Companies

The rise of the superstars

A small group of giant companies—some old, some new—are once again dominating the global economy, says Adrian Wooldridge. Is that a good or a bad thing?
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ON AUGUST 31ST 1910 Theodore Roosevelt delivered a fiery speech in Osawatomie, Kansas.

The former president celebrated America’s extraordinary new commercial power but also gave warning that America’s industrial economy had been taken over by a handful of corporate giants that were generating unparalleled wealth for a small number of people and exercising growing control over American politics. Roosevelt cautioned that a country founded on the principle of equality of opportunity was in danger of becoming a land of corporate privilege, and pledged to do whatever he could to bring the new giants under control.

Roosevelt’s speech sounds as fresh today as on the day he made it. A small number of giant companies are once again on the march, tightening their grip on global markets, merging with each other to get even bigger, and enjoying vast profits. As a proportion of GDP, American corporate profits are higher than they have been at any time since 1929. Apple, Google, Amazon and their peers dominate today’s economy just as surely as US Steel, Standard Oil and Sears, Roebuck and Company dominated the economy of Roosevelt’s day. Some of these modern giants are long-established stars that have reinvented themselves many times over.

Some are brash newcomers from the emerging world. Some are high-tech wizards that are conjuring business empires out of noughts and ones. But all of them have learned how to combine the advantages of size with the virtues of entrepreneurialism. They are pulling ahead of their rivals in one area after another and building up powerful defences against competition, including enormous cash piles equivalent to 10% of GDP in America and as much as 47% in Japan. 

In the 1980s and 1990s management gurus pointed to the “demise of size” as big companies seemed to be giving way to a much more entrepreneurial economy. Giants such as AT&T were broken up and state-owned firms were privatised. High-tech companies emerged from nowhere. Peter Drucker, a veteran management thinker, announced that “the Fortune 500 [list of the biggest American companies] is over.” That chimed with the ideas of Ronald Coase, an academic who had argued in “The Nature of the Firm” (1937) that companies make sense only when they can provide the services concerned more cheaply than the market can.

But now size seems to matter again. The McKinsey Global Institute, the consultancy’s research arm, calculates that 10% of the world’s public companies generate 80% of all profits. Firms with more than $1 billion in annual revenue account for nearly 60% of total global revenues and 65% of market capitalisation.

The quest for size is producing a global bull market in mergers and acquisitions. In 1990 there were 11,500 M&A deals with a combined value equivalent to 2% of global GDP. In the years since 2008 the number has risen to 30,000 a year, worth about 3% of global GDP. America’s antitrust authorities have recently given Anheuser-Busch InBev, one of the world’s biggest drinks companies, the all-clear to buy SABMiller, another global drinks firm, for $107 billion.

The superstar effect is most visible in America, the world’s most advanced economy. The share of nominal GDP generated by the Fortune 100 biggest American companies rose from about 33% of GDP in 1994 to 46% in 2013, and the Fortune 100’s share of the revenues generated by the Fortune 500 went up from 57% to 63% over the same period. The number of listed companies in America nearly halved between 1997 and 2013, from 6,797 to 3,485, according to Gustavo Grullon of Rice University and two colleagues, reflecting the trend towards consolidation and growing size. Sales by the median listed public company are almost three times as big as they were 20 years ago. Profit margins have increased in direct proportion to the concentration of the market.

Startups, meanwhile, have found it harder to get off the ground. Robert Litan, of the Council on Foreign Relations, and Ian Hathaway, of the Brookings Institution, note that the number of startups is lower than at any time since the late 1970s, and that more companies die than are born, pushing up their average age. American workers are also changing jobs and moving across state borders less often than at any time since the 1970s.

Competition is for losers
 
The superstar effect is particularly marked in the knowledge economy. In Silicon Valley a handful of giants are enjoying market shares and profit margins not seen since the robber barons in the late 19th century. “Competition is for losers,” says Peter Thiel, a co-founder of PayPal, a payments system, and the first outside investor in Facebook. On Wall Street the five largest banks have increased their share of America’s banking assets from 25% in 2000 to 45% today.

