SOURCE: DemocraticUnderground.com, 2007-01-22 | local copy (html)
The 'Plutonomy' Reports are a confidential series of reports that Citigroup initially circulated only to it's wealthiest customers. Those reports, since leaked, plainly discuss the power of the Plutonomy in America, and how it would only strengthen, as long as the "the rest us" (the non-plutonics) could be kept in the dark about the existence of the Plutonomy, its role, and its over-arching control in the American Economy.
In a report called "The Plutonomy Symposium Rising Tides Lifting Yachts," Ajay Kapur, Citigroup's global strategist, says the balance sheets of the rich are "in great shape, and will get much better," which is why he recommends going out and buying stocks of companies that cater to that very select market. Spending by the uber-rich overwhelms that of the average consumer and helps explain why the U.S. economy has continued to do well and the U.S. dollar hasn't collapsed even in the face of the current federal budget deficit, a negative savings rate, global imbalances and high energy prices, he says. The United States is one of the plutonomy countries countries whose economies are powered by a relatively small number of rich people.
"Want Wealth? Invest In the Uber-Rich," The Globe and Mail [2006-10-02]
Citigroup Global Markets says it is time to binge on bling. That is, load up again on plutonomy stocks. For the uninitiated, those are the stocks that stand to benefit from spending by the uber-rich. In a report called "The Plutonomy Symposium -- Rising Tides Lifting Yachts," Ajay Kapur, Citigroup's global strategist, says the balance sheets of the rich are "in great shape, and will get much better," which is why he recommends going out and buying stocks of companies that cater to that very select market.
Spending by the uber-rich overwhelms that of the average consumer and helps explain why the U.S. economy has continued to do well and the U.S. dollar hasn't collapsed even in the face of the U.S.'s current account deficit, a negative savings rate in the U.S., global imbalances and high energy prices, he says. The U.S. is one of the plutonomy countries -- countries whose economies are powered by a relatively small number of rich people. Canada and Britain also fall into that category.
High energy costs just don't matter that much to the top 20 per cent of Americans. And Mr. Kapur says the negative savings rate reflects the uber-rich's tendency to spend, not save. They don't need to. After all, their net worth as a fraction of their income has soared 50 per cent over the last 15 years, buoyed by a rising stock market and executive compensation and so "dis-saving," as he dubbed it, has very limited impact on their net worth.
While he urges investors to buy so-called plutonomy stocks -- plutonomy is a term that Citigroup made up almost a year ago -- Mr. Kapur acknowledges that stocks of luxury goods and services companies aren't, as a group, cheap, when measured on a price-to-book-value basis. Rather, what is important in terms of stock performance is the pricing power of luxury goods purveyors relative to inflation. Since 1976, the prices of luxury goods items have climbed at twice the rate of the consumer price index.
For their part, the luxury goods suppliers face the challenge of maintaining the mystique of prestige while at the same time trying to increase revenue and hit the mass-affluent market, he says. Pure plays on the plutonomy market are few and far between. So what stocks show up on the plutonomy list? They range all the way from Polo Ralph Lauren Corp., Sotheby's and Tiffany and Co. to Bulgari SpA, Shangri-La Asia Ltd. and Four Seasons Hotels Inc.
Citigroup Plutonomy Report [2005-10-16] Ajay Kapur et al. "Equity Strategy. Plutonomy: Buying Luxury, Explaining Global Imbalances."
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The World is dividing into two blocs -- the Plutonomy and the rest. The U.S., UK, and Canada are the key Plutonomies -- economies powered by the wealthy. Continental Europe (ex-Italy) and Japan are in the egalitarian bloc.
Equity risk premium embedded in "global imbalances" are unwarranted.
In plutonomies the rich absorb a disproportionate chunk of the economy and have a massive impact on reported aggregate numbers like savings rates, current account deficits, consumption levels, etc. This imbalance in inequality expresses itself in the standard scary "global imbalances." We worry less.
