inflation very low would be nice. But is it worth having an economic depression to achieve that goal? I don't think so. I happen to be a wealthy person who is retired. Inflation could certainly hurt me. But I think investments in the stock market could help me keep up well enough. And I certainly don't want to strangle the economy to protect the value of my savings. I want the economy to grow and inflate, as it has in the past, so that my two sons can keep their jobs and build their own wealth. I think they'd rather earn it than inherit it all from me.
That's what I think. And after last Friday I believe Ron Baron thinks like me. Too bad he probably didn't convince many of the folks in his thick-headed audience.