The 0.01% Have Never Had It Better

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Worry over inequality occupies Wall Street, says the WSJ.  The worry is based on the suspicion that what's keeping corporate profits up is largely artificial.  Many corporations are profitable because they've fired people; the unemployed don't spend, thus not boosting the consumer driven economy.  The 0.01% are profiting hugely, but do they really contribute to the real economy?  This is the concern investors have about the sustainability of corporate profits, and of the supposed 'recovery.'

Over the years, as the WSJ notes [6], the only way inequality has really mattered to professional investors is 'if the rich are getting richer, companies that cater to them have better prospects'. Lately, though, some big investors have worried increasing income and wealth gaps threaten the economy's ability to expand (discussed here [7] and here most recently [8].) One reason U.S. corporate profit margins are at records is the share of revenue going to wages is so low. An economy where income and wealth disparities are smaller might be healthier; but it would also leave less money flowing to the bottom line, something that is increasingly grabbing fund managers' attention.

Over the years, the only way inequality has really mattered to investors has been as a factor when considering stocks. If the rich are getting richer, companies that cater to them have better prospects. Goldman Sachs Group, for example, recently conducted a survey that showed optimism among high-income consumers relative to low-income ones at a high and pointed investors toward companies like department-store operator Nordstrom and luxury-bag maker Tumi Holdings.

Lately, though, some big investors have worried increasing income and wealth gaps threaten the economy's ability to expand. They also fret that public anger over it

Former Morgan Stanley equity strategist Gerard Minack notes the U.S. Gini index, a gauge of income disparities that is also at a record, tracks with measures of political polarization. So he worries inequality could give rise to more political dysfunction that risks damaging the economy.

Another concern is that rising inequality creates financial instability. Raghuram Rajan, the economist now heading India's central bank, has posited that the credit bubble in the early part of the last decade was a consequence of inequality.

But if inequality has risen to a point in which investors need to be worried, any reversal might also hurt.

One reason U.S. corporate profit margins are at records is the share of revenue going to wages is so low. Another is companies are paying a smaller share of profits on taxes. An economy where income and wealth disparities are smaller might be healthier. It would also leave less money flowing to the bottom line, something that will grab fund managers' attention.

Further Reading

WSJ Article