Rudi's View | Oct 18 2007
This story was first published two days ago in the form of an email sent to registered FNArena readers.
By Rudi Filapek-Vandyck, Editor FNArena
Is it possible that in an overanalysed world as ours today there’s still something left we have failed to properly acknowledge? Something on the positive side perhaps?
Maybe we shouldn’t worry too much about the few million US citizens who are going to lose their jobs, their credit cards, their cars, their mortgages and ultimately their houses over the next eighteen months or so. Sure, their losses will make for very sad news stories, and you certainly wouldn’t want to be in their shoes, but when it comes to the question whether the US economy will manage to avoid a recession or not, these people may not hold the answer to that question.
The early years of the third millennium have brought unusually strong economic growth to most parts of the world. As a direct result of this, global wealth in its entirety has probably never been as high as today. Not only have the poor in many countries become less poor, the rich certainly have become richer.
At no point in history has the world seen as many millionaires as today. And the numbers continue growing, especially in countries such as Hong Kong, China, India and Russia. However, nowhere are there as many millionaires as in the US.
The few surveys into this matter suggest the growth of wealthy and super-wealthy people has accelerated over the past few years. It is believed that the amount of multimillionaire households in the US alone has at least doubled over the past ten years. A study by the Federal Reserve covering 2004, but only released in February this year, estimates more than 1.4 million households in the US are worth at least US$5 million and more than 530,000 households are worth more than US$10 million.
The world can change a lot in three years. Surveys by Merrill Lynch and Cap Gemini estimate the amount of wealthy households in the US has been growing in high single digits over the past few years. This would suggest that the Federal Reserve estimates are likely to be 1.75 million and 615,000 households respectively today (the actual numbers are probably higher as I accounted for conservative 7% annual growth).
This rapid growth of the wealthy and the super-wealthy is already bringing many changes to modern US society. Consider, for instance, that thousands of students are willing to pay US$12,000 to learn the tricks and trades of a modern butler. If they manage to secure a job at one of the wealthy households they can look forward to a starting salary between US$70,000 and US$120,000 a year, plus free room and board and who knows what else in extras. Becoming a butler, or Certified Household Manager (CHM) as the Americans call it these days, is now one of the fastest growing occupations in the country.
Citigroup Head of global equity strategy in New York, Ajay Kapur, believes the life style of today’s super rich is so extravagant that each of these households spends as much as sixty other average households. No wonder Kapur believes that today’s economic growth in the US is increasingly powered by the wealthy few.
In Kapur’s opinion many of today’s global imbalances are in fact caused by this shift in society towards the wealthy few. It’s a view that is backed up by the aforementioned Federal Reserve triennial Survey of Consumer Finances, covering 2004, but released in February this year.
According to the study, the richest 10% of families account for 43% of the US’s total income and 57% of the national wealth, while the bottom 40% account for 10% of the country’s total income and 9% of its wealth. But again, that was back in 2004. Today’s numbers are likely even more impressive.
And this is just the top layer of modern US society. As one would expect, the number of households worth more than US$1 million has grown significantly as well, as have households worth US$500,000 and US$250,000. In fact, while it is easy to separate the super wealthy from the rest, it is much more difficult to decide who’s simply rich and who isn’t.
A study by HSBC earlier this year revealed that households with an annual income over US$250,000 -this is the top 1.5% of US society- had just as much problems in paying the monthly bills as their less affluent peers. HSBC found nearly half of the respondents with US$250,000 in income have no savings at all as they simply spend all their money each month. One in ten of the respondents even complained they have difficulties in making ends meet.
While the HSBC survey suggests the top layer of US society remains vulnerable to economic shocks as many of the not super rich have no savings to fall back on, the latest Cap Gemini/Merrill Lynch World Wealth Report indicates America’s rich have commenced to diversify their investments away from the home country and the US dollar. Europe has become the favourite destination for investments outside the US, and European real estate in particular has been very popular.
Many countries in Europe, including Spain and France, have enjoyed strong property booms and it would seem part of this wealth creation has ended up in the pockets of US investors. The Russian property market appreciated by 700% in 2006.
Still, some 73% of all assets owned by the super-rich were located in the US at the end of last year.
The latest hot spot, by the way, seems to be the Middle East with wealthy investors expected to re-allocate some of their funds out of Asia.
What we know is that spending by this (growing) group of wealthy Americans is less susceptible to economic ups and downs. The unanswered question remains whether their continued spending is sufficient to offset the losses at the bottom of the food chain in the year ahead.
My best guess is that a US recession this time around seems much less likely than ten years ago. In fact, the country that may suffer the most from the sub-prime mortgages fallout may well be Mexico as the transfers of funds to families in Mexico from illegal workers in the US building industry has reportedly completely dried up.
As always, it’s the poor and unprotected that are hit first and the hardest.