The World is dividing into two blocs -- the Plutonomy and the rest. The U.S., UK, and Canada are the key Plutonomies -- economies powered by the wealthy. Continental Europe (ex-Italy) and Japan are in the egalitarian bloc.
Equity risk premium embedded in "global imbalances" are unwarranted. In plutonomies the rich absorb a disproportionate chunk of the economy and have a massive impact on reported aggregate numbers like savings rates, current account deficits, consumption levels, etc. This imbalance in inequality expresses itself in the standard scary "global imbalances." We worry less.
There is no "average consumer" in a Plutonomy. Consensus analyses focusing on the "average" consumer are flawed from the start. The Plutonomy Stock Basket outperformed MSCI AC World by 6.8% per year since 1985. Does even better if equities beat housing. Select names: Julius Baer, Bulgari, Richemont, Kuoni, and Toll Brothers.
In early September [2005] we wrote about the irrelevance of oil to equities and introduced the idea that the U.S. is a Plutonomy -- a concept that generated great interest from our clients. As global strategists, this got us thinking about how to buy stocks based on this plutonomy thesis, and the subsequent thesis that it will gather strength and amass breadth. In researching this idea on a global level and looking for stock ideas we also chanced upon some interesting big picture implications. This process manifested itself with our own provocative thesis: that the so called "global imbalances" that worry so many of our equity clients who may subsequently put a lower multiple on equities due to these imbalances, is not as dangerous and hostile as one might think. Our economic steam led by Lewis Alexander researches and writes about these issues regularly and they are the experts. But as we went about our business of finding stock ideas for our clients, we thought it important to highlight this provocative macro thesis that emerged, and if correct, could have major implications in terms of how equity investors assess the risk embedded in equity markets. Sometimes kicking the tires can tell you a lot about the car business.
Well, here goes. Little of this note should tally with conventional thinking. Indeed,traditional thinking is likely to have issues with most of it. We will posit that:
(1) the world is dividing into two blocs -- the plutonomies, where economic growth is powered by and largely consumed by the wealthy few, and the rest. Plutonomies have occurred before in sixteenth century Spain, in seventeenth century Holland, the Gilded Age and the Roaring Twenties in the U.S. What are the common drivers of Plutonomy? Disruptive technology-driven productivity gains, creative financial innovation, capitalist-friendly cooperative governments, an international dimension of immigrants and overseas conquests invigorating wealth creation, the rule of law, and patenting inventions. Often these wealth waves involve great complexity, exploited best by the rich and educated of the time.
(2) We project that the plutonomies (the U.S., UK, and Canada) will likely see even more income inequality, disproportionately feeding off a further rise in the profit share in their economies, capitalist-friendly governments, more technology-driven productivity, and globalization [see also note iet7Ud8k in my raw file].
(3) Most "Global Imbalances" (high current account deficits and low savings rates, high consumer debt levels in the Anglo-Saxon world, etc) that continue to (unprofitably) pre-occupy the world's intelligentsia look a lot less threatening when examined through the prism of plutonomy. The risk premium on equities that might derive from the dyspeptic "global imbalance" school is unwarranted -- the earth is not going to be shaken off its axis, and sucked into the cosmos by these "imbalances." The earth is being held up by the muscular arms of its entrepreneur-plutocrats, like it, or not.
Fixing these "global imbalances" that many pundits fret about requires time travel to change relative fertility rates in the U.S. versus Japan and Continental Europe. Why? There is compelling evidence that a key driver of current account imbalances is demographic differences between regions. Clearly, this is tough. Or, it would require making the income distribution in the Anglo-Saxon plutonomies (the U.S., UK, and Canada) less skewed to the rich, and relatively egalitarian Europe and Japan to suddenly embrace income inequality. Both moves would involve revolutionary tectonic shifts in politics and society. Note that we have not taken recourse to the conventional curatives of global rebalance -- the dollar needs to drop, either abruptly, or smoothly, the Chinese need to revalue, the Europeans/Japanese need to pump domestic demand, etc. These have merit, but, in our opinion, miss the key driver of imbalances -- the select plutonomy of a few nations, the equality of others. Indeed, it is the "unequal inequality", or the imbalances in inequality across nations that corresponds with the "global imbalances" that so worry some of the smartest people we know.
