Millionaires’ Club - Record Plunge In 2008
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
1. Millionaires’ Club Shrank at Record Rate in 2008
2. Global Millionaire Population Still Concentrated, but...
3. Household Net Worth Continues to Fall
With the double-whammy of falling home prices and a major bear market in stocks, and a global credit crisis on top of that, it is not surprising that the number of millionaires in the US and around the world plunged last year.
An interesting new report out last week from Capgemini (a global consulting firm) and Merrill Lynch found that the ranks of the world's millionaires shrank at the fastest rate ever in 2008, with North America suffering the biggest wealth loss worldwide.
The Capgemini/Merrill Lynch annual “World Wealth Report” notes that the global slump in property and equity markets last year cut the number of millionaires by 15% to 8.6 million, wiping out two years of increases. The value of the world’s millionaires’ assets fell 20% to $32.8 trillion, after a 9.4% increase in 2007, according to the latest report.
Since this weekly E-Letter is primarily sent to high net worth investors, I thought it might be interesting to summarize the 13th annual World Wealth Report for you in the pages that follow. Even if you are not a millionaire, the results of this new study should be both interesting and instructive. The reduction in the number of millionaires may ultimately affect all of us in one way or another as I will discuss later.
Following that summary, we will look at some statistics on household wealth here in the US, which will shed light on consumer spending, the engine of the US economy.
Millionaires’ Club Shrank at Record Rate in 2008
The Capgemini/Merrill Lynch World Wealth Report for 2008, which was released last Wednesday, defines a millionaire as someone with a net worth of $1,000,000 excluding the value of their primary residence, collectibles, consumables, and consumer durables (ie – liquid assets). The survey is conducted globally each year. The authors use the acronym “HNWI” to represent High Net Worth Individuals who are millionaires, as defined above.
The Report concludes that at the end of 2008, the world’s population of HNWIs was down 14.9% from the year before to 8.6 million, and their wealth had dropped 19.5% to $32.8 trillion. The declines were unprecedented, and wiped out two robust years of growth in 2006 and 2007. As a result, the world’s population of millionaires and their wealth ended 2008 below levels seen at the close of 2005.
The global population of millionaires had seen robust annual growth of 7.2% on average from 2005 to 2007, before reversing in 2008. The same trend was evident in HNWI financial wealth, which grew 10.4% per year in 2005-07, before the steep contraction.
The most significant declines in the HNWI population in 2008 occurred in the three largest regions: North America (-19.0%), Europe (-14.4%) and Asia-Pacific (-14.2%). But behind the aggregate numbers lie some interesting developments in the HNWI populations of those regions. The authors summarize as follows:
The Capgemini/Merrill World Wealth Report also surveys the globe for the super-rich, those with at least $30 million in liquid assets, which they refer to as the “Ultra-HNWIs.” The contraction in the overall HNWI population was exacerbated by the steeper-than-average decline (globally and regionally) in the number of Ultra-HNWIs.
A decline in Ultra-HNWI numbers has a disproportionate effect on overall HNWI wealth, because so much world wealth is concentrated in their hands. The Report notes that at the end of 2008, Ultra-HNWIs accounted for 34.7% of global HNWI wealth, but only 0.9% of the total HNWI population.
Recall as noted above that the entire world population of HNWIs was down 14.9% in 2008, and their wealth had dropped 19.5% to $32.8 trillion. Yet the world population of Ultra-HNWIs shrank and lost even more. The number of Ultra-HNWIs plunged 24.6% in 2008, and their wealth was down 23.9%. This is very interesting!
The Ultra-HNWIs (those with at least $30 million in liquid assets) should have access to the very best in money management, and they should be highly diversified. Yet they lost more numbers and more wealth than the mere millionaires.
The authors suggest that the sharp decline in the number of Ultra-HNWIs globally largely resulted from that group’s “partiality for more aggressive products, which tend to deliver greater-than-average returns in good times, but delivered hefty losses in 2008.” While this may have been true in some cases, I strongly suspect that the losses occurred primarily because many millionaires (along with average investors) bought into Wall Street’s buy-and-hold mantra, and when the stock markets plunged, so did their assets.
It is also true that some of the most highly sought after, high profile professional money managers lost 40% or more last year. And who knows, they may have had money with Bernie Madoff! I would also suggest that the plunge in oil prices last year played a role in the losses among Ultra-HNWIs, many of whom are Middle East oil sheiks.
Global Millionaire Population is Still
The Report noted that the U.S., Japan and Germany together accounted for 54.0% of the world’s HNWI population in 2008, up very slightly from 53.3% in 2007, despite the substantial loss of wealth by HNWIs in those countries, particularly the United States. The authors noted:
HNWI Wealth is Forecast to Resume
The authors of the Capgemini/Merrill World Wealth Report are considerably more optimistic than I am about global economic growth over the next several years. (But then what do you expect from Merrill Lynch?) They expect that the US will lead the recovery, along with Asia. I have my doubts, of course, but here are their forecasts:
While I am not nearly as optimistic as the folks at Capgemini and Merrill Lynch, I certainly hope they are correct. In any event, their annual World Wealth Report is very interesting and appreciated, at least by me.
Finally, I am sure there will be readers who will respond and ask, Why should I care if a lot of millionaires and super-millionaire fat cats took a beating over the last 18 months; after all, I lost a lot of money in the market as well. To that question, I would simply remind everyone that the wealthy create lots of jobs and pay a lot of taxes (top 5% of taxpayers pay over 60% of all income taxes). To that end, their large loss of wealth will have a negative effect on economic growth and the federal budget deficits.
