What if Only the Rich Recover?
For the past several months, I have assumed that any economic recovery would be slow for everyone-rich and poor alike.
Associated Press Gloria Vanderbilt Stokowski, left, her cousin Cornelius "Sonny" Vanderbilt Whitney and his wife arrive at the Metropolitan Opera House in New York to attend the Met's 68th season premiere performance, November 10, 1952.
The recession was supposed to be class blind, since job losses, plunging asset values, declining wages and the credit crunch have hit all levels of society. The fact that the number of millionaires has fallen at least 20%, and that their fortunes have fallen by the same or more, was further proof that the rich were being brought down to earth and would need years to climb back.
But rising stock markets have ushered in an alternative scenario: a quick comeback for the wealthy. Will Richistan recover while the rest of America remains mired in recession?
It is too early to know the answer. But one line of reasoning, offered here at Baseline Scenario and at Zero Hedge, suggests that the wealthy may be recovering faster than the rest of the country because of their different portfolios.
Specifically, the two point out that for 90% of the population, real estate accounts for more than half their net worth. By contrast, they say, real estate accounts for only about a quarter of the net worth of millionaires. (Merrill Lynch and Capgemini say it is 18% but that excludes primary residences, so it could be slightly higher). Stocks, bonds and alternative investments account for more than 40% of the wealth of millionaires.
This matters because stocks have rebounded in recent months, while real estate is still in the tank. The rising tide of stocks, in other words, may not lift all boats: it may only lift the yachts, while the middle class remains weighed down by real estate.
As Zero Hedge says: "90% of the population will be feeling the impact of an economy still gripped in a recession for a long time due to the bulk of its assets deflating. The other observation is that only 10% of the population has truly benefited from the 50% market rise from the market lows: those better known as the Upper class."
Granted, some financial products held by the wealthy–such as commercial real estate, derivatives, hedge funds and private equity–are still reporting uneven performance or aren't even trading.
What is more, the drastic fall in luxury real-estate values and the rising number of personal bankruptcies among the wealthy suggests that the rising Dow may give a misleading picture of high-end finances.
Do you think Richistan will recover first? Will the rest of the country be left behind?
Associated Press Gloria Vanderbilt Stokowski, left, her cousin Cornelius "Sonny" Vanderbilt Whitney and his wife arrive at the Metropolitan Opera House in New York to attend the Met's 68th season premiere performance, November 10, 1952.
The recession was supposed to be class blind, since job losses, plunging asset values, declining wages and the credit crunch have hit all levels of society. The fact that the number of millionaires has fallen at least 20%, and that their fortunes have fallen by the same or more, was further proof that the rich were being brought down to earth and would need years to climb back.
But rising stock markets have ushered in an alternative scenario: a quick comeback for the wealthy. Will Richistan recover while the rest of America remains mired in recession?
It is too early to know the answer. But one line of reasoning, offered here at Baseline Scenario and at Zero Hedge, suggests that the wealthy may be recovering faster than the rest of the country because of their different portfolios.
Specifically, the two point out that for 90% of the population, real estate accounts for more than half their net worth. By contrast, they say, real estate accounts for only about a quarter of the net worth of millionaires. (Merrill Lynch and Capgemini say it is 18% but that excludes primary residences, so it could be slightly higher). Stocks, bonds and alternative investments account for more than 40% of the wealth of millionaires.
This matters because stocks have rebounded in recent months, while real estate is still in the tank. The rising tide of stocks, in other words, may not lift all boats: it may only lift the yachts, while the middle class remains weighed down by real estate.
As Zero Hedge says: "90% of the population will be feeling the impact of an economy still gripped in a recession for a long time due to the bulk of its assets deflating. The other observation is that only 10% of the population has truly benefited from the 50% market rise from the market lows: those better known as the Upper class."
Granted, some financial products held by the wealthy–such as commercial real estate, derivatives, hedge funds and private equity–are still reporting uneven performance or aren't even trading.
What is more, the drastic fall in luxury real-estate values and the rising number of personal bankruptcies among the wealthy suggests that the rising Dow may give a misleading picture of high-end finances.
Do you think Richistan will recover first? Will the rest of the country be left behind?
http://blogs.wsj.com/wealth/2009/10/06/what-if-only-the-rich-recover/
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