David Tice Battles Michael Moore's Plutonomy Guy - Rather Successfully We Might Add

Remember Ajay Kapur, the Citigroup analyst cited in Michael Moore's film 'Capitalism: A Love Story'? The guy who in a 2005 report said that America is a country where the wealthy benefit disproportionately - in other words a plutonomy. Well it seems he is up to his smug old tricks again, now at Mirae Asset Securities (we enclose our objections at the bottom of this post). This weekend he was on Bloomberg, still espousing his plutonomy thesis and urging investors to buy stocks. According to him the American economy is soon going to be propelled to new heights by the spending of its wealthy few, while the rest of the country graces the unemployment statistic column.

Readers can watch David Tice patiently battle Mr. Kapur's inane thoughts here. For those readers who might have missed the Plutonomy Dog & Pony show here some reminders from the infamous reports One & Two:

The World is dividing into two blocs - the Plutonomy and the rest. The U.S., UK, and Canada are the key Plutonomies - economies powered by the wealthy. Continental Europe (ex-Italy) and Japan are in the egalitarian bloc. In plutonomies the rich absorb a disproportionate chunk of the economy.

[In America], there are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the "non-rich", the multitudinous many, but only accounting for surprisingly small bites of the national pie. [Therefore investors should focus on the behavior of the rich, instead of that of the "average" consumer].

Risks to the Plutonomy Structure - What Could Go Wrong?

Our whole plutonomy thesis is based on the idea that the rich will keep getting richer. This thesis is not without its risks. For example, a policy error leading to asset deflation, would likely damage plutonomy. Furthermore, the rising wealth gap between the rich and poor will probably at some point lead to a political backlash. Whilst the rich are getting a greater share of the wealth, and the poor a lesser share, political enfrachisement remains as was -- one person, one vote (in the plutonomies). At some point it is likely that labor will fight back against the rising profit share of the rich and there will be a political backlash against the rising wealth of the rich. This could be felt through higher taxation on the rich (or indirectly though higher corporate taxes/regulation) or through trying to protect indigenous [home-grown] laborers, in a push-back on globalization -- either anti-immigration, or protectionism.

Now we fully agree with him about the plutonomy thesis and the fact that such a high degree of social imbalance will continue in the near future at least. What we disagree on is his rather smug assertion that this imbalance is something to be capitalized upon by buying stocks of companies catering to the wealthy. His thesis is wrong on several fronts:

1. Firstly, while that thesis might have sounded o.k. in 2005, in the current economic scenario where nearly 17% of the population is unemployed/underemployed and people are struggling to put food on the table, it sounds downright jarring. Like a Marie Antoinette moment.
2. Secondly, most indications are that the stock market is probably cresting/ at best moving sideways, so buying Tiffany's now won't do you much good, instead just like David Tice recommends investors should take a defensive position.
3. The thesis that the U.S. can export its way out of the crisis is also wrong. In a situation where most global economies are hurting and engaging in beggar-thy-neighbor policies, capital and trade controls are soon going to be the norm. Case in point being Bernanke's recent defiant outburst at his confirmation hearing, that if his 0% interest rate policy is creating asset bubbles in other nations it is not his problem.
4. Lastly and most importantly, the U.S. economy is not powered by the wealthy 1%, but by ordinary folks who were spending "like they were wealthy" by taking on too much debt. Much of U.S. consumer spending has been based on "aspirational" purchases: a bigger car, bigger house, designer clothes and jewelry. Many ordinary Americans took on too much debt to fit into this aspirational society where your worth is measured by how much you own. Now that the debt bubble is bursting and the credit rug is being pulled from under the consumers feet, there is precious little that the 1% rich can do to fill the economic growth hole left by the retreating masses.

So Mr. Kapur, perhaps it is time you let David Tice teach your old pony some new tricks?