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   <text x="37.943279" y="3721.0254" font-size="24px" style="paint-order:stroke fill markers" xml:space="preserve"><tspan x="37.943279" y="3721.0254">Was the U.S. always a plutonomy - powered by the wealthy, who aggrandized larger</tspan><tspan x="37.943279" y="3751.0254">chunks of the economy to themselves? Not really. For those interested in the details, we</tspan><tspan x="37.943279" y="3781.0254">recommend “Wealth and Democracy: A Political History of the American Rich” by</tspan><tspan x="37.943279" y="3811.0254">Kevin Phillips, Broadway Books, 2002.</tspan></text>
   <text x="37.387276" y="3286.6675" font-size="24px" style="paint-order:stroke fill markers" xml:space="preserve"><tspan x="37.387276" y="3286.6675">Let’s dive into some of the details. As Figure 1 shows the top 1% of households in the</tspan><tspan x="37.387276" y="3316.6675">U.S., (about 1 million households) accounted for about 20% of overall U.S. income in</tspan><tspan x="37.387276" y="3346.6675">2000, slightly smaller than the share of income of the bottom 60% of households put</tspan><tspan x="37.387276" y="3376.6675">together. That’s about 1 million households compared with 60 million households, both</tspan><tspan x="37.387276" y="3406.6675">with similar slices of the income pie! Clearly, the analysis of the top 1% of U.S.</tspan><tspan x="37.387276" y="3436.6675">households is paramount. The usual analysis of the “average” U.S. consumer is flawed</tspan><tspan x="37.387276" y="3466.6675">from the start. To continue with the U.S., the top 1% of households also account for</tspan><tspan x="37.387276" y="3496.6675">33% of net worth, greater than the bottom 90% of households put together. It gets better</tspan><tspan x="37.387276" y="3526.6675">(or worse, depending on your political stripe) - the top 1% of households account for</tspan><tspan x="37.387276" y="3556.6675">40% of financial net worth, more than the bottom 95% of households put together. This</tspan><tspan x="37.387276" y="3586.6675">is data for 2000, from the Survey of Consumer Finances (and adjusted by academic</tspan><tspan x="37.387276" y="3616.6675">Edward Wolff). Since 2000 was the peak year in equities, and the top 1% of households</tspan><tspan x="37.387276" y="3646.6675">have a lot more equities in their net worth than the rest of the population who tend to</tspan><tspan x="37.387276" y="3676.6675">have more real estate, these data might exaggerate the U.S. plutonomy a wee bit.</tspan></text>
   <text x="18.897636" y="3212.293" font-size="28px" font-weight="bold" style="paint-order:stroke fill markers" xml:space="preserve"><tspan x="18.897636" y="3212.293">THE UNITED STATES PLUTONOMY - THE GILDED AGE, THE ROARING TWENTIES,</tspan><tspan x="18.897636" y="3247.293"> AND THE NEW MANAGERIAL ARISTOCRACY</tspan></text>
   <text x="37.219276" y="3003.395" font-size="24px" style="paint-order:stroke fill markers" xml:space="preserve"><tspan x="37.219276" y="3003.395">The U.S., UK, and Canada are world leaders in plutonomy. (While data quality in this</tspan><tspan x="37.219276" y="3033.395">field can be dated in emerging markets, and less than ideal in developed markets, we</tspan><tspan x="37.219276" y="3063.395">have done our best to source information from the most reliable and credible</tspan><tspan x="37.219276" y="3093.395">government and academic sources. There is an extensive bibliography at the end of this</tspan><tspan x="37.219276" y="3123.395">note). Countries and regions that are not plutonomies: Scandinavia, France, Germany,</tspan><tspan x="37.219276" y="3153.395">other continental Europe (except Italy), and Japan.</tspan></text>
   <text x="16.741636" y="2967.1277" font-size="28px" font-style="italic" font-weight="bold" style="paint-order:stroke fill markers" xml:space="preserve"><tspan x="16.741636" y="2967.1277" fill="#171717" font-size="28px" font-style="normal" font-weight="bold">RIDING THE GRAVY TRAIN - WHERE ARE THE PLUTONOMIES?</tspan></text>