(4) In a plutonomy there is no such animal as "the U.S. consumer" or "the UK consumer", or indeed the "Russian consumer." There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the "non-rich", the multitudinous many, but only accounting for surprisingly small bites of the national pie. Consensus analyses that do not tease out the profound impact of the plutonomy on spending power, debt loads, savings rates (and hence current account deficits), oil price impacts etc, i.e., focus on the "average" consumer are flawed from the start. It is easy to drown in a lake with an average depth of 4 feet, if one steps into its deeper extremes. Since consumption accounts for 65% of the world economy, and consumer staples and discretionary sectors for 19.8% of the MSCI AC World Index, understanding how the plutonomy impacts consumption is key for equity market participants.
(5) Since we think the plutonomy is here, is going to get stronger, its membership swelling from globalized enclaves in the emerging world, we think a "plutonomy basket" of stocks should continue do well. These toys for the wealthy have pricing power, and staying power. They are Giffen goods, more desirable and demanded the more expensive they are.
[ ... SNIP! ... ]
We are not often shocked. But shocked we were, when we published our note on the Irrelevance of Oil, several weeks ago, and discovered just how significant the rich were in terms of income, wealth and consumption in the U.S.
Looking into this in more detail, we have found that the U.S. is not alone. Unequal societies abound in the Anglo-Saxon world. This income inequality, we have called Plutonomy.
Outlandish it may sound, but examined through the prism of plutonomy, some of the great mysteries of the economic world seem to look less mystifying. As we showed, there is a clear relationship between income inequality and low savings rates: the rich are happy to run low or negative savings given their growing pool of wealth. In turn,those countries with low/negative household savings rates tend to be the countries associated with current account deficits.
So why should we equity strategists care about this? Well simply, because the issue that most consistently seems to vex our equity client base, from a top down perspective, is the U.S. current account deficit, the associated lack of savings, and the build-up of debt. It is both intellectually fashionable and elegant, apparently, to attack "the crazy American consumer, and his/her overspending."
This has of course, from a portfolio perspective, been a costly trade to run-with, over the last 10 years. Those "crazy American consumers" seem to be in rude health. Their imminent demise has been a long time imminent.
If we are right, that the rise of income inequality, the rise of the rich, the rise of plutonomy, is largely to blame for these "perplexing" global imbalances. Surely, then, it is the collapse of plutonomy, rather than the collapse of the U.S. dollar that we should worry about to bring an end to imbalances. In other words, we are fretting unnecessarily about global imbalances. In turn, the risk premium on equities is probably too high.
Secondly, we hear so often about "the consumer." But when we examine the data, there is no such thing as "the consumer" in the U.S. or UK, or other plutonomy countries. There are rich consumers, and there are the rest. The rich are getting richer, we have contended, and they dominate consumption.
As the rich have been getting richer, so too stocks associated with the rich, have performed exceptionally well. Our Plutonomy Basket, generated returns of 17.8% per annum, on average, from 1985. If Plutonomy continues, which we think it will, if income inequality is allowed to persist and widen, the plutonomy basket should continue to do very well. Names in this basket that our analysts recommend as buys include Julius Baer, Bulgari, Burberry, Richemont, Kuoni, and Toll Brothers.
Citigroup Plutonomy Report Part 2 [2006-03-05] Ajay Kapur et al. "Equity Strategy. Revisiting Plutonomy: The Rich Getting Richer."
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The latest Survey of Consumer Finances, for 2004, has been released by the Federal Reserve [see also note veegh4Wu in my raw file]. 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. Implication 1: Worry less about these conundrums.
We think the rich are likely to get even wealthier in the coming years. Implication 2: we like companies that sell to or service the rich -- luxury goods,private banks etc. Favored names include LVMH and Richemont.
