Plutonomy

In his new movie, Michael Moore mentions a citigroup document on plutonomy. Here are excerpts from what seems to be it. The document is available here:  Download Plutonomy 1

WELCOME TO THE PLUTONOMY MACHINE

In early September we wrote about the (ir)relevance 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 economics team 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.

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) preoccupy 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 (andhence 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 depthof 4 feet, if one steps into its deeper extremes. Since consumption accounts for 65% ofthe 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.

...

We will focus here on data from Prof. Emmanuel Saez of U.C. Berkeley who works with data from tax sources. Figure 2 shows the share of income for the top 0.1%, 1% and 5% in the U.S. since the 1910s. Clearly the fortunes of the top 0.1% fluctuate the most.

Indeed, the fortunes of the top 5% (or even top 10%), or the top 1%, are almost entirely driven by the fortunes of the top 0.1% (roughly 100,000 households).
With the exception of the boom in the Roaring 1920s, this super-rich group kept losing out its share of incomes in WWI, the Great Depression and WWII, and till the early eighties. Why? The answers are unclear, but the massive loss of capital income
(dividend, rents, interest income, but not capital gains) from progressive corporate and estate taxation is a possible candidate. The rise in their share since the mid-eighties might be related to the reduction in corporate and income taxes. Also, to a new wave of entrepreneurs and managers earning disproportionate incomes as they drove and participated in the ongoing technology boom. As Figure 3 shows, while in the early 20th century capital income was the big chunk for the top 0.1% of households, the resurgence in their fortunes since the mid-eighties was mainly from oversized salaries. The rich in the U.S. went from coupon-clipping, dividend-receiving rentiers to a Managerial Aristocracy indulged by their shareholders.

...

Society and governments need to be amenable to disproportionately allow/encourage the few to retain that fatter profit share. The Managerial Aristocracy, like in the Gilded Age, the Roaring Twenties, and the thriving nineties, needs to commandeer a vast chunk of that rising profit share, either through capital income, or simply paying itself a lot. We think that despite the post-bubble angst against celebrity CEOs, the trend of cost-cutting balance sheet-improving CEOs might just give way to risk-seeking CEOs, re-leveraging, going for growth and expecting disproportionate compensation for it. It sounds quite unlikely, but that’s why we think it is quite possible. Meanwhile Private Equity and LBO funds are filling the risk-seeking and re-leveraging void, expecting and realizing disproportionate remuneration for their skills.

 

Revision: it appears that someone is trying to have all the copies of these reports deleted from the web. The links may not be active any longer (but try this one http://jdeanicite.typepad.com/i_cite/2011/07/deleted-files.html).

Comments

[D. Smith (Traverse City, MI)]

It's truly frightening to read this analysis and how we, "the 99" are viewed by them, "the 1%". Like we are something of value only for the sake of taking or keeping something from us...like we are nothing more than a host to a parasite sucking the lifeblood out of us. The "Plutomomists" should heed the lesson in nature, for a necrotrophic parasite in its quest for survival and acquisition, ends up not only killing the host, but itself as well. Without the 99%, the 1% cannot exist. The 1% NEEDS the 99% in order to remain in power. WE, the 99%, don't need the 1%!
The 99% have 99% of the VOTE!! Let's use it!!!

"I refuse to live in a country like this, and I’m not leaving." (Michael Moore)

[Jodi]

Thanks for your comment--the memos are pretty extreme, kinda like the Dead Peasants policies. What's particularly interesting: no attempt to hide class conflict, oppression, exploitation.

[asfasfasdf]

It just goes to show how demented these people are and why we need a socialist revolution in this country. These people have no concept of moral right or wrong. They live in a fantasy world of analysis that's based on nothing but their own wishful thinking. It's as if analysis were a form of creative writing.

BTW, did anyone else notice what poor sentence construction, word choice and what a lousy sense of composition were on display? Simply put, the person who wrote that is stupid, as in low IQ. It sounds like a business major who drank his way through b-school and has learned to insert the buzzwords of his peers in cookie-cutter sentences he gleaned off of the mindless, fact-free drivel his industry churns out.

[tm]

There are two parts to the memo. I believe Moore alludes to the second part. Here's a bit on both:

http://interimtom.blogspot.com/2009/10/humping-dumpty-plutonomics-by-ajay.html

[Levi]

Great find, Jodi. In response to another poster, I don't know that I would call the person/people who wrote this memo "stupid" or captivated by wishful thinking. What strikes me as "wishful thinking" is the naive belief that somehow normative concerns like right and wrong can have any impact whatsoever on this sort of reasoning. I don't know what's more demoralizing here: the fact that there are those in this 1% that are, in a sophisticated fashion, *clear-sightedly* theorizing strategies to maximize their interests in such a cynical fashion (the author of this document is like a mad scientist or a wicked Marxist that understands everything Marx said and recognizes it to be true yet uses all of that to *intensify* these inequalities) or that we have naive "radical leftist activists"(tm) that think the appropriate or viable response is a normative denunciation that points out how they're "wrong" or "stupid" or "wicked". Sure, this response is natural and it's gratifying to situate oneself in the position of being "right", but the whole "logic" of this response is that of the knavish slave that thinks he's accomplishing something by gossiping behind his master's back by talking about how tacky his master's taste is while nonetheless remaining a slave. Point out bad grammar all you like (how many poorly written articles are there out there in social and political philosophy?), it doesn't change the fact that folks like this are winning with these strategies. The question then is that of how to adequately and realistically respond to strategies like this. Somehow I don't think the Habermasian and Adornonian normophiliacs get what they're up against... And this goes doubly for those who have thoroughly missed the point of Zizek and Badiou that continue to think a truth-procedure consists in pointing out "they're bad, baaad!" Yes, they're bad, but that doesn't change the fact that they're shooting the moon or dominating the field. Certainly we can come up with better strategies.