The constantly rising gap between the world's poor and rich

03 sep. 11:16 English Section
MIHAI GONGOROI (TRANSLATED BY COSMIN GHIDOVEANU)
The constantly rising gap between the world's poor and rich

Capgemini analysis: The wealth of the world's richest people increased last year after falling for the first time in seven years in 2018 

Wealth gaps at the level of the population have always existed. But this year, with the total disconnection between the markets and the real economy, the gap between the rich and the poor has become more than obvious - particularly in the US, country with the largest number of so-called high-net-worth individuals (HNWIs), the group of people that have the largest fortunes in the world.

The mass of HNWI - those with investable assets of 1 million dollars or more -, globally, is more recently somewhere at 46.8 million citizens (+1.1 million in 2019, of which 675,000 are Americans), according to the latest report, in 2019, by Capgemini. According to the document, these HNWIs are spread across all continents, but especially in the US (about 18.61 million HNWIs in 2019) and Europe, with a growing dynamic in the rest of the world - Asia, Africa, Latin America and the Middle East.

Ultra-HNWIs, those who own over 50 million dollars in investable amounts, excluding their primary residence, collections (ed. note: for instance stamp or art collections, etc.), consumables and long-term use commodities, include about 200,000 individuals.

Across regions, the combined wealth of those fewer than 200,000 individuals (more particularly 168,030 people), who account for approximately 0,003% of the planet's population, are divided as follows: the majority of them, at the end of 2019, were in the US 80,510 UHNWIs (48% of all the UHNWIs in the world, an increase of 70,540 in 2018), of which 4,830 UHNWIs had fortunes of more than 500 million dollars. China was ranked second, with 18,130, up from 16,510 in 2018. Next is Germany (6,800), UK (4,640), India (4,460), France (3,700), Canada (3,530), Japan (3,350), Russia (3,120) and Hong Kong (3.100). The European continent has 33,550 UHNWIs.

It bears mentioning that when discussing HNWIs worth, it does not include the amount of factories, stores, ships and aircraft involved in services or production. Essentially, the HNWI notion excludes the value of businesses from the numbers.

Therefore, those HNWIs control a significant portion of the planet's economic resources.

BURSA wrote in the past about how the global financial crisis has changed the behavior of the planet's richest people. In the 2010 report, HNWI experts have drawn the conclusion that the "rich are more aware of conspicuous consumption".

It bears mentioning that the aggregated wealth of the north-American continent has increased by 4.1 trillion in 2019, of which 3.9 trillion were generated in the United States, whereas the spending money of HNWIs on the European continent have increased by 3 trillion. For countries in Asia-Pacific, excluding China and India, HNWI cash has increased by 825 billion dollars.

At the end of 2019, the world's wealth amounted to 360.6 trillion dollars. That wealth reached 351.3 trillion at the end of 2017, but decreased in 2018, for the first time in the previous seven years, to 345.4 trillion due to the international trade conflicts, the uncertainty caused by Brexit and the stock market losses, before returning to growth to over 360 trillion despite the slowdown of the global economy, the international trade conflicts and the geopolitical tensions.

The best example of UHNWIs is Jeff Bezos, founder of Amazon and the planet's richest man, who recently reached a fortune of over 200 million dollars, way above the value of all products and services produced by individual countries - for comparison, Romania's GDP in dollars at the end of 2019 was 243.7 billion. The increase of Bezos' wealth came amid a mega rally of 102% recorded by the Amazon stock between the Covid-low (March 12) and the August 27 close of the New York stock exchange. The holding in the company he has founded accounts for 90% of Bezos' wealth.

At the bottom of the pyramid, half of all of the planet's adults, (the bottom 50%) hold less than 1% of the global wealth, while the 10% of the world's richest people hold 82% of the world's wealth. The top 1% hold nearly half (45%) of all of the world's assets.

In detail, a pyramid from the Capgemini report shows the following statistic: HNWIs, meaning the 47 million people (0.9% the planet's population), hold 158.3 trillion dollars (43.9% of the world's population); 499 million people (with fortunes between 100,000 and 1,000,000 dollars) hold 140.2 trillion dollars (38.9% of the world's wealth), and at the bottom 2.88 billion people (with fortunes below 10,000 dollars) hold 6.3 trillion dollars (1.8% of the world's wealth).

The second pyramid attached also shows another statistic among HNWIs: 168,030 people are Ultra high net worth individuals, with fortunes of over 50 million dollars, 1.83 million HNWIs have fortunes between 10 and 50 million dollars, 3.68 million people have fortunes between 5 and 10 million dollars, and 41.1 million people have between 1 and 5 million dollars.

Capgemini also estimates that by 2024, the world's global wealth will increase over 27% reaching 459 trillion dollars, with the number of HNWIs expected to rise by then to about 63 million, and the number of Ultra-HNWIs to 234,000.

Now, as inequality between countries has seriously decreased amid globalization and the shifting towards emerging countries of some production factors in the West, it is clear that the inequality (therefore particularly in the West) between the lower and upper layers of society has become even greater because of the disappearance of the somewhat well paying jobs in the industry, the financialization of the economy and the increase in the value of financial assets as a result of the quantitative easing programs and the artificially low interest rates which have distorted the functioning of the markets.

However, the pandemic has managed to emphasize the differences between the richest and the poorest. If at least for European citizens in the lower classes there is still a safety net (even though at any rate the inequality between the richest and the poorest is at historical levels), for the millions of Americans left without jobs the only things that seem to be increasing these days are pain and uncertainty - and that is also due to the expiration of the additional 600 dollars in unemployment aid granted by the US administration.

