#AI - #OpenAI - #ChatGPT What if America taxes the wealthy’s ownership of shares?

I asked ChatGPT:

Often references to the wealthiest are illustrated by how much they own of the stock market.

How much does the whole US stock market represent of all US’s wealth?

ChatGPT answered:

The US stock market is a significant component of the nation's wealth, but it doesn't encompass the entirety of it. To provide a clearer picture, let's break down the components of US wealth and the stock market's share in it.

Components of US Wealth

1. Real Estate: Residential and commercial properties.
2. Corporate Equity and Mutual Fund Shares: Ownership in public and private companies.
3. Pension Entitlements: Retirement funds and related investments.
4. Private Businesses: Small and large privately held companies.
5. Deposits: Bank savings and checking accounts.
6. Bonds: Government and corporate bonds.
7. Other Assets: This includes various financial assets and physical assets like vehicles, art, and collectibles.

The US Stock Market

The value of the US stock market can be measured by the total market capitalization, which is the combined value of all publicly traded companies. As of mid-2023, the market capitalization of the US stock market was approximately $46 trillion.

Total US Wealth

According to the Federal Reserve's Financial Accounts of the United States, the total net worth of US households and nonprofits was around $150 trillion as of early 2023.

Percentage Representation

To estimate the percentage of the US wealth represented by the stock market:

$\text{Percentage of Wealth in Stock Market}=\left(\frac{\text{Market Capitalization}}{\text{Total Net Worth}}\right)\times 100$

Plugging in the values:

$\text{Percentage of Wealth in Stock Market}=\left(\frac{46\text{ trillion}}{150\text{ trillion}}\right)\times 100\approx 30.7\mathrm{\%}$

Conclusion

The US stock market represents approximately 30-35% of the total wealth in the United States. This percentage can fluctuate based on market conditions and changes in other asset values.

I asked ChatGPT:

And if we take away what foreigners own, how much does the US remaining stock market represent of all US’s wealth?

ChatGPT answered:

To determine the share of the US stock market owned by domestic investors and its representation of total US wealth, we need to account for the ownership by foreign investors.

Foreign Ownership of US Stocks

As of recent estimates, foreign investors own about 40% of the US stock market. This figure can vary slightly depending on the source and the specific time frame considered.

Domestic Ownership of US Stocks

Given the total market capitalization of the US stock market is approximately $46 trillion, the value owned by US domestic investors can be calculated as follows:

$\text{Domestic Market Capitalization}=\text{Total Market Capitalization}\times (1-\text{Foreign Ownership Percentage})$

Plugging in the values:

$\text{Domestic Market Capitalization}=46\text{ trillion}\times (1-0.40)=46\text{ trillion}\times 0.60=27.6\text{ trillion}$

Total US Wealth

The total net worth of US households and nonprofits is approximately $150 trillion.

Percentage Representation of Domestic Stock Ownership

To estimate the percentage of US wealth represented by the domestically owned stock market:

$\text{Percentage of Wealth in Domestically Owned Stock Market}=\left(\frac{\text{Domestic Market Capitalization}}{\text{Total Net Worth}}\right)\times 100$

Plugging in the values:

$\text{Percentage of Wealth in Domestically Owned Stock Market}=\left(\frac{27.6\text{ trillion}}{150\text{ trillion}}\right)\times 100\approx 18.4\mathrm{\%}$

Conclusion

The US stock market, when accounting for domestic ownership only, represents approximately 18-20% of the total wealth in the United States. This reflects the significant but not dominant role that domestic equity investments play in the overall wealth composition of the country.

I asked ChatGPT:

And if we then, after taking away what foreigners own, we take away what insurance companies, pension funds and similar funds own, how much does the US remaining stock market represent of all US’s wealth?

ChatGPT answered:

To determine the remaining portion of the US stock market owned by individual investors, we need to account for the shares owned by institutional investors like insurance companies, pension funds, and similar funds.

Institutional Ownership of US Stocks

Institutional investors, including insurance companies, pension funds, mutual funds, and other similar entities, own a substantial portion of the US stock market. Estimates suggest that institutional investors own around 70-80% of the US stock market, though this can vary.

For this calculation, let's assume that institutional investors own 75% of the domestically owned portion of the stock market.

Calculating Individual Ownership

First, we need to determine the portion of the stock market owned by individual (retail) investors after excluding foreign ownership and institutional ownership.

