The title of this article is pretty much our entire business.

As an asset manager, we need 1) products that people want 2) those products to perform well. Both things require us to have a point of view on what the world will look like tomorrow, and what that will mean for investors.

Easier said than done! There is no playbook for how to do this, and obviously it requires a healthy dollop of both art and science. One thing we do to help us divine the future is we study the past. While the world we live in changes rapidly, it is still operated by human beings, and human beings don’t really change. So history provides clues on how humans are likely to react to different stimuli.

Over the course of the Roaring 1920s, the top marginal tax rate in the US was cut from 73% to 24%, while the estate tax was capped at 20% and cap gains were taxed at 12.5%. Unsurprisingly, inequality - both wealth and income - exploded. By 1929, the top 1% earned 24% of the income and controlled 45% of the wealth.

What happened next isn’t much of a surprise: populism. Our belief is that the primary goal of most politicians is to get re-elected and they will behave accordingly. In normal times, the best way to get re-elected is with money, and so politicians pander to their funding sources. However, once populism reaches a certain scale, this flips - it becomes impossible to get re-elected without pandering to the masses, and so you see even previously conservative politicians suddenly supporting redistributive policies. This has happened again and again in history.

The Great Depression lit the fuse and by the mid 1930s the top marginal tax rate was back up to 79%, the estate tax was capped at 70%, and most cap gains were taxed as income. Did inequality collapse? It did. How much was because of the tax code versus WWII? Impossible to say and completely irrelevant. The key formula is low tax rates relative to history + a triggering populism event = jacking up of tax rates.

Income and wealth inequality today is now approaching the levels last seen in the 1920s. The top 1% control about 20% of the income and about a third of the wealth. Whether the fuse has been lit or not is only a question of degree at this point. It is clear that persistently-rising cost of living has helped fuel the rise of populist, redistributive candidates and policy proposals. AI-related job losses, should they materialize, have the potential to add more gasoline. Putting it all together, we think tax rates on the type of folks we work with are likely at secular lows, and unlikely to stay there for very long.

As I said above, we need products that perform well, and “perform well” is an after-tax concept. Many investment strategies become DOA in an environment like the one we had in 1935. Sorting through that now - before it is clearly too late - is a core part of what it means today to skate to where the puck is going.