How Inequality Hurts

Remembering When Citigroup ‘Cared’ about Inequality

Citi analysts spent two years obsessing over luxury consumption by the rich. Last week, the ultimate symbol of that consumption — the fine art bubble — finally popped.

By Sam Pizzigati

Back a year ago, not long after Bear Stearns bit the Wall Street dust, buyers and sellers at New York’s annual spring fine art auctions shrugged off the rapidly multiplying signs of impending high-finance flop and went on to gleefully conduct business as usual.

At the Sotheby’s contemporary art auction last May, auctioneers pulled in a jaw-dropping $362 million. Over at Christie’s, connoisseurs of contemporary pieces shelled out a nearly as impressive $348 million.

income sharesLast week, the auctioneers went back at it. But this time around no one was shrugging. On Tuesday, the Sotheby’s contemporary art take dropped $315 million off last year’s total. A day later, Christie’s netted $254 million less than last year.

Among the disappointed: Daniel Loeb, the CEO of Third Point, a Park Avenue hedge fund. Loeb had brought a seven-foot-high blue-and-pink Easter egg sculpture by Jeff Koons to the Sotheby’s sale. In London, last year, a Koons went for $25.7 million. Loeb’s Koons, this year, fetched only $5.4 million.

Sotheby’s top auctioneer, Tobias Meyer, kept a stiff upper lip after last week’s “lackluster bidding.” He acknowledged only “a general pullback in the level of prices.” A local Manhattan art dealer at the auction gave a Bloomberg reporter a considerably blunter assessment: “It was a struggle to find buyers.”

So how should the rest of us react to all this angst in the high-end art world? Should we take a bit of pleasure, a little spring schadenfreude, at the sight of the excessively comfortable finally getting some comeuppance?

Or should this bursting of the fine art bubble have us out of sorts, too? Should sinking prices for seven-foot Easter eggs worry us as much as reports that refrigerators at Sears aren’t selling?

Maybe these sinking art prices should worry us more. Or so suggests the work of Ajay Kapur, the former chief global equity strategist at Citigroup.

Four years ago, in 2005, Kapur and his Citigroup research team started arguing that what “average” consumers do or don’t do with their money really doesn’t matter all that much any more.  Whose behavior does matter? Essentially, the analysts contended, only the rich. The United States, they maintained, has become a nation “where the rich are so rich that their behavior” simply “overwhelms” whatever ordinary people spend or save.

Kapur and his Citigroup team even coined a word to describe this inequality consumption dynamic. The United States, they proposed, has become a “plutonomy,” an economy “powered by a relatively small number of rich people.”

Kapur and his Citi analysts spent two years propagating this plutonomy thesis. They filled Citigroup research reports with charts and tables documenting just how staggeringly much U.S. income and wealth have concentrated at the top. They hosted Citigroup plutonomy symposiums tagged with cheeky, attention-grabbing titles. Read one: “Rising Tides Lifting Yachts.”

Future historians will no doubt wax ironic when they recount this unlikely “plutonomy” episode. In 2005 and 2006, at the arrogant height of Wall Street’s domination over the U.S. economy, America’s biggest bank — Citigroup — was bankrolling and showcasing research that detailed how only America’s rich were prospering.

Kapur and his team had, to be sure, no subversive intent behind their plutonomy push. The Citi analysts emphasized repeatedly they were merely describing the economy, not railing against it.

“We have no moral opinion on whether this income inequality is good or bad,” they noted in one paper, “just that it matters a great deal.”

Especially to investors. By investing in companies that cater to the rich, Kapur told the power suits who flocked to his symposiums and read his global strategy research papers, they could multiply their fortunes.

“Re-commit to plutonomy stocks,” Kapur advised in a September 2006 report. “Binge on bling.”

Kapur included Sotheby’s, the fine art auction house, in his “plutonomy basket” of recommended stocks — and saw nothing but good times ahead, at least in the near future, for the awesomely affluent.

“The plutonomists,” he wrote three years ago, “are likely to get even richer over the coming years.”

What could trip up this rosy scenario? Kapur, in all his plutonomy presentations, did acknowledge the risk of a Wall Street “financial collapse.” But he called the “political process” the greater danger.

“Ultimately, the rise in income and wealth inequality to some extent is an economic disenfranchisement of the masses to the benefit of the few,” Kapur observed in one Citigroup paper. “However in democracies this is rarely tolerated forever.”

Ajay Kapur left Citigroup in 2007 to start a hedge fund in Hong Kong. His highly recommended stock choice, Sotheby’s, last month announced plans to cut its dividend and 5 percent of its staff, on top of a 15 percent staff cutback last fall.  

Meanwhile, in the United States, inequality is still tolerated.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality.

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