Total Domestic Market Capitalization

From the previous calculation: $\text{Domestic Market Capitalization}=27.6\text{ trillion}$

Institutional Ownership

$\text{Institutional Ownership}=\text{Domestic Market Capitalization}\times 0.75$ $\text{Institutional Ownership}=27.6\text{ trillion}\times 0.75=20.7\text{ trillion}$

Individual (Retail) Ownership

$\text{Retail Ownership}=\text{Domestic Market Capitalization}-\text{Institutional Ownership}$ $\text{Retail Ownership}=27.6\text{ trillion}-20.7\text{ trillion}=6.9\text{ trillion}$

Total US Wealth

The total net worth of US households and nonprofits is approximately $150 trillion.

Percentage Representation of Retail Stock Ownership

To estimate the percentage of US wealth represented by the portion of the stock market owned by individual investors:

$\text{Percentage of Wealth in Retail Owned Stock Market}=\left(\frac{\text{Retail Ownership}}{\text{Total Net Worth}}\right)\times 100$

Plugging in the values:

$\text{Percentage of Wealth in Retail Owned Stock Market}=\left(\frac{6.9\text{ trillion}}{150\text{ trillion}}\right)\times 100\approx 4.6\mathrm{\%}$

Conclusion

After accounting for foreign ownership and institutional ownership, the portion of the US stock market owned by individual (retail) investors represents approximately 4-5% of the total wealth in the United States. This highlights the relatively smaller but still significant role that individual stock ownership plays in the overall wealth composition of the country.

I asked ChatGPT:

Now, if those remaining very wealthy individuals, in order to raise the money to pay the “fair” tax some are demanding, had to sell e.g., the shares they own in the US stock market, who would they sell these to, and what would happen to the price of the remaining shares?

ChatGPT answered:

If the wealthiest individuals had to sell a significant portion of their shares in the US stock market to raise money for a new tax, it could have a substantial impact on the market, depending on several factors. Here’s a detailed analysis of the potential scenarios and effects:

Potential Buyers

1. Institutional Investors: Pension funds, mutual funds, insurance companies, and other institutional investors might absorb some of the shares, although their capacity and willingness to buy large quantities would depend on market conditions and regulatory constraints.
2. Retail Investors: Individual investors might also purchase some shares, though their collective buying power is typically less than that of institutional investors.
3. Foreign Investors: Investors from outside the US might be interested in buying shares, especially if they perceive them as undervalued due to the sell-off.

Market Impact

1. Supply and Demand Imbalance: A large-scale sell-off would increase the supply of shares in the market. If the demand doesn’t match this increase, it would likely lead to a decline in stock prices.
2. Market Liquidity: The market’s ability to absorb a large volume of shares without significantly affecting the price would be tested. High liquidity markets can handle larger transactions with less impact on prices.
3. Price Decline: A sudden and significant increase in the supply of shares would likely lead to a decrease in their prices. This decline would continue until new buyers are found or the selling pressure diminishes.
4. Market Volatility: Increased selling by wealthy individuals could lead to heightened market volatility as prices adjust to the new supply levels. This could create a feedback loop where declining prices prompt further selling.
5. Investor Sentiment: The perception that the wealthiest individuals are divesting could lead to broader concerns about market stability, potentially exacerbating the sell-off as other investors seek to protect their portfolios.

Long-Term Effects

1. Revaluation of Stocks: If a significant portion of shares changes hands at lower prices, it could lead to a broader revaluation of stock prices, impacting company valuations and market indices.
2. Economic Impact: A major decline in stock prices could affect consumer and business confidence, potentially slowing economic growth.
3. Regulatory Response: Regulators might intervene to stabilize markets, through measures such as temporary trading halts or changes in margin requirements.

Mitigating Factors

1. Staggered Selling: If the sales are staggered over a longer period, the impact on stock prices might be less severe as the market has more time to adjust.
2. Diversified Buyers: Increased participation from a diverse set of buyers (institutional, retail, and foreign) could help stabilize prices.
3. Government Intervention: The government might provide measures to support market stability, such as buying shares through sovereign wealth funds or implementing policies to encourage investment.

Conclusion

If the wealthiest individuals were to sell a significant portion of their shares to pay a new tax, the immediate effect would likely be a decline in stock prices due to the imbalance between supply and demand. The extent of the impact would depend on the scale of the sales, the market's liquidity, and the presence of potential buyers. Long-term effects could include a revaluation of stocks and broader economic implications. Market dynamics, regulatory responses, and the behavior of other investors would play crucial roles in determining the overall outcome.

Me:

I might come back on this but, meanwhile, many thanks!

ChatGPT:

You're welcome! Feel free to come back anytime if you have more questions or need further clarification. Have a great day!

