Investment Contrarians

Why Larry Ellison’s $500-million Island Purchase Is the Problem

By for Investment Contrarians |

Larry Ellison’s $500-million Island PurchaseThere are the rich and then there are the mega-rich. A study showed that those with a net worth of at least $25.0 million tend to spend more lavishly on vacations and home renovations, compared to their spending on clothing, cars, and jewelry, according to the Spectrem Group. Then there’s the CEO of Oracle Corporation (NASDAQ/ORCL), Larry Ellison, who purchased the sixth largest island in Hawaii for a cool $500 million. When you are worth over $30.0 billion, dropping half a billion dollars on an island is not a big deal.

As I recently discussed, the income gap between the top one to five percent of income earners and the other 95%–99% is widening, which will likely present problems down the road. In 2009, the Internal Revenue Service pegged the adjusted gross income (AGI) level for the top one percent club at $343,917. To be included in the top five percent, the AGI was $154,643.

While the presidential candidates debate about the economy and monetary policy, one thing is sure—America is on fragile ground and needs a jump start to drive consumer spending in the economy.

Retail sales are showing improvement, but consumer spending on durable goods was horrible in August, when spending on non-essential goods and services cratered at -13.2%, versus the -5.0% estimate and the -4.1% in July. Even when you eliminate the spending in the transportation market sector, consumer spending on durable goods fell 1.6%, again worse than the -0.2% estimate and revised -1.3% in July. Of course, Ellison and the other top five percent aren’t concerned with a personal budget. The reality is that America as a whole needs to spend and drive consumer spending, but this is not happening. The poor reading indicates hesitancy in consumer spending on non-essential goods and services that, in my view, is a key component of a healthy and growing economy. When consumers refrain from buying non-essential goods and services, it shows a lack of confidence in the economy, thereby affecting consumer spending.

The decline in durable goods was the biggest decline since the January 2009 recession period, and it indicates a potential decline in factory orders. The number was disappointing since prior to this, durable goods recorded three straight months of increases.

The report by the Commerce Department also indicated that shipments of manufactured durable goods fell in two of the last three months, while inventories rose in 31 of the last 32 months. (Source: “Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders August 2012,” U.S. Department of Commerce.) Some would argue that companies are building inventory in anticipation of rising consumer spending, but I doubt that.

The second-quarter GDP growth (third estimate) reflected the current stalling in U.S. consumer spending, as the growth of 1.3% was well below the estimate of 1.7% and represented the slowest rate of growth since the third quarter of 2011.

So while the Larry Ellisons of the world continue to spend lavishly on ridiculous purchases, they will not be able to ignite the U.S. economy alone; this falls into the hands of the other 95%–99%. This is the problem we have in America, and it needs to be addressed.

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  • raulgarcia

    Lack of confidence? Are you serious? Try lack of disposable income.

  • http://www.facebook.com/people/Jim-McKosky/1182201500 Jim McKosky

    U assume I think the burglar should be jailed…I don't.