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Only War, Inflation And Financial Collapse Can End The Global "Plutonomy", According To Citi

Tyler Durden's picture




 

The last time the market was as euphoric and as complacent as it is now, was in the happy go lucky days of 2006 when every day stocks surged without a care in the world, when Lehman bankers were looking to a comfortable retirement after cashing out their stock (then trading north of $70), when the only question was which mega M&A and supermega LBO will hit next, and when the then-brand new Fed chairman Ben Bernanke said there is nothing to worry about because subprime was contained and because home prices in the US just can not possibly drop. Not surprisingly, late 2006 was also when Citigroup held its first and only Plutonomy symposium: a joyous celebration of the 0.001%, or as Citi called them, "The Uber-rich, the plutonomists who are likely to see net worth-income ratios surge, driving luxury consumption", adding "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."

Wait what? Was there really a time 8 years before the French economist Piketty bashed (and made millions in the process) class and wealth inequality, when one of the world's soon to be most insolvent banks had a symposium in which the bank pulled a page right out of pre-revolutionary France and celebrated the world's mega rich?

Yes, and that's not all.

In a trilogy of reports authored by Citi's then head of global srategy, Ajay Kapur (who subsequently quit Citi, tried his hand at running a hedge fund, failed, went to Deutsche Bank to head the bank's Asian equity strategy, failed, and has for the past year been working at Bank of America in that pluotcracy mecca, Hong Kong), couldn't find enough words of praise to explain just how great the brave new world is, one in which the 0.1% control about half of the world's financial assets, and said, on September 29, 2006, that "we think the balance sheets of the rich are in great shape, and are likely to continue to improve."

In retrospect we now know he couldn't be more wrong, and as events just two years later proved, it required a coordinated, global multi-trilion bailout of the entire financial system (which is still ongoing), to avoid the total collapse of the balance sheets of the rich.

However, the flip side of this ongoing intervention by central banks has meant that the (merely) uber rich in 2006 have since become uberest rich, and the nascent Plutonomy of the mid 2000s has morphed into a giant monster unseen at any time before in history.

And since the class divide of society has only gotten worse, here are some of Citi's observations on Plutonomy back then, which are even more applicable now.

From Citi's September 29, 2006 report:

Plutonomy – the story so far...

 

Over the last 20 years or so, in certain countries, the rich have been getting substantially richer. 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.

 

...

 

What has driven this? We see three drivers. Firstly, the bull market in financial assets – particularly equities – as inflation has fallen, has benefited those whose assets have been invested, particularly in equities as the disinflation was also accompanied by strong earnings growth as margins rose.

The current analog: the Fed-induces record breaking rally since the 666 lows hit in early 2009

Secondly, the rise of managerial capitalism, with CEO remuneration increasingly tied into EPS growth and equity performance.

Which should explain the record surge in corporate stock buyabcks. After all, yield-squeezed bondholders have to pay to make management (and activist shareholders) wealthier than ever before.

Finally, as with previous waves of plutonomy – such as sixteenth century Spain, seventeenth century Holland, Industrial Revolution Britain, the Gilded Age and the Roaring Twenties in the US – the ongoing technological revolution has generated a new wave of ultra-high net worth individuals.

... Such as a ludicrous $40 billion valuation of a taxi-alternative service or a several hundred billion market cap for yet another "cool, hip du jour" social network, all perfectly rational and which clearly have nothing to do with the endless pool of zero-cost money that VCs can recycle into perpetually unprofitable projects

To be sure, being uber-wealthy is not without its drawback. As Citi explained back in 2005, there is inflation, and then there is "inflation for the uber rich":

It's Never Been More Expensive To Be Rich...

 

Another new data point we have is the CLEW (Cost of Living ExtremelyWell) Index from Forbes Magazine for 2005 (in our original Plutonomy note back in October, we didn’t have the latest data point for the year 2005).

 

CLEWI is an inflation index of the cost of luxury goods. It measures such things as the cost of suite at the Four Seasons in New York (up 15% year on year) and a kilo of Imperial Beluga caviar (at US$6840, up 40% year on year). In 2005, the CLEWIndex rose 4%, while US CPI rose at 3.6%. Luxury goods still have relative pricing power. The 0.4% gap might not sound all that impressive, but bear in mind that a stronger US dollar, probably helped check this inflation rate (many luxury goods come from Europe, but the CLEWI is a measure in dollars). At any rate, the year to year fortunes of the CLEWI versus the CPI are less relevant. The long-term chart says it all (Figure 4). The most recent data point just confirms that in the search for pricing power, we’d rather be in luxury goods, than low end consumer businesses.