Note: The answers are copied exactly from those given to me by OpenAI - ChatGPT.

ChatGPT - OpenAI: Getting to know you!

Oxfam, how do you redistribute wealth already created, without risking making the poor poorer?

Felix Salmon, when commenting on Oxfam’s “Reward work, not wealth: To end the inequality crisis, we must build an economy for ordinary working people, not the rich and powerful” writes: 

“The world’s billionaires – the richest 2,000 people on the planet – saw their wealth increase by a staggering $762 billion in just one year. That’s an average of $381 million apiece. If those billionaires had simply been content with staying at their 2016 wealth, and had given their one-year gains to the world’s poorest people instead, then extreme poverty would have been eradicated. Hell, they could have eradicated extreme poverty, at least in theory, by giving up just one seventh of their annual gains.”

That particular paragraph is spoken like a true redistribution profiteer 😞

First: Where do those “one-year gains” originate? If from criminal corruption, if from skewed central banks stimuli, if from exploiting monopoly and similar forces, then a reduction in that wealth increase would be absolutely justified and good… but, if that wealth increase came from true wealth creation, or even from heritage, then a reduction of it could have very negative consequences for all, especially for the poor.

Second: If that wealth has already been created and is consequently represented by assets, how does one liquidate those assets so as not to affect the value of those assets, or in other ways put markets at risk? One of those 2.000 billionaires is probably he who bought Leonardo da Vinci’s “Salvator Mundi” for $450 million. He, de facto, like with a sort of voluntary tax, froze $450 million of purchasing power on a wall, or in a safe box. How on earth does one go about to reconvert that into $450 million of new purchase power that could be handed over to the poor?

The Oxfam report contains many correct statements. I totally agree with that wealth should not be created by criminal and unfair behavior, or derived from crony statist relations; and I also agree with that wealth should not be used to abusively increase the influence of the wealthy in our societies.

But when the report states “To end extreme poverty, we must also end extreme wealth” I disagree. First because whether one likes it or not, wealth, as it is invested in assets, has de facto already been redistributed… like in the previous case to those who received the $450 million paid for the “Salvator Mundi”… to those who sell a luxury yacht… to those who sell handmade shoes in Milan… to governments by buying public debt… to markets by buying shares.

On the report Jeffrey Sachs comments: “Sometimes the super-rich call out Oxfam and others for ‘stoking class warfare’ but the truth is that in many societies, including my own, the United States, many of the super- rich have in effect declared war on the poor.”

That sounds precisely like what Chavez preached and now Maduro does in my Venezuela… and look where that has taken our poor country… with asset values and salaries totally destroyed over some very few years… a whole generation of Venezuelans growing up severely malnourished… and the Bolivarian revolutionaries blaming it all on the war declared on them by The Empire. 

Oxfam, a multinational confederation of NGOs, having issued this report, has now a moral obligation of explaining, once wealth has been created, how it can be redistributed without running the risks of making the poorest poorer. And, if it can’t, it should stop creating false expectations.

PS. Legend holds it that when Otelo Saraiva de Carvalho, chief strategist of the 1974’s Carnation Revolution in Lisbon, told Sweden’s Olof Palme: “In Portugal we want to get rid of the rich”, Palme replied, “how curious, in Sweden we only aspire to get rid of the poor”

PS. Here are some tweets on this thorny issue.

Expropriate it! 

Stock markets and the real economy, c’est pas la meme chose.

Do not confuse the strength of the stock market with the strength of the economy.

The strength of the stock market can have to do only with the strength of owning what little there is to own. 

If central banks fueled share buybacks continue, we might end up with the strongest of stock markets, and the weakest of the real economies.

Virtual tulipomania in New York City

I was told  this week that New York was more beautiful than ever. The tulips planted all along Park Avenue were in full bloom in a kaleidoscope of colors.

By chance, I also read this week about the share price of one particular firm reaching the skies on a stock exchange in New York. Both things conspired to remind me of a book by John Kenneth Galbraith, A Short History of Financial Euphoria.

This book addresses a curious speculative process, which took place in  Holland around the year 1630 and which revolved around tulip bulbs. of one particular chapter of the book, The Tulipomania, I have extracted the following quotes:

“Speculation, it has been noted, comes when popular imagination settles on something seemingly new in the field of commerce or finance.” “. . . by 1636, a bulb of no previously apparent worth might be exchanged for ‘a new carriage, two grey horses and a complete harness.’” 