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    <text x="37.195278" y="2776.6233" style="paint-order:stroke fill markers" xml:space="preserve"><tspan x="37.195278" y="2776.6233">5) Since we think the plutonomy is here, is going to get stronger, its membership</tspan><tspan x="37.195278" y="2806.6233">swelling from globalized enclaves in the emerging world, we think a “plutonomy</tspan><tspan x="37.195278" y="2836.6233">basket” of stocks should continue do well. These toys for the wealthy have pricing</tspan><tspan x="37.195278" y="2866.6233">power, and staying power. They are Giffen goods, more desirable and demanded the</tspan><tspan x="37.195278" y="2896.6233">more expensive they are.</tspan></text>
    <text x="37.387276" y="2379.7729" style="paint-order:stroke fill markers" xml:space="preserve"><tspan x="37.387276" y="2379.7729">4) In a plutonomy there is no such animal as “the U.S. consumer” or “the UK</tspan><tspan x="37.387276" y="2409.7729">consumer”, or indeed the “Russian consumer”. There are rich consumers, few in</tspan><tspan x="37.387276" y="2439.7729">number, but disproportionate in the gigantic slice of income and consumption they take.</tspan><tspan x="37.387276" y="2469.7729">There are the rest, the “non-rich”, the multitudinous many, but only accounting for</tspan><tspan x="37.387276" y="2499.7729">surprisingly small bites of the national pie. Consensus analyses that do not tease out the</tspan><tspan x="37.387276" y="2529.7729">profound impact of the plutonomy on spending power, debt loads, savings rates (and</tspan><tspan x="37.387276" y="2559.7729">hence current account deficits), oil price impacts etc, i.e., focus on the “average”</tspan><tspan x="37.387276" y="2589.7729">consumer are flawed from the start. It is easy to drown in a lake with an average depth</tspan><tspan x="37.387276" y="2619.7729">of 4 feet, if one steps into its deeper extremes. Since consumption accounts for 65% of</tspan><tspan x="37.387276" y="2649.7729">the world economy, and consumer staples and discretionary sectors for 19.8% of the</tspan><tspan x="37.387276" y="2679.7729">MSCI AC World Index, understanding how the plutonomy impacts consumption is key</tspan><tspan x="37.387276" y="2709.7729">for equity market participants.</tspan></text>
    <text x="37.219276" y="1926.0375" style="paint-order:stroke fill markers" xml:space="preserve"><tspan x="37.219276" y="1926.0375">Fixing these “global imbalances” that many pundits fret about requires time travel to</tspan><tspan x="37.219276" y="1956.0375">change relative fertility rates in the U.S. versus Japan and Continental Europe. Why?</tspan><tspan x="37.219276" y="1986.0375">There is compelling evidence that a key driver of current account imbalances is</tspan><tspan x="37.219276" y="2016.0375">demographic differences between regions. Clearly, this is tough. Or, it would require</tspan><tspan x="37.219276" y="2046.0375">making the income distribution in the Anglo-Saxon plutonomies (the U.S., UK, and</tspan><tspan x="37.219276" y="2076.0376">Canada) less skewed to the rich, and relatively egalitarian Europe and Japan to suddenly</tspan><tspan x="37.219276" y="2106.0376">embrace income inequality. Both moves would involve revolutionary tectonic shifts in</tspan><tspan x="37.219276" y="2136.0376">politics and society. Note that we have not taken recourse to the conventional curatives</tspan><tspan x="37.219276" y="2166.0376">of global rebalance - the dollar needs to drop, either abruptly, or smoothly, the Chinese</tspan><tspan x="37.219276" y="2196.0376">need to revalue, the Europeans/Japanese need to pump domestic demand, etc. These</tspan><tspan x="37.219276" y="2226.0376">have merit, but, in our opinion, miss the key driver of imbalances - the select plutonomy</tspan><tspan x="37.219276" y="2256.0376">of a few nations, the equality of others. Indeed, it is the “unequal inequality”, or the</tspan><tspan x="37.219276" y="2286.0376">imbalances in inequality across nations that corresponds with the “global imbalances”</tspan><tspan x="37.219276" y="2316.0376">that so worry some of the smartest people we know.</tspan></text>