 

Surely everyone feels the pain resulting from the rising costs of living for the uber wealthy.

Sarcasm aside, the biggest question on everyone's mind is how does the current episode of peak-Plutocracy end. Back in 2005/2006 Citi saw nothing but bright skies ahead for the world's mega rich, and yet there already were ripples forming...

The risks to plutonomy

 

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... 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 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.

 

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.

Back in 2006 Citi ultimately ended up being very, very wrong, however in a way that ultimately made the rich whose financial paper wealth was about to disappear even richer, courtesy of the biggest taxpayer-funded wealth transfer in history. As a result those who were merely uber rich a decade ago have been wealthier (if only on paper).

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.

Here, Citi was absolutely spot-on accurate. However, the question now stands: since there is a finite amount of wealth that can be transferred from the expiring global middle class, and since everything above that is merely dilution from excess printing of fiat money, inquiring minds want to know: is the world financial system due for another massive collapse, one which will even further accelerate the wealth redistribution, or is the world's population so zombified that nothing can ever possibly tips the scales ever again, and the lesson from the French revolution, when an unprecedented amount of wealth and power was held by a precious few, have been forever lost on the world and its citizens?

 

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Mon, 12/29/2014 - 00:43 | 5600712 Calmyourself
Calmyourself's picture

"capitalism" QUOTES ARE A NICE TOUCH.  This crap sandwich we are all forced to eat has very little to do with true capitalism.  This crony owned circus is much closer to a fascist amalgam of state and corp power.   Mussolini's dream todays America...

Mon, 12/29/2014 - 03:19 | 5600837 OldPhart
OldPhart's picture

I rarely give votes. You've got one of mine.

 

Mon, 12/29/2014 - 03:06 | 5600826 cornflakesdisease
cornflakesdisease's picture

Only a world government that can teach people to love what is right and care for one another will bring world peace.

Mon, 12/29/2014 - 03:42 | 5600850 Blano
Blano's picture

Forgot your sarc tag there buddy.

Sun, 12/28/2014 - 22:34 | 5600468 yogibear
yogibear's picture

After Citi setup the Cromnibus taxpayer derivative bailout it's boasting about it.

Like saying we are going to offshore all the money and crash the derivatives leaving you taxpaying suckers holding the loses.

Sun, 12/28/2014 - 22:37 | 5600478 gadzooks
gadzooks's picture

Citi should sacrifice itself for the greater good...... So when is it closing?

 

Sun, 12/28/2014 - 22:42 | 5600491 q99x2
q99x2's picture

Sounds good. Where do enlist to fight Citi?

Sun, 12/28/2014 - 23:29 | 5600600 flyonmywall
flyonmywall's picture

Plutonomy is a dance.

If the music is playing.

Keep dancing until it stops.

 

 

....Fuck you CITI

 

 

Mon, 12/29/2014 - 00:35 | 5600608 Peter Pan
Peter Pan's picture

Some years ago I told my children that the system is interested in them only if they are buying or borrowing and that the ultimate freedom is to be able to wake up one morning and to be able to say "enough is enough. I have enough to live a simple life and I now have the time to give back to my community as a volunteer, benefactor or whatever."

The next greatest freedom is to be able to buy whatever you want but instead you choose to buy what you need.

The message is clear, stop feeding the system. Only then will the 0.01% understand that we fully understand and that their days of manipulation and slavery are over.

Sun, 12/28/2014 - 23:47 | 5600640 Amerikan Patriot
Amerikan Patriot's picture

Some fun questions to ring in the New Year!

Russia’s Vladimir Putin refers to himself as “Russia’s humble public servant.”  This humble public servant’s net worth is:

a)  Negligible – after all, he’s merely a humble public servant;

b)  On a par with that of Russia’s oligarchs, who often are required to get clearance for important transactions from Mr. Putin himself;

c)  Greater than that of most oligarchs, since approval by Mr. Putin for large transactions is a given, and naturally, “palms will need to be greased”; or

d)  Quite modest, Mr. Putin preferring to be paid in bottles of Baltika No. 3.

For those that answered (b) or (c), a follow-up question:

Mr. Putin’s extraordinary wealth is the result of:

a)  Blatant corruption and quid pro quo deal-making;

b)  Skimming from the Russian treasury;

c)  A night job working on the KaMAZ truck assembly line; or

d)  Generous donations via Western Union from loyal Zero Hedgers.

Mon, 12/29/2014 - 00:14 | 5600684 Peter Pan
Peter Pan's picture

And I suppose you have the full dossier on his wealth and its whereabouts.

Do you have any proof or is it all hearsay and back of the envelope style calculations.

Plus you forget America's humble servant who received a NOBEL PRIZE in advance.

Who else managed such a feat?

And who else has disappointed so greatly?

 

Mon, 12/29/2014 - 00:43 | 5600711 the grateful un...
the grateful unemployed's picture

receiving the Nobel in advance is almost like receiving the Presidency of the United States, in advance, only the prize is award in private with no media present

Mon, 12/29/2014 - 00:50 | 5600719 Amerikan Patriot
Amerikan Patriot's picture

Don't stomp off in a defensive huff, Bob.

Answer the questions - c'mon, it'll be fun!

Mon, 12/29/2014 - 01:27 | 5600747 bid the soldier...
bid the soldiers shoot's picture

OMG you got some crack cocaine for Christmas and now you think you're Samantha Power.

Excuse me but I'm going to vomit.

Mon, 12/29/2014 - 02:15 | 5600786 MEAN BUSINESS
MEAN BUSINESS's picture

nap time AP? U no fun

Mon, 12/29/2014 - 02:40 | 5600803 MEAN BUSINESS
MEAN BUSINESS's picture

Thanks for the greenie. You can see where I'm going with this LULZ

Mon, 12/29/2014 - 00:23 | 5600688 nortie
nortie's picture

TROLL!

Mon, 12/29/2014 - 00:53 | 5600721 MEAN BUSINESS
MEAN BUSINESS's picture

Don't by any chance have a list of every summer job the kid had. Do Ya? me neither. wiki says his Mom worked in a factory. So I'll go with c)

I almost gave your first ever greenie for a pretty well structured comment that I did find some fun in. A break from the daily bombardment of cut and paste ad nosium that has zh'rs all wearing out our scroll buttons. Nobody has time to read all of that so please try to keep it down to a dull roar ok? At least Fonestar was always brieferer. Thanks

Mon, 12/29/2014 - 05:09 | 5600889 MEAN BUSINESS
MEAN BUSINESS's picture

Yawn. Goodnight AP

EDIT:btw, i should have specified above "YOUR cut and paste" but i think most understand I MEAN AP

Mon, 12/29/2014 - 03:57 | 5600864 Counterpunch
Counterpunch's picture

Honestly, ZH ought to do like 4Chan and also ban people for repeated threadjacks. 

 

Mon, 12/29/2014 - 04:51 | 5600893 dreadnaught
dreadnaught's picture

Change your handle to AMERIKAN IDIOT-would be more fitting.

Mon, 12/29/2014 - 06:41 | 5600929 Jano
Jano's picture

poor moron. r u a member of the criminal gang of Soetoro, or only a dupe?

Mon, 12/29/2014 - 00:05 | 5600670 astitchintime
astitchintime's picture

Oh wait ... WHAT?

This from Citi from September 2006!?!?

This is ancient history LOL ... and here I was thinking Citi recently had a "fear of God" moment or a 'revelation' or a 'pennance' or something!!

*-*

Mon, 12/29/2014 - 00:39 | 5600702 Atomizer
Atomizer's picture

Lastly, Jan 25, 2015

The helical model - our Galaxy is a vortex, describes the galactic plane. Up or down changes the suns climate within the Galaxy, not just earth.

 

A POPE or Zionist fuck looking to score new slave taxation on a collapsing fiat will not be able to explain this. Ask them to pray and produce more sun spots with six massive CME’s to rebuild the thinning protective shield. Ask them to pray and produce more sun spots with six massive CME’s to rebuild the thinning protective shield. The Sun will be demanded to church confession, as to why he isn’t producing enough sun spots

Enjoy.

Mon, 12/29/2014 - 00:51 | 5600720 the grateful un...
the grateful unemployed's picture

went to a CITI investor forum about ten years before this, in which the stocks they were promoting were the new energy companies (ENRON, et all) it was strictly TA, no discussion of the fundamentals unless it came up in Q & A. the TA departments were dupes for the cause, as long as the stock goes up, who cares why? eventually these big firms dumped their chartist altogether, but no fundamental analyst is going to trash a stock the company wants to sell (or underwrite) i forget who did the underwriting on Enron? now its easier to cover your ass by describing a TREND, and then assigning stocks that fit in that trend, and then discussing the TREND, for instance you promote a company with lots of financially engineered earnings, and what you discuss is how long can the FED KEEP SUPPLYING CHEAP MONEY, short answer, until they stop. research at the big firms used to be somewhat credible, now it barely passes the Cramer test.

Mon, 12/29/2014 - 01:43 | 5600762 22winmag
22winmag's picture

Criminals should not be allowed to profit further from their crimes (think- murder someone and then write a bestseller about it). This should go double for guilty-as-all-sin criminal organizations like Citi!

 

2014 MSNBC verbal diarrhea compilation!

 

https://www.youtube.com/watch?feature=player_embedded&v=WKT_iwg9xbY

Mon, 12/29/2014 - 02:02 | 5600782 Chad_the_short_...
Chad_the_short_seller's picture

Facts that prove they are the most disgusting filth to ever walk the earth and are here to genocide white people.

 

http://www.whyileftsweden.com/?p=198

Mon, 12/29/2014 - 03:02 | 5600820 CitizenPete
CitizenPete's picture

Only a Rothschild could afford that.

Mon, 12/29/2014 - 03:08 | 5600827 california chrome
california chrome's picture

WTF is plutonomy premium? Sik Chit by Citi.

Mon, 12/29/2014 - 03:26 | 5600842 Fresh
Fresh's picture

One of the worst GE Mark 1 reactors is being shut down on Dec 31, 2014. I hope they aren't drinking on New Years Eve.

They like new Years Eve fireworks in Hawaii, but we don't need any Chernobyl sky lights! Funny how they picked that day, probably based on financials, depreciation, and some tax avoidance scheme. Anyhow, good riddance.

 http://www.foxbusiness.com/markets/2014/12/28/town-shudders-anti-nuclear...

Now we go into the next reality check. The decomissioning.

Entergy plays the card...we want to finish the decomm as soon as possible, not let it drag out until 2070, but it all depends on how the decomm fund grows through investments.

They have around $600M in the decomm fund, and it will like cost $1,800M or more to bring it back to "greenfield". 

I did some spreadsheets and came up with "they don't have a snow balls chance in hell of ever getting this done."       In some scenarios, the fund growth could outpace inflation enough to catch up.    BUT and this is huge and massive BUT (big enough to break the internet, lol) all this analysis is based upon no major market correction in the next 55 years.

Charts and downloadable Excel is here

http://nukeprofessional.blogspot.com/2014/12/vermont-yankee-is-dead-long...

Mon, 12/29/2014 - 07:09 | 5600941 Kina
Kina's picture

Can we have a seperate thread called... 'American Patriot anti Putin masturbation community' ?

where he can go at his hearts content on his Putin hatred and MSM propoganda practice.

Mon, 12/29/2014 - 07:11 | 5600945 smacker
smacker's picture

"The [four] risks to plutonomy"

The first one listed - "war" - is higher up the scale of risk than the author thinks.

The fourth risk - "political action" - will only happen when pressure from electorates can't be ignored any longer, meaning that the very health/welfare of the elites is at risk because they see people stocking up on rope, piano wire and weapons. The political elites will never initiate action on their own because they are also up to their necks in the consequences of plutocracy.

Mon, 12/29/2014 - 09:46 | 5601181 Ewtman
Ewtman's picture

The study of Socionomics makes this stuff understandable. Little understood because it is contrary to the way most of society believes things occursocial mood causes social action, not the other way around. 

http://www.globaldeflationnews.com/negative-social-mood-causes-geopoliti...

Mon, 12/29/2014 - 11:52 | 5601541 falak pema
falak pema's picture

Hahaha, calling Sandy Weill and Bill Clinton...PULEESE undo what you did and give us back Glass Steagall.

Puleese tell us Reaganomics is OVER, puleese tell us Greenspan and Robert Rubin, the Squid and Summers in Hell are just thingies of the past! 

Puleese tell us GWB American magnanimous world prison and war games for King Oil are all smoke n mirrors.

We all want to go back to horse and buggy and the Magnificent Ambersons. 

Oh to hear Orson Welles say : The Martians are coming, or ....Deep among the lonely sun-baked hills of Texas, the great and weatherbeaten stone still stands. The Comanches called it Squaw's Head Rock. 

Mon, 12/29/2014 - 14:12 | 5601949 Overflow-admin
Overflow-admin's picture

"Only War, Inflation And Financial Collapse Can End The Global "Plutonomy", According To Citi"

 

They would actually LOVE to get all of the above, because it WON'T end the global "Plutonomy" IT WOULD MAKE IT WORSE... WHO'S MAKING A PROFIT OF WAR INFLATION AND COLLAPSE?

 

"Kill a banker, kill Citi, End The Global "Plutonomy"!"

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