LONDON (Reuters) - Canny
caution or bumbling oversight, the world's richest
people have retained huge stockpiles of zero-yielding
cash throughout the recent surge in financial asset
prices.
Their persistence may have, counter-intuitively, prolonged the
buoyancy of those very assets in the process - helping to inflate
the outsize wealth of the super-rich further.
With the debate about rising inequality re-invigorated this year by
French economist Thomas Piketty's best-selling book on ballooning
wealth gaps, the spending and savings behavior of the so-called "plutonomists"
has rarely seen more scrutiny or had more influence on the economy
and markets.
Political clamor for redress through greater taxation of asset
incomes, rents, gifts and inheritances may well build. But few
expect much change in the rising wealth of the richest 1 percent of
households or the 0.1 percent deemed 'high net-worth individuals.'
Yet as stock markets barreled to record highs - with the MSCI's
all-country index up almost 30 percent over the past 18 months -
investment advisors estimate up to 40 percent of their money remains
un-invested and is still parked in deposits.
As the latest equity market surge began early last year, a benchmark
survey by CapGemeni and RBC Wealth Management had average cash or
deposit holdings among those global wealth investors at almost 28
percent - more than the 26 percent held in equity or some 20 percent
in real estate.
Defining the richest 12 million savers as those with more than $1
million in investible assets - excluding their primary residences
and collectibles - the survey's high cash holdings may simply
reflect a preference for banking large slices of wealth rather than
risking it in volatile markets.
And, to be sure, returns on the 70 percent of other investments
would have paid handsomely enough anyway.
The richest have always tended to hold relatively high levels of
cash. Liquid holdings are preferred for wealth protection,
tax-avoiding mobility, inheritances or gifts.
Yet the survey's cash levels are more than twice the levels
registered in the equivalent survey from the height of the
pre-crisis go-go years in 2006 and 2007.
And with near-zero interest rates meaning deposits are losing money
adjusted for inflation and with broad market volatility at
multi-year lows, the caution is remarkable.
What's more, other surveys and anecdotal evidence suggest cash
holdings remain elevated or have actually risen over the past year.
A survey of more than 4,000 rich investors - those with more than
$200,000 to invest - conducted at the turn of this year for asset
managers Legg Mason showed 26.5 percent held in cash. An estimate by
Wells Fargo puts cash holdings among the wealthiest clients as high
as 40 percent.
Brian Jacobsen, portfolio strategist at Wells Fargo Asset
Management, said equity markets rallied so quickly after the credit
crash that by the time many of these individual investors felt
comfortable enough going back in, both equities and bonds had
reached levels they felt were unsustainable.
Retirement and other demographics added to that caution.
"I can't tell you how many times I go to client events where people
say after a 10 percent correction, then I'm going to allocate,"
Jacobsen said. "But you might be waiting for Godot.
"Precisely because there are so many people waiting for that
pullback, it may become a self-destructing expectation. You see a
five percent move like we did have and people just jump in - and you
don't ever get to the 10 percent move down."
PIKETTY AND PLUTONOMISTS
Piketty's book envisages soaring inequality and wealth gaps as
returns on assets outstrip economic growth to such an extent that
the ratio of private wealth to national income rises to 1910 peaks
of 500 percent by 2030 from about 440 percent now.
To the extent that asset inflation has been stoked by the easy-money
policies designed to stabilize the world economy after the crash,
central banks find themselves squarely in the firing line for
fueling inequality for the sake of job creation.
The cash-hoarding behavior of the rich tends to blunt that
accusation. Yet, how central bank policies in turn affect that
behavior may still have far-reaching consequences.
For a start, a headlong dash by wealthy investors to pumped- up
markets at this juncture could well create the sort of bubble they
and central banks may have good reason to fear.
Already the top 0.1 percent of the U.S. spectrum own some 23 percent
of U.S. wealth - the equivalent of bottom 90 percent put together.
According to the U.S. Labour Department, the top 20 percent of the
income bracket has the average pre-tax income equal to the sum of
the bottom four quintiles together and average expenditures of the
bottom 60 percent combined.
Bank of America Merrill Lynch strategist Ajay Kapur coined the term
'plutonomy' in 2005 when he was at Citi and describing economies
dominated by a growing but small cohort of super rich. He reckons
any easing of post-crisis caution among the plutonomists could have
a profound effect on the world economy.
"If plutonomists get over the shock of the global financial crisis,
take comfort in their vastly expanded wealth from QE-driven asset
inflation - and reduce their saving rate that doubled to 38.2
percent after ... 2008 - the U.S. current account deficit could
expand again - a big positive for emerging markets."
(Additional reporting by Chris Vellacott. Editing by Larry King)
