Wednesday, May 28, 2014

Piketty, Piketty. Why Does That Name Seem Familiar? El-Erian on Piketty's Investment Strategies

From Fortune's Term Sheet:

El-Erian: Is Piketty right about investment strategies?
Economist Thomas Piketty  
Watching Bentley Prices
The gap between rich and poor does indeed influence where investors put their money, but so do other factors, including monetary policy and technological advances.
FORTUNE – Having surged to the top of best-seller lists, Thomas Piketty's Capital in the Twenty-First Century continues to attract attention, and rightly so. With the initial flurry over its conclusions now giving way to an intensifying debate over the underlying data, the interest will continue to grow for quite a while yet, as will analytical work on inequality – a topic that is capturing greater public awareness.
Yet there is one related area that, until now, remains under, if not unexplored: The extent to which the book can and should inform investment strategies.

Piketty's analysis of several countries over history highlights how the return to owning capital (what he labels "r"), be it financial or real estate, tend to exceed the rate of economic growth ("g"). As such, income inequality rises; and it does so until the social fabric erodes excessively and/or the rich recognizes it is in their self-interest to capture less of the country's wealth.

Piketty's numbers-driven analysis, while subject to counters, reinforces what some others have documented using other data sources. Moreover, and quite counter-intuitively considering it has only been six years since the financial sector almost tipped the world into a Great Depression, increasing inequality has been a notable feature of the much-shorter post-financial crisis period.

Turning to market implications, well-off households have been richly rewarded in recent years by taking significant exposure to capital markets. Luxury brands serving the rich have out-performed, as have activities aimed at supporting vulnerable segments of the population – that is to say, at the two extremes of the income and wealth distributions. The average returns to labor services have been disappointing as reflected in the protracted sluggishness of wage earnings and unusually high unemployment....MORE

HT: The Reformed Broker