    <text x="37.219276" y="1699.4578" style="paint-order:stroke fill markers" xml:space="preserve"><tspan x="37.219276" y="1699.4578">3) Most “Global Imbalances” (high current account deficits and low savings rates, high</tspan><tspan x="37.219276" y="1729.4578">consumer debt levels in the Anglo-Saxon world, etc) that continue to (unprofitably) pre-</tspan><tspan x="37.219276" y="1759.4578">occupy the world’s intelligentsia look a lot less threatening when examined through the</tspan><tspan x="37.219276" y="1789.4578">prism of plutonomy. The risk premium on equities that might derive from the dyspeptic</tspan><tspan x="37.219276" y="1819.4578">“global imbalance” school is unwarranted - the earth is not going to be shaken off its</tspan><tspan x="37.219276" y="1849.4578">axis, and sucked into the cosmos by these “imbalances”. The earth is being held up by</tspan><tspan x="37.219276" y="1879.4578">the muscular arms of its entrepreneur-plutocrats, like it, or not.</tspan></text>
    <text x="36.907276" y="1548.2767" style="paint-order:stroke fill markers" xml:space="preserve"><tspan x="36.907276" y="1548.2767">2) We project that the plutonomies (the U.S., UK, and Canada) will likely see even more</tspan><tspan x="36.907276" y="1578.2767">income inequality, disproportionately feeding off a further rise in the profit share in their</tspan><tspan x="36.907276" y="1608.2767">economies, capitalist-friendly governments, more technology-driven productivity, and</tspan><tspan x="36.907276" y="1638.2767">globalization.</tspan></text>
    <text x="37.243279" y="1189.0295" style="paint-order:stroke fill markers" xml:space="preserve"><tspan x="37.243279" y="1189.0295">Well, here goes. Little of this note should tally with conventional thinking. Indeed,</tspan><tspan x="37.243279" y="1219.0295">traditional thinking is likely to have issues with most of it. We will posit that: 1) the</tspan><tspan x="37.243279" y="1249.0295">world is dividing into two blocs - the plutonomies, where economic growth is powered</tspan><tspan x="37.243279" y="1279.0295">by and largely consumed by the wealthy few, and the rest. Plutonomies have occurred</tspan><tspan x="37.243279" y="1309.0295">before in sixteenth century Spain, in seventeenth century Holland, the Gilded Age and</tspan><tspan x="37.243279" y="1339.0295">the Roaring Twenties in the U.S. What are the common drivers of Plutonomy?</tspan><tspan x="37.243279" y="1369.0295">Disruptive technology-driven productivity gains, creative financial innovation, capitalist-</tspan><tspan x="37.243279" y="1399.0295">friendly cooperative governments, an international dimension of immigrants and</tspan><tspan x="37.243279" y="1429.0295">overseas conquests invigorating wealth creation, the rule of law, and patenting</tspan><tspan x="37.243279" y="1459.0295">inventions. Often these wealth waves involve great complexity, exploited best by the</tspan><tspan x="37.243279" y="1489.0295">rich and educated of the time.</tspan></text>
    <text x="37.219276" y="716.78064" style="paint-order:stroke fill markers" xml:space="preserve"><tspan x="37.219276" y="716.78064">In early September we wrote about the (ir)relevance of oil to equities and introduced the</tspan><tspan x="37.219276" y="746.78064">idea that the U.S.is a Plutonomy - a concept that generated great interest from our</tspan><tspan x="37.219276" y="776.78064">clients. As global strategists, this got us thinking about how to buy stocks based on this</tspan><tspan x="37.219276" y="806.78064">plutonomy thesis, and the subsequent thesis that it will gather strength and amass</tspan><tspan x="37.219276" y="836.78064">breadth. In researching this idea on a global level and looking for stock ideas we also</tspan><tspan x="37.219276" y="866.78064">chanced upon some interesting big picture implications. This process manifested itself</tspan><tspan x="37.219276" y="896.78064">with our own provocative thesis: that the so called “global imbalances” that worry so</tspan><tspan x="37.219276" y="926.78064">many of our equity clients who may subsequently put a lower multiple on equities due to</tspan><tspan x="37.219276" y="956.78064">these imbalances, is not as dangerous and hostile as one might think. Our economics</tspan><tspan x="37.219276" y="986.78064">team led by Lewis Alexander researches and writes about these issues regularly and they</tspan><tspan x="37.219276" y="1016.7806">are the experts. But as we went about our business of finding stock ideas for our clients,</tspan><tspan x="37.219276" y="1046.7806">we thought it important to highlight this provocative macro thesis that emerged, and if</tspan><tspan x="37.219276" y="1076.7806">correct, could have major implications in terms of how equity investors assess the risk</tspan><tspan x="37.219276" y="1106.7806">embedded in equity markets. Sometimes kicking the tires can tell you a lot about the</tspan><tspan x="37.219276" y="1136.7806">car-business.</tspan></text>
