Dear fellow investors,

The investors of Smead Capital Management have been hearing us talk about ‘First World Problems’ recently. These are undoubtedly problems, but (in a manner of progress) are vastly different problems than we had before. Therefore, we feel we’ve solved the problems of the past and have opened ourselves up to new problems. This is like moving forward from pre-algebra to algebra in math. Our parents would be proud.

The well-known billionaire hedge fund manager and author Ray Dalio succinctly communicated our prior problem of capitalism when he wrote in 2019:

Over these many years I have also seen capitalism evolve in a way that it is not working well for the majority of Americans because it’s producing self-reinforcing spirals up for the haves and down for the have-nots. This is creating widening income/wealth/opportunity gaps that pose existential threats to the United States because these gaps are bringing about damaging domestic and international conflicts and weakening America’s condition.

The inequality of wealth has reached epic proportions over the last couple of years. We witnessed economists and central bankers become unabashed ZIRP (zero interest rates policy) believers, in a way that would make the Bank of Japan from the early 1990’s blush. To Dalio’s point, this looked like a Gilded Age in the accrual of wealth to the top. However, what makes this different is that Jay Gould and Cornelius Vanderbilt didn’t tell everyone how the system was wrong then. The low interest rates of the 19th century faded and the wealth of the gilded families and royals was quite different by the end of World War I. If you need a good example, read Helen Rappaport’s book After the Romanovs to learn what blue bloods did to make money after they escaped Russia (or listen to our podcast with her here).

Can we see the same wheels of change fixing the problem that Dalio laid out? Yes, because first, interest rates are rising. All assets are worth less with higher risk-free rates. This is prima facie. In a practical way, not all assets will be treated the same. To the right is a breakout of assets by income percentile in the 4th quarter of 2021.

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