Our whole plutonomy thesis is based on the idea that the rich will keep getting richer. This thesis is not without its risks. For example, a policy error leading to asset deflation, would likely damage plutonomy. Furthermore, the rising wealth gap between the rich and poor will probably at some point lead to a political backlash. Whilst the rich are getting a greater share of the wealth, and the poor a lesser share, political enfrachisement remains as was -- one person, one vote (in the plutonomies). At some point it is likely that labor will fight back against the rising profit share of the rich and there will be a political backlash against the rising wealth of the rich. This could be felt through higher taxation on the rich (or indirectly though higher corporate taxes/regulation) or through trying to protect indigenous (home-grow)] laborers, in a push-back on globalization [see also note iet7Ud8k in my raw file] -- either anti-mmigration, or protectionism. We don't see this happening yet, though there are signs of rising political tensions. However we are keeping a close eye on developments.
The latest Survey of Consumer Finances for 2004 from the Fed, just released, shows that the richest 20% of Americans have gotten even wealthier since the last survey was conducted in 2001, and continue to enjoy a disproportionately large share of both income (58%) and wealth (68%). We should make clear that we have no normative view on whether plutonomies are good or bad. Our analysis is based on the facts, not what the society should look like.
This lies at the heart of our plutonomy thesis: that the rich are the dominant source of income, wealth and demand in plutonomy countries such as the UK, US, Canada and Australia, countries that have an economically liberal approach to wealth creation. We believe that the actions of the rich and the proportion of rich people in an economy helps explain many of the nasty conundrums and fears that have vexed our equity clients recently, such as global imbalances or why high oil prices haven't destroyed consumer demand. Plutonomy, we think explains these problems away, and tells us not to worry about them. If we shouldn't worry, the risk premia on equity markets may be too high.
Secondly, we believe that the rich are going to keep getting richer in coming years, as capitalists (the rich) get an even bigger share of GDP as a result, principally, of globalization. We expect the global pool of labor in developing economies to keep wage inflation in check, and profit margins rising -- good for the wealth of capitalists, relatively bad for developed market unskilled/outsource-able labor. This bodes well for companies selling to or servicing the rich. We expect our Plutonomy basket of stocks -- which has performed well relative to the S&P 500 index over the last 20 years -- to continue performing well in future. From this basket, we would highlight in particular, at the moment, LVMH and Richemont.
Citigroup Plutonomy Report [2006-09-29] Ajay Kapur et al. "Equity Strategy. The Global Investigator The Plutonomy Symposium -- Rising Tides Lifting Yachts."
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Time to re-commit to plutonomy stocks -- Binge on Bling. Equity multiples appear too low, the profit share of GDP is high and likely going higher, stocks look likely to beat housing, and we are bullish on equities. The Uber-rich, the plutonomists, are likely to see net worth-income ratios surge, driving luxury consumption. Buy plutonomy stocks (list inside).
Plutonomy stocks at a premium, but relative pricing power is key. While trading at a 'worrying' 30% P/B premium to the market, this has no predictive power. Relative pricing power of luxury goods versus CPI is key for plutonomy stock performance. With stronger equities, higher profit share, bling pricing power is likely to rise.
Our Plutonomy Symposium take-aways. The key challenge for corporates in this space is to maintain the mystique of prestige while trying to grow revenue and hit the mass-affluent market. Finding pure-plays on the plutonomy theme, however, is tricky.
Plutonomy and the Great Conundrums of our age. We think the balance sheets of the rich are in great shape, and are likely to continue to improve. Don't be shocked if the savings rate worsens as equities do well.
What could go wrong? Beyond war, inflation, the end of the technology/productivity wave, and financial collapse, we think the most potent and short-term threat would be societies demanding a more 'equitable' share of wealth. Globalization [see also note iet7Ud8k in my raw file], productivity, a rising profit share and dis-inflation have helped plutonomy. Beyond war, inflation, the end of the technology / productivity wave and/or financial collapse, which have killed previous plutonomies, we think the most potent and short-term threat would be societies demanding a more 'equitable' share of wealth.