The value of one particular bulb, the Semper Augustus, would be the equivalent of US$ 50,000 at today’s prices! Everyone, from nobles to servants, speculated, cashing in their property and investing in flowers. Capital inflow inundated Holland. “In 1637, came the end.”

In New York, the share price of a company which initiated operations in 1995, has never registered a profit, has (according to management itself) no short-term possibility of doing so either, does not possess any major tangible assets, and has issued a management report in accordance to SEC rules and regulations in which it makes known a series of risks that would make any investor’s hair stand on end, is traded at US$ 200 per share, when it was quoted on the exchange AT US$ 10, only one year ago.

Evidently, the firm described above operates in Internet commerce, sells books and, in my humble opinion,  has joined the rank and files of the “tulipomanias”. In order to arrive at this argument, it is sufficient to analyze some of the risks the firm itself has enumerated in various reports.

The Internet, the Net, or the Web, however you wish to call it, is above else a medium for the transfer of information. In this context, developing technology known as “shopping agents” will permit clients to quickly compare one company’s prices to those of its competition.

This would seem to presage an eventual but fierce price war, an environment that is not exactly the breeding ground for profits that back the market valuation we are observing. 

The low cost of entry and the probability that sooner or later some efforts will be aimed at prohibiting any monopolistic controls of the Web are also factors which can make the advantages created by an early incursion disappear in a flash. 

This has nothing to do with the company itself. All that I’ve read leads me to believe it is well managed and that it probably has a brilliant future. The problem lies solely in the market’s irrational expectations. Today’s market value of the firm, equivalent to the share price times the amount of the shares issued surpasses US$ 33 billion.

Make your own calculations. The firm reported in 1998 total sales of US$ 610 million, a net loss of US$ 124 million and a book value (assets less liabilities) as of 31st of December 1998 of only US$ 139 million. 

Total book sales in the United States during 1998 were worth close to US$ 23 billion. If we assume that a profit margin of 8% would be reasonable, this would mean that there would be US$ 1.8 billion available to reimburse capital invested, both equity as well as debt financing. 

If we then, for the sake of simplicity assume an overall return of 10%, we can estimate the global value of companies that sell books in the United States in the order of US$ 18 billion. 

If the company that's the object of this analysis, and today commands less than 3% of market share eventually attains a whooping 20%, its value could then reach US$ 3.6 billion. 

This is not even remotely close to the market values of US $33 billio I've mentioned earlier.

This Financial Euphoria seems to have infected many firms associated with the Internet, I conclude that this must be a modern version of the speculative Dutch tulips. I also conclude that both these and the real tulips thrive in New York in spring.

From The Daily Journal, Caracas, April 30, 1999

PS. And I gave this article the following introduction in my 2006 book  "Voice and Noise"

My book, Amazon’s profits and the value of its shares

I am including below “Virtual Tulipomania in New York City,” an article that I wrote in April 1999 for the following reasons:

When I started to write this book in 2004, I fretted over having to invest tremendous efforts in getting a publisher interested and, if successful, then having to negotiate lengthily in order to defend my copyright interests. Then I discovered the existence of some new publishing facilities that allow a rookie book writer like me to outsource. As these new facilities print the book “on demand,” there is no need to invest piles of money in printing too many copies that would reflect the author’s general sense of optimism and that could only later end up as tombstones in memory of shattered dreams. Well, it so happens that the new-wave publisher I chose was recently acquired by Amazon and as the article has to do with that company, I also found the perfect excuse to include it … for a very worthy reason … that of shameless self-promotion.

As a financial analyst (which is what an economist frequently does for a living) I am especially proud of this article since it evidences how I managed and dared to question the whole dot.com boom, at its peak, just by doing some thinking on my own. Of course, now, with the profits Amazon should expect from its new investment … and my book, I guess that once again the sky should be the limit for them.

One brief note though about these new “on demand” one-at-a-time printing methods. With them it seems that what we know as “editions” first, second, third, will in fact disappear and this might negatively impact book collectors and rare-book stores. Will they disappear?

Not necessarily, since this method could make collection even more challenging as you could view each individual book as an individual edition and therefore be able to improve your collection by moving up few slots at the time, perhaps from the 12.834th to the 235th edition. Whatever, just in case, you better hedge your bets and rush out and buy a second copy of an early edition of this book. 

Given that it is so easy and inexpensive to make changes to the book by using this publishing system, we could also have an incredible amount of different editions which might make debates about the book much more interesting—in one, I would write in yellow, and in another, in blue, and so I might finally reach the green I am looking for— by seeding confusion. Then rare-book stores would have unlimited access to rarities.