But at the end of the day, what this demonstrates for all investors is that Wall Street’s buy-and-hold mantra was a recipe for huge losses over the last 18 months, just as it was during the last bear market in 2000-2002. Perhaps that is why we are seeing a wave of investors seeking actively managed alternative investment strategies such as those I recommend.
Household Net Worth Continues To Fall
The Capgemini/Merrill Lynch report on the plunge in millionaires globally wasn’t the only recent source of bad news about last year’s drop in personal net worth. According to a Federal Reserve report earlier this month, 2008 was the worst year on record for US household net worth (assets minus liabilities).
Household net worth in the United States declined by $11.2 trillion (-18%) last year and Americans curbed their spending as they watched the value of their assets fall. It was the worst yearly decline in household net worth on record.
In the 4Q of last year alone, household net worth plunged by $5.1 trillion (-9%), the largest quarterly drop in dollar terms on record, going back to 1951, when the government began keeping quarterly records.
On June 11, the Federal Reserve reported that US household net worth plunged $1.7 trillion (-2.6%) in the first three months of this year. That followed the record large drop in 2008 when household net worth plunged (18%). The 1Q of this year marked the seventh consecutive quarterly drop in household net worth.
The continued swift decline in household net worth was caused, once again, primarily by the continued decline in home values and the stock markets in the 1Q, plus the significant rise in the unemployment rate.
The Fed reported that the value of household real-estate holdings, mostly home residences, fell 2.4% in the 1Q to $50.4 trillion overall, down from $51.7 trillion at the end of 2008. Collectively across the US, homeowners had 41.4% equity in their homes in the 1Q, another record low. That was down from 42.9% in the 4Q of last year.
Making matters even worse, the damage to US household wealth in the 1Q also came from the sinking stock market. The Fed reported that the value of Americans’ stock holdings dropped 5.8% from the final quarter of last year.
While the equity markets have rebounded nicely since the early March lows, home values have continued to fall, so household net worth on average is almost certainly lower today than it was at the end of March (latest data available). And, of course, we know that many Americans, and foreigners as well, bailed out of the stock markets late last year and early this year and have yet to get back in, so they have not benefitted from the recent rebound in equities and related mutual funds.
This Does Not Bode Well For Stocks
Consumer spending accounts for 66%-72% of GDP (depending on whose stats you use). Almost every forecaster that is predicting an end to the recession in the second half of this year is counting on a revival in consumer spending. I find that wishful thinking in light of the continued fall in household net worth.
It is true that there have been some bright spots over the past few weeks. Consumer confidence has picked up over the last few months from very low levels, although it declined slightly in June as reported this morning. Personal income saw a healthy 1.4% jump in June, thanks in part to the government’s stimulus checks. Personal spending and retails sales ticked up slightly in May (latest data available), also from very low levels.
Yet most Americans are increasing their savings significantly, which is more money that will not find its way into cash registers. The Commerce Department reported last Friday that the personal savings rate spiked to 6.9% of disposable income in May, up from 5.6% in April and 4.3% in March. The May savings rate of 6.9% was the highest since December 1993. Most analysts believe the personal savings rate is on its way to 10% by year-end.
So, in addition to the continued decline in household net worth, which is likely to continue all year as home prices fall further, the rapidly rising savings rate does not bode well for a lasting surge in consumer spending just ahead. This is a key reason why I believe we will not emerge from this recession until next year.
The bear market in stocks, which saw the S&P 500 Index fall by more than 50% from the peak in late 2007, has certainly inflicted a lot of casualties on the world’s millionaires and super-millionaires.
The White House National Economic Council estimates that on a global basis, $50 trillion dollars in wealth has been erased over the last 18 months. This includes $7 trillion dollars in US stock market wealth which has vanished, and $6 trillion dollars in US housing wealth that has been destroyed over that period. These declines were unprecedented, and wiped out two robust years of growth in 2006 and 2007.
In 2008, the world’s population of millionaires was down 14.9% from the year before to 8.6 million, and their wealth had dropped 19.5% to $32.8 trillion. The super-millionaires ($30 million or more) fared even worse. The number of super-millionaires plunged 24.6% in 2008, and their wealth was down 23.9%.
I found this surprising since you would think that those with fortunes of $30 million or more would avail their portfolios (or at least part of them) to professional money managers and programs that employ defensive strategies that can go to cash or hedge long positions in a bear market.
As most readers know by now, Halbert Wealth Management specializes in finding such professional money managers, doing due diligence on their programs, verifying their past performance records and then recommending them to our many clients across the US.
All of the equity managers we recommend in our AdvisorLink® program performed much better than the stock market in 2008. Some of the equity managers that I have featured in these pages in recent years actually made money in 2008 and thus far in 2009. Of course, past performance is no guarantee of future results.
If you would like to see detailed information on these professional money managers, including their actual performance records (net of all fees), simply CLICK HERE. Remember that all of these programs have the ability to move to cash and/or hedge long positions in case of a bear market. Obviously, that has been a very good option to have in the last year and a half!
As always, if you would like to learn more about the benefits of active money managers, feel free to give one of my professional Investment Consultants a call at 800-348-3601 or visit our website at www.halbertwealth.com. If you prefer, you can also contact us via e-mail at firstname.lastname@example.org.
Wishing you a great summer,
Gary D. Halbert
P.S. Now that the House of Representatives has narrowly passed President Obama’s “cap and trade” bill, otherwise known as “cap and tax,” you might want to look at the following articles on the subject. Most Americans have no idea what this bill really holds for the future.
The Cap and Tax Fiction
Cap and trade being cancelled in other countries
Cap and trade bill flunks the math
No Recovery in Sight
Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.