It's almost a year since we made up the word Plutonomy. From time to time, in the strategy world at Citigroup, we have a tendency to make up words, to describe some of our more out of the box thoughts. Our European colleagues three years back first referred to de-equitization to describe the wave of private equity and cash funded bids for equities they expected to see over the coming years with free cash flow yields very high, and corporate bond yields very low. Not only do they appear to have been spot on in their prediction but the word is now heard around the world (this year we've heard it back to us in meetings from Melbourne to Tokyo, Cape-Town to Helsinki, Moscow to Dublin and from New York to San Fran) in the press, and on TV. Robert, Jonathan and Hasan, our European colleagues, tell us they wish they'd trademarked this ugly word when they made it up.
So back to Plutonomy. Another neologism and one we in the global team made up. Like de-equitization, it's not the word that's important, but what it describes.
About a year ago, we started doing work on segmenting the so-called consumer, into different types of consumers -- rich through poor. We were fascinated by how, when we did this, we found possible explanations for why the world hadn't spun off its axis in response to some of the problems that many commentators seem to endlessly worry about, such as global imbalances or high oil prices.
To us there are certain economies, driven by massive income and wealth inequality -- plutonomies -- where the rich are so rich that their behavior -- be it negative savings, or just very low consumption of oil as a % of their income -- overwhelms that of the "average" or median consumer. Last year, for example, we suggested that in the US, the top 20% of consumers might account for nearly 60% of income and spending. The bottom 20% by contrast account, on our data, for about 3% of income and spending. We have no moral opinion on whether this income inequality is good or bad, just that it matters a great deal, when we think about the mystical 'consumer' in the US or other plutonomy countries such as the UK, Australia or Canada.
A second conclusion of our analysis was that the forces which had driven the recent 20 year rise in income inequality were likely to continue over the next few years.
And a third conclusion was that Plutonomy would likely drive a positive operating environment for companies selling to or servicing the rich.
Last week Citigroup hosted a Plutonomy Symposium in London, where a number of companies and commentators discussed the outlook for the Plutonomists. These were mainly luxury goods companies, or companies servicing the ultra-high net worth community. We had a number of industry experts also share their views.
Over the last 20 years or so, in certain countries, the rich have been getting substantially richer. As Figure 1 shows, the share of the top 1% of the population of income has grown substantially in countries such as the US, UK and Canada. The countries, which apparently tolerate income inequality, are what we call plutonomy countries -- economies powered by a relatively small number of rich people. [ ... SNIP! ... ]
Our thesis is that the plutonomists are likely to get even richer over the coming years. This could mean global imbalances get even larger, without the planet getting knocked of its axis and sucked into the cosmos.
But this thesis is not without its risks. Plutonomies have existed before and they have come to an end.
To this end we see four primary risks. The first, war and/or inflation. Secondly, financial collapse. Three, the end of the technological revolution. Finally, political pressure to end the increase in income and wealth inequality.
Looking back over time, wars have been pretty bad times for wealth. Both because of the destruction of physical assets, and/or confiscation of wealth, but also more generally as wars have tended to be inflationary. And inflation itself is a major destroyer of financial wealth (just as disinflation has helped create wealth over the last 24 years). Global conflict/revolution on a scale that could destroy the wealth of the plutonomy countries looks to us unlikely in the short term.
Secondly, financial collapse. As much of the wealth of the plutonomists is held in one shape or other in financial wealth (as opposed to land or property), the state of the financial system is important. Financial collapse, as in the Great Depression in the US, would be a serious challenge to the plutonomists. While we have worried periodically about systemic financial risk, say in the aftermath of the LTCM debacle, it is beyond us to speculate about financial collapse. This would however be a serious issue for the rich.
