Here’s a report from Citicorp on income inequality and the likely long-term economic patterns that may result from it.
The latest Survey of Consumer Finances, for 2004, has been released by the Federal Reserve. It shows the rich continue to account for a disproportionately large share of income and wealth in the US economy: the richest 10% of Americans account for 43% of income, and 57% of net worth. The net worth to income ratio for the richest 10% of Americans increased from 7.4x in 2001, to 8.4x in the 2004 survey. The rich are in great shape, financially.
We think this income and wealth inequality (plutonomy) helps explain many of the conundrums that vex equity investors, such as why high oil prices haven’t seriously dented growth, or why “global imbalances” are growing along with the equity bull market. Implication1: Worry less about these conundrums.
We think the rich are likely to get even wealthier in the coming years. Implication2: we like companies that sell to or service the rich -luxury goods, private banks etc. Favored names include LVMH and Richemont.
I’m always suspicious of “it’s different now” analysis like this. But I also think that suspicious, or not, you have to take these views seriously.
There are, in our opinion, two issues for equity investors to consider. Firstly, if we are right, that plutonomy is to blame for many of the apparent conundrums that exist around the world, such as negative savings, current account deficits, no consumer recession despite high oil prices or weak consumer sentiment, then so long as the rich continue to get richer, the likelihood of these conundrums resolving themselves through traditionally disruptive means (currency collapses, consumer recessions etc) looks low. The first consequence for equity investors who worry about these issues, is that the risk premia they ascribe to equities to reflect these conundrums/worries, may be too high.
I’ve talked about this stuff a lot – and the fear at root has always been that we’ll wind up with a vastly wealthy transnational monied class, and a large group of interchangeable workers – which may be great for much of the world, but will put the US well into Neil Stevenson’s model where “once the Invisible Hand has taken all those historical inequities and smeared them out into a broad global layer of what a Pakistani brickmaker would call prosperity” America falls apart.