My post this morning on the growing class divergence between first class travelers and coach travelers reminded me of an old piece of market analysis done in 2005 for Citigroup that’s become a bit of a cult classic among economics writers. The document in question is Ajay Kapur’s “Plutonomy: Buying Luxury, Explaining Imbalances” (PDF). The analysis itself is a mixed bag, but the bullet point summary is a brilliant instance of summarization so I’ll just quote it:
— The World is dividing into two blocs - the Plutonomy and the rest. The U.S.,UK, andCanada are the key Plutonomies - economies powered by the wealthy. Continental Europe (ex-Italy) and Japan are in the egalitarian bloc.
— Equity risk premium embedded in “global imbalances” are unwarranted. In plutonomies the rich absorb a disproportionate chunk of the economy and have a massive impact on reported aggregate numbers like savings rates, current account deficits, consumption levels, etc. This imbalance in inequality expresses itself in the standard scary “ global imbalances”. We worry less.
— There is no “average consumer” in a Plutonomy. Consensus analyses focusing on the “average” consumer are flawed from the start. The Plutonomy Stock Basket outperformed MSCI AC World by 6.8% per year since 1985. Does even better if equities beat housing. Select names: Julius Baer, Bulgari, Richemont, Kuoni, and Toll Brothers.
So there you have the key bullet points. Thanks to growing inequality, the consumer economy is increasingly driven by a relatively small number of very rich people who represent a very large share of the overall consumption. But now note that the key conclusion of the second bullet point have been proved to be totally wrong. He thought that because plutonomy implies global imbalances, the imbalances themselves are non-threatening. They turn out to be very threatening. But the consequences of the global financial crisis make bullet point three all the more crucial. The ability to borrow money against rising home prices allowed middle class consumers to keep increasing their consumption even in the face of stagnating wages and incomes. The crisis has brought that to an end and created a situation in which labor market polarization directly implies polarization of the consumer side of the economy. Airlines increasing investment in improved first class amenities while doing nothing to improve the median passenger experience is just one window into that dynamic. “At Wal-Mart, shoppers cut back on staples like milk and meat that had price increases of a few cents,” Stephanie Clifford reported for the New York Times last week, while “At Saks Fifth Avenue, they paid full price for shoes and designer fashions at a rate higher than before the recession.”
That’s the business environment of late plutonomy. An increasingly price-sensitive mass market whose sheer numbers mean they still spend a lot, and a price insensitive plutocrat class whose price-insensitivity makes them the target of choice for sales- and profit-growth.