A third challenge would be the end of the wave of technological revolution. The great plutonomy waves of previous centuries, such as the Gilded Age, the Industrial Revolution in Britain, the era of Dutch supremacy, were often associated with technological and financial progress. Economies advanced through progress, with the gains in the first instance disproportionately going to the innovator and risk takers. Were the technology revolution to dissipate, it is likely that the income gains would channel less to the top. Furthermore, technology waves are usually associated with productivity gains, which in turn tend to help keep inflation low and profit growth high. This in turn being a major source of financial wealth creation. So an end of this positive spur would be unhelpful to plutonomy. We see the current internet and communications revolution as being far from dead.
Perhaps the most immediate challenge to Plutonomy comes from the political process. Ultimately, the rise in income and wealth inequality to some extent is an economic disenfranchisement of the masses to the benefit of the few. However in democracies this is rarely tolerated forever.
One of the key forces helping plutonomists over the last 20 years has been the rise in the profit share -- the flip side of the fall in the wage share in GDP. As plutonomists or capitalists tend to be long the profit share, they have benefited from trends like globalization [see also note iet7Ud8k in my raw file] and the productivity revolution, disproportionately. However, labor has, relatively speaking, lost out.
We see the biggest threat to plutonomy as coming from a rise in political demands to reduce income inequality, spread the wealth more evenly, and challenge forces such as globalization which have benefited profit and wealth growth.
Globalization has come in for its fair share of attack of late. And political attention on immigration and protectionism is never far from the surface. As we suggested in our note in October last year, reactionary political forces are likely to rise as globalization persists and the losers in developed economies gain in numbers. To an extent we see this happening in Europe, for example, where the rise in the profit share (fall in the wage share) has come at the same time as the rise of right-wing, generally anti-immigration parties (please see Figure 13)
On the other hand, ageing populations in countries where there are developed and well-financed pension schemes, and a big equity component in these, are probably more tolerant of a rising profit share. As individuals move from being workers to retirees, their incomes shift from being earned as wages, to dividends and savings, which are more linked to profits.
This would suggest that in the UK and US for example, demographics might support -- politically -- a higher profit share, though this might not hold true, for example, in a country like France.
So, is plutonomy under threat politically? We are keeping an eye on this one. At the moment, it is too early to make this call. Calls for protectionism and an end to immigration grow louder by the day, but they are difficult to measure. But a substantial percentage of Americans are in favor of repealing the estate tax (though only 2%, roughly, will ever pay it), which does not resonate as a population determined to destroy wealth inequality.
The political process is the greatest threat to plutonomy. We don't see it as a threat today in most countries. But we are alert to changes here. helps explain many conundrums that simplistic analysis of "the average consumer" ignores.
The rise of the plutonomy has been an incredibly important development of the last 25 years. We think the huge increases in wealth and income inequality that has occurred as the rich have become richer helps explain many conundrums that simplistic analysis of "the average consumer" ignores.
The rich earn a lot. They are worth a lot. They don't tend to save out of income. They are apparently impervious to US$70 oil, run negative savings rates, and are, we believe, largely to 'blame,' for the negative savings rates in plutonomy countries. Not that rich people in non-plutonomy countries aren't doing exactly the same, or feeling the same forces. It's just that in egalitarian countries like Japan or most of Europe ex the UK, there simply aren't enough rich folks to influence the data in the way that there are in plutonomy countries like the UK, US or Canada.
Our Plutonomy Symposium in London looked at the challenges and opportunities presented by this fast growing market. The general message was that the rich wanted great service, uniqueness, quality and that the traditional concept of cost was far less than value. Time is of great value, rather than money. The rich value personal attention and uniqueness. While it is difficult for companies to retain prestige and continue to provide excellent service, the underlying market/demand looks exceptionally strong.
Our own view is that the rich are likely to keep getting even richer, and enjoy an even greater share of the wealth pie over the coming years. We think rising profit margins will keep profit growth strong, and equities are at any rate undervalued. And the rich tend to be disproportionately exposed to the equity markets. While there are challenges to this, not least through populations/the political process demanding a more "equitable" share of the wealth, in the short term we think the trend of the rich getting richer is likely to persist. Plutonomy related stocks should, we think, continue to see strong demand and inflation-beating pricing power.
[ ... SNIP! ... ]
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