Reports in the American media about these increasingly growing disparities are many, but one that stands out is a recent article in the New York Times by economist Paul Krugman, 2008 Economics Nobel prize winner in 2008. According to Krugman, the Wall Street types, "who love their letter games", are now talking about a "K-shaped recovery": the increase in the value of stocks and individual wealth of the richest people, and at the same time the drop in income and the deepening pain among the lower classes.

Very telling is a relevant poll for the month of July published in the Wall Street Journal: 20% of Americans who have children are saying that they can't afford to buy them food over the course of a week, whereas 12.1% of American citizens aged over 18 say that they can't afford enough food from one week to the next.

Krugman points out that the real economy in the US, unlike the financial economy, is still in a "terrible" state, with most of the jobs that have remained lost focused among the population paid less than 27,000 dollars a year.

The rally of the American stock markets - S&P 500 last week reached five new all-time highs, recouping over 55% from the Covid lows - has been driven mostly by the big tech stocks, companies that are expected to remain profitable over the coming years regardless of what happens with the American economy in the coming quarters. For American investors, Krugman writes, "the depressed economy barely matters".

Data from the St. Louis Federal Reserve: Over 87% of all the stocks traded on the American exchanges are held by only 10% of the population

Unfortunately, capital gains represent a very small portion of monthly income for ordinary Americans (and generally for ordinary citizens in most countries). Besides, the ownership of shares of listed companies in the United States is strongly concentrated among a very small number of the population, as shown by the data of the St. Louis branch of the Federal Reserve (Fed).

According to data from the Fed, at the end of the first quarter, the richest 10% of Americans came to hold 87% of the stocks listed on the American exchanges and of all the mutual fund units on the American market.

The weight held by that group in the total volume of listed stocks and mutual fund units has increased in the last decade from 82.4% in 2009 and from 79% 30 years ago, while the percentage of the total US population which holds stocks in listed companies has decreased dramatically, according to a poll made in April by Gallup, to 55% at the end of Q1, - a historic low - from a high of 67% in 2002.

At the same time, the richest 1% of Americans held 51.8% of the stocks traded on the American exchanges at the end of the first quarter, the equivalent of 11.33 trillion dollars, while the bottom 50% only held 0.7% of the total stocks on the American exchanges, in other words a wealth of 0.16 trillion dollars. The maximum for that latter category was reached in 1991 - 1.6% of the total shares and mutual funds in the US.

Uninspired, many lower class Americans have liquidated their stock market holdings due to the market crash in the global financial crisis of 2008-2009 and the implicit volatility inherent in stock market investments, while the rich have remained invested, says Yosef Bonaparte, finance professor at the University of Colorado, quoted by WSJ.

At the same time, many middle-class families did not benefit from the last bull market, the longest in history, because their wealth is mostly represented by their homes. As most such homes are bought on credit, the amounts left available for stock market investments are quite small, says Edward Wolff, a professor of economics at New York University.

It should also be noted that the wages of most Americans have largely stagnated over the past 40 years (the minimum wage, for example, has not risen since July 2009), whereas compared to the S&P bottom of 666 points in March 2009, the reference index has increased its value more than four times, developments that have led to the exacerbation of inequality up to record levels.

Currently, the S&P 500 has rallied more than 55% off the March lows, which brought the value of the stocks and mutual funds of the richest 1% of Americans to a value of over 14 trillion dollars. As a sidenote, the value of the United States' GDP at the end of 2019 was 21.43 trillion dollars.

The accommodating monetary policies implemented by the Federal Reserve have also contributed to an even greater concentration of wealth and increased inequality, and despite efforts to expand middle-class ownership, including through 401k private pension plans (provided by employers), the amounts invested by the middle class are quite small.

"The middle class has virtually missed the stock market rise. The rich have become completely detached from the rest of society. They have become an enclave in themselves," said Wolff, a professor at New York University.

Capgemini estimates: In the first four months, world wealth fell by 6-8 percent

Amid the global sell-offs on the stock markets in February-March, Capgemini's World Wealth 2019 report estimates that in the first four months of 2020 global wealth decreased between 6 and 8 percent. Global sell-offs on the stock markets shaved about 18 trillion dollars from the global markets, but it is possible, given the more than complete recovery of the financial markets, that the rising trend of global wealth will return, after the contraction caused by the pandemic.

The authors also show that in the beginning of 2020, stocks became the most important asset class for HNWIs, accounting for about 30% of their financial portfolios on average, while cash ranked second, with a weight of about 25%, with the latter probably being caused by the fact they don't have investments available.

The report highlights that lately, HNWIs are interested in "sustainable investments" bearing "social responsibility", that they are carefully and constantly examining the fees they pay and that they want (especially the youngest of HNWI) to hyper-personalize the services that they receive - the interpretation of the risk profile through "sentiment analysis", customized portfolios built via machine learning and data analytics or advice tailored specifically to their investment behavior.

The two main reasons for HNWI's interest in "sustainable investment" - i.e. in businesses with a low negative impact on the environment - are higher earnings and lower risk, as HNWIs consider that less speculative.

During the global financial crisis, a broker said live on the BBC that it is not governments that run the world, but Goldman Sachs. We don't know if Goldman Sachs runs the world. Rather, HNWIs run the world, but of course the heads of Goldman Sachs are also HNWIs.

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