Wednesday, April 3, 2013

The rich are leveraging up

There’s a saying about high-net-worth individuals: they’re always the first to snap their wallets shut in a recession and the last to start spending in a recovery.  But when the rich finally start spending again they spare no expense! 

Witness the rebound in consumer spending in the U.S. since the 2009 rebound.  While earnings and discretionary spending among the middle class has shown only modest gains, spending among the “upper crust” has been nothing short of robust.  According to Mark Jordahl, president of U.S. Bank Wealth Management, high-net-worth individuals are not only spending fast and furiously, their also taking on leverage.  Jordahl told Barron’s  that his lending business is up 66% on a year-over-year basis. 

The increased borrowing among the wealthy is not a function of need, but of perceived opportunity.  The rich are taking on leverage because they see investment return opportunities at historically low rates of interest.  They’re feeling more risk averse than they were just a couple of years ago and more money is coming out of safe haven investments (like bonds and gold) and flowing into risk assets (like stocks). 

Spending patterns by upper-income earners remain buoyant thanks to strong stock prices and rising home prices, as well as dividends and bonuses distributed in late 2012 (rather than in 2013 to avoid higher taxes).  Kipplinger Finance points out that consumers at the upper end of the wealth spectrum pack an outsize punch in the economy, with those in the top 20% of income accounting for roughly 40% of spending. 

So what does it mean when the rich come out to play?  While it’s still too early to worry about the implication of increased leveraged among upper-income investors, the trend toward increased debt is certainly troubling and will eventually lead to increased volatility down the line. 

For now, let’s enjoy the economy’s strong showing courtesy of the upper 20%! 

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