{"id":34866,"date":"2014-06-10T08:04:09","date_gmt":"2014-06-10T06:04:09","guid":{"rendered":"http:\/\/beta.next-finance.net\/opinion\/piketty-and-plutonomy-the-revenge-of-inequality\/"},"modified":"2014-06-10T08:04:09","modified_gmt":"2014-06-10T06:04:09","slug":"piketty-and-plutonomy-the-revenge-of-inequality","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/opinion\/piketty-and-plutonomy-the-revenge-of-inequality\/","title":{"rendered":"Piketty and Plutonomy: The revenge of inequality"},"content":{"rendered":"

Plutonomists \u2013 the very rich \u2013 cannot be ignored. Thomas Piketty\u2019s magnum opus,
\nthe controversial, surprise bestseller, \u201cCapital in the Twenty-First Century\u201d has
\nmade sure of that. We first wrote about plutonomy about a decade ago \u2013 the theme
\nhas certainly resonated since then. We think analyzing plutonomies \u2013 economies
\nwhere economic growth is powered by and largely consumed by the wealthy few \u2013
\nis critical for investors as they grapple with today\u2019s complex markets. More so after
\nthe Piketty tome, where he asserts the power of compound interest, and the rising
\ngap between investment returns (r) and economic growth (g) is likely to have
\ndramatic consequences for income inequality. He projects the global private wealth
\nto national income ratio to rise from 440% in 2010 to record highs of 500% by 2030.
\nThese levels were last seen in 1910. This ties in squarely with BofA Merrill Lynch
\nenterprise theme of A Transforming World<\/a>, under the rubric \u201cMarkets\u201d where
\n\u201cincome inequality\u201d is a key sub-theme. Ten implications of plutonomy for investors:<\/p>\n

1) Plutonomy plus asset inflation equals lower national household savings
\nrates.<\/strong> Why? When the rich account for a major proportion of the economy, and
\nexperience a stock market boom, they drop their savings rates from current income.
\nAnd vice versa. If plutonomists get over the shock of the global financial crisis, take
\ncomfort in their vastly expanded wealth from QE-driven asset inflation, and reduce
\ntheir savings rate which doubled to 38.2% after the financial crisis of 2008, the US
\nC\/A deficit could expand again, a big positive for EMs. <\/p>\n

2) Consumption volatility for plutonomists is significantly higher than the
\naverage. Economic and earnings surprises are linked to their behavior. <\/p>\n

3) In the short term, the cessation of QE policies \u2013 where plutonomist balance
\nsheets and behavior were a critical part of the monetary transmission
\nmechanism \u2013 is likely to threaten plutonomy (luxury stocks). <\/p>\n

4) Anti-corruption moves in EMs are also likely to hurt plutonomy stocks. <\/p>\n

5) EM plutonomy-driven luxury property markets could be at risk from QE
\ncessation, EM anti-corruption measures, and macro-prudential measures <\/p>\n

6) Absent policy intervention, in the longer term, EMs are likely to become
\nentrenched and egregious plutonomies.<\/strong> The forces that propagate plutonomy \u2013
\nthe Rule of Law, patent protection, financial deregulation, high profile immigrants
\n(returnee emigrants for EMs), greater global linkages, rising military spending that is
\na key innovation driver, and vast untapped catch-up markets (health, education,
\nenvironment, financial services etc.) \u2013 are all gathering momentum in EMs. <\/p>\n

7) According to Piketty, global Wealth is likely to rise from \u20ac313tn in 2010 to
\n\u20ac667tn in 2030 \u2013 a rise of \u20ac354tn.<\/strong> EM Wealth is projected to rise from \u20ac158tn to
\n\u20ac437tn \u2013 i.e., 80% of incremental Global Wealth creation. Great for Asset
\nmanagers, capital markets players, insurance firms, private banks (and investment
\nprofessionals) operating in EMs. <\/p>\n

8) Financial re-regulation will likely put a damper on the incomes of some
\nfinance professionals, reducing income inequality at the level of the top 0.1%
\nof households (>US$1.5mn income) but not for the top 0.01% households
\n(>US$7.2mn). <\/p>\n

9) EM education boom. <\/strong><\/p>\n

10) Rising EM political polarization.<\/strong><\/p>\n

According to Piketty, global wealth is concentrated in the hands of the plutonomists
\n\u2013 the top 1% wealth holders in the US account for about 35-40% of private wealth
\n(45% in 1910). The top 0.1% (wealth >US$20mn) own about 23% of US wealth,
\nabout the same as the bottom 90% put together. In 1978, they owned just a fourth
\nof what the bottom 90% owned. In emerging markets, wealth concentration data are
\nscarce, but in Russia, Malaysia, Israel, the Philippines, Taiwan and Chile, the uber-plutonomists account for a much larger share of their economies, than their
\ncompatriots in the US. <\/p>\n

Given that larger fortunes enjoy larger pre-tax returns, we expect this wealth
\nconcentration to grow \u2013 the rich are likely to get an even larger slice of an
\nexpanding private wealth cake. We are aware of the debate over Piketty\u2019s math, but
\nare generally comfortable with the thrust of his analysis. <\/p>\n

When wealth and income are as concentrated as they are, and expected (a la
\nPiketty) to get even more so, examining the \u201caverage\u201d consumer or \u201caverage\u201d
\ninvestor makes little sense. Examining the fat tail \u2013 the behavior of the plutonomists,
\nrather than that of the multitudinous many \u2013 is more advantageous to investors.
\nThat\u2019s what we have attempted in this report. <\/p>\n","protected":false},"excerpt":{"rendered":"

When wealth and income are as concentrated as they are, and expected (a la
\nPiketty) to get even more so, examining the \u201caverage\u201d consumer or \u201caverage\u201d
\ninvestor makes little sense. Examining the fat tail \u2013 the behavior of the plutonomists,
\nrather than that of the multitudinous many \u2013 is more advantageous to investors.
\nThat\u2019s what we have attempted in this report. <\/p>\n","protected":false},"author":1,"featured_media":34864,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1480],"tags":[1656,1809,1659,1437,1724,1999,1650,1962],"_links":{"self":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/34866"}],"collection":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/comments?post=34866"}],"version-history":[{"count":0,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/34866\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media\/34864"}],"wp:attachment":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media?parent=34866"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/categories?post=34866"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/tags?post=34866"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}