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   <text x="18.505638" y="680.00934" font-size="28px" font-style="italic" font-weight="bold" style="paint-order:stroke fill markers" xml:space="preserve"><tspan x="18.505638" y="680.00934" fill="#171717" font-size="28px" font-style="normal" font-weight="bold">WELCOME TO THE PLUTONOMY MACHINE</tspan></text>
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  <circle transform="translate(18.898)" cx="28.346" cy="481.89" r="5.6693" style="paint-order:stroke fill markers"/>
  <text x="74.918556" y="489.81696" font-size="24px" stroke-linecap="round" stroke-linejoin="round" stroke-width="10" style="paint-order:stroke fill markers" xml:space="preserve"><tspan x="74.918556" y="489.81696">There is no “average consumer” in a Plutonomy. Consensus analyses focusing</tspan><tspan x="74.918556" y="519.81696">on the “average” consumer are flawed from the start. The Plutonomy Stock</tspan><tspan x="74.918556" y="549.81696">Basket outperformed MSCI AC World by 6.8% per year since 1985. Does</tspan><tspan x="74.918556" y="579.81696">even better if equities beat housing. Select names: Julius Baer, Bulgari,</tspan><tspan x="74.918556" y="609.81696">Richemont, Kuoni, and Toll Brothers.</tspan></text>
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   <text x="55.612915" y="300.55258" font-size="24px" stroke-linecap="round" stroke-linejoin="round" stroke-width="10" style="paint-order:stroke fill markers" xml:space="preserve"><tspan x="55.612915" y="300.55258">Equity risk premium embedded in “global imbalances” are unwarranted. In</tspan><tspan x="55.612915" y="330.55258">plutonomies the rich absorb a disproportionate chunk of the economy and have</tspan><tspan x="55.612915" y="360.55258">a massive impact on reported aggregate numbers like savings rates, current</tspan><tspan x="55.612915" y="390.55258">account deficits, consumption levels, etc. This imbalance in inequality</tspan><tspan x="55.612915" y="420.55258">expresses itself in the standard scary “ global imbalances”. We worry less</tspan></text>
   <text x="56.020916" y="187.28674" font-size="24px" stroke-linecap="round" stroke-linejoin="round" stroke-width="10" text-align="center" style="paint-order:stroke fill markers" xml:space="preserve"><tspan x="56.020916" y="187.28674" text-align="start">The World is dividing into two blocs - the Plutonomy and the rest. The U.S.,</tspan><tspan x="56.020916" y="217.28674" text-align="start">UK, and Canada are the key Plutonomies - economies powered by the wealthy.</tspan><tspan x="56.020916" y="247.28674" text-align="start">Continental Europe (ex-Italy) and Japan are in the egalitarian bloc</tspan></text>
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   <text x="17.777637" y="169.7731" font-size="28px" font-style="italic" font-weight="bold" style="paint-order:stroke fill markers" xml:space="preserve"><tspan x="17.777637" y="169.7731" fill="#171717" font-size="28px" font-style="normal" font-weight="bold">SUMMARY</tspan></text>
   <text x="16.125639" y="101.61855" font-size="36px" font-weight="bold" style="paint-order:stroke fill markers" xml:space="preserve"><tspan x="16.125639" y="101.61855">Plutonomy: Buying Luxury, Explaining Global Imbalances</tspan></text>
   <text x="15.201638" y="53.601639" font-size="48px" style="paint-order:stroke fill markers" xml:space="preserve"><tspan x="15.201638" y="53.601639" fill="#171717" font-size="48px" font-weight="bold">Equity Strategy</tspan></text>
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