The picture in other rich countries is more varied. Whereas in Britain and South Korea the scale of consolidation has been similar to that in America, in continental Europe it has been much less pronounced. In a list of the world’s top 100 companies by market capitalisation compiled by PwC, an accountancy firm, the number of continental European firms has declined from 19 in 2009 to 17 now. Still, in most of the world some consolidation is the rule.

The OECD, a club of mostly rich countries, notes that firms with more than 250 employees account for the biggest share of value added in every country it monitors.

There are good reasons for thinking that the superstar effect will gather strength. Big and powerful companies force their rivals to bulk up in order to compete with them. They also oblige large numbers of lawyers, consultancies and other professional-services firms to become global to supply their needs. Digitisation reinforces the trend because digital companies can exploit network effects and operate across borders.

James Manyika, of the McKinsey Global Institute, points out that today’s superstar companies are big in different ways from their predecessors. In the old days companies with large revenues and global footprints almost always had lots of assets and employees. Some superstar companies, such as Walmart and Exxon, still do. But digital companies with huge market valuations and market shares typically have few assets. In 1990 the top three carmakers in Detroit between them had nominal revenues of $250 billion, a market capitalisation of $36 billion and 1.2m employees. In 2014 the top three companies in Silicon Valley had revenues of $247 billion and a market capitalisation of over $1 trillion but just 137,000 employees.
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Yet even “old” big companies employ far fewer people than they used to. Exxon, the world’s most successful oil company, has cut back its workforce from 150,000 in the 1960s to less than half that today, despite having merged with a giant rival, Mobil. At the same time “new” big companies are becoming more like the corporations of yore. High-tech companies often give senior jobs to former Washington insiders and employ armies of lobbyists. Many modern superstar companies park their money in offshore hideaways and devote considerable efforts to keeping down their tax bills. Superstar companies tend to excel at everything they do—including squeezing as much as they can out of government while paying the lowest possible taxes.

This special report will explain why the age of entrepreneurialism, ushered in by Britain’s Margaret Thatcher and America’s Ronald Reagan, is giving way to an age of corporate consolidation even as most companies are becoming more virtual. It will examine the forces behind the rise of the superstars and reveal their managerial secrets. And it will attempt to answer the question that Roosevelt raised in Osawatomie: are such corporate giants a cause for concern or for celebration?


Dangers Rise as America Retreats

Fifteen years after 9/11, the next president will face greater risks and a weaker military to combat them.

By Dick Cheney and Liz Cheney

September 11, 2001, in New York. Photo: Gamma-Rapho/Getty Images


Fifteen years ago this Sunday, nearly 3,000 Americans were killed in the deadliest attack on the U.S. homeland in our history. A decade and a half later, we remain at war with Islamic terrorists. Winning this war will require an effort of greater scale and commitment than anything we have seen since World War II, calling on every element of our national power.

Defeating our enemies has been made significantly more difficult by the policies of Barack Obama.

No American president has done more to weaken the U.S., hobble our defenses or aid our adversaries.

President Obama has been more dedicated to reducing America’s power than to defeating our enemies. He has enhanced the abilities, reach and finances of our adversaries, including the world’s leading state sponsor of terror, at the expense of our allies and our own national security. He has overseen a decline of our own military capabilities as our adversaries’ strength has grown.


Our Air Force today is the oldest and smallest it has ever been. In January 2015, then-Army Chief of Staff Gen. Ray Odierno testified that the Army was as unready as it had been at any other time in its history. Chief of Naval Operations Adm. Jonathan W. Greenert testified similarly that, “Navy readiness is at its lowest point in many years.”

Nearly half of the Marine Corps’ non-deployed units—the ones that respond to unforeseen contingencies—are suffering shortfalls, according to the commandant of the Corps, Gen. Joseph F. Dunford Jr. For the first time in decades, American supremacy in key areas can no longer be assured.

The president who came into office promising to end wars has made war more likely by diminishing America’s strength and deterrence ability. He doesn’t seem to understand that the credible threat of military force gives substance and meaning to our diplomacy. By reducing the