[Commons-Law] ...and patent protection.

[Sunil Abraham]

The rich bail out rest of the economy, says Citigroup Kapur
http://www.financialexpress.com/fe_full_story.php?content_id=121126

MARCH 20:  Ajay Kapur has a message for investors who fret that low U.S.
savings, the record current-account deficit and indebted U.S. households
will kill consumer spending, boost interest rates, sink the dollar, slow
the global economy and torpedo stock markets. 

‘‘Relax,’’ says Kapur, Citigroup Inc.’s head of global equity strategy
in New York.


He says many of the world’s economic ills — what economists call global
imbalances — can be explained by the habits of the rich, who account for
an overwhelming share of income, wealth and spending in the U.S., U.K.,
Canada and Australia.

In his view, the rich are bailing out the rest of the economy. They
spend, and they buy imported goods, and no one gets hurt.

‘‘Global imbalances that worry many investors aren’t as threatening as
one might suspect,’’ says Kapur. The world’s wealthy ‘‘aren’t headed for
the poorhouse anytime soon. They are in great shape financially.’’

Kapur’s analysis reassures investors such as Madhav Dhar, of hedge fund
Traxis Partners in New York, about the stability of the global economy. 

It also gives investors a way to make money that Kapur says has worked
for years: buying shares of companies that cater to the folks with the
cash.

He suggests luxury-goods companies such as Switzerland’s Cie. Financiere
Richemont AG, the maker of Cartier jewelry, and clothing maker Burberry
Group Plc of the U.K., known for its plaid pattern; Swiss bank Julius
Baer Holding AG; and U.S. luxury-home builder Toll Brothers Inc.

Plutonomies

Citigroup strategists divide the developed world into two blocs:
economies driven by the very rich — mostly the U.S., the U.K. and Canada
— and more egalitarian cultures, such as Japan and most of continental
Europe.

Kapur calls the first group plutonomies, a cross between ‘‘ploutos,’’
the Greek word for wealth and ‘‘economy.’’ They are characterized by
capitalist-friendly governments and tax regimes, constant technological
innovation, an embracing of globalization and immigration, financial
innovation, the rule of law and patent protection.

Take the U.S. The richest 10% of families account for 43% of the
country’s income and 57% of the national wealth, while the bottom 40%
account for 10% of total income and 9% of the wealth, according to the
Federal Reserve’s latest triennial Survey of Consumer Finances, which
covers 2004 and was released in February.

Meanwhile, the net wealth of the richest Americans was 8.4 times their
annual income, up from 7.4 times in 2001 and six times in 1995.

‘Rising Wealth’ ‘‘This rising wealth is the real reason why the rich are
happy to keep consuming,’’ Kapur wrote in a March 5 report to clients.
‘‘They simply do not need to save as much to maintain a healthy wealth
balance as they did in prior decades.’’

The plutonomy thesis goes a long way in explaining why consumer spending
has held up, even amid soaring oil prices and surveys that show
weakening sentiment; why the U.S. has a negative savings rate; and why
the U.S. trade deficit with the 12-nation euro zone nearly doubled from
November 2000 to November 2004, while the dollar fell more than 50%
against the euro.

Simply put, the wealthy account for such a large part of the economy
that expensive oil and a sinking greenback have minimal, if any, impact
on their spending habits, contends Kapur. And as long as their wealth
climbs at a faster rate than their income, they can afford to spend more
than they save. Kapur’s view is not shared by his own company’s Robert
Rubin, chairman of Citigroup’s executive committee and former U.S.
Treasury Secretary. Rubin has been outspoken about what he sees as the
economic dangers facing the world.

In a speech in New Delhi on March 9, Rubin decried such ‘‘enormous
imbalances’’ as projected budget deficits, current account deficits,
savings rates at ‘‘virtually zero’’ and high levels of personal debt.
Together, they have ‘‘the potential for leading to real trouble in the
American economy,’’ he said.

Kapur has found agreement among some investors, though. The plutonomy
theory has ‘‘a ring of truth,’’ says Dhar, of Traxis Partners. ‘‘It has
made us more comfortable with the macro-economic outlook.’’

Gerard Lane, an investment strategist at Morley Fund Management in
London, says the thesis ‘‘is credible as an explanation of what’s going
on in the U.S. economy and why so many of us have been wrong about the
U.S. consumer over the last five years.’’ The firm, which manages 156.1
billion pounds ($274 billion), owns shares of Richemont; France’s LVMH
Moet Hennessy Louis Vuitton SA; Swiss bank UBS AG, because of its
private-client business; Miami-based Carnival Corp., which offers
$25,000 round-the-world-cruises; and Japan’s Sharp Corp., whose 65-inch
flat-screen TV sells for $20,000 in New York.

‘‘It’s the super wealthy who are going to access these quality or
well-branded goods and services,’’ says Lane.

Drawbridge Global Macro Advisors, a New York-based hedge fund with more
than $4 billion under management, is going a step further. It is
investing in a basket of high-end European luxury-goods makers —
including Richemont, LVMH, France’s Hermes International and Italy’s
Bulgari SpA — while periodically selling short mass-market U.S.
retailers, such as Liz Claiborne Inc., TJX Cos. and Quiksilver Inc.

-- 
Sunil Abraham   Manager sunil at apdip.net  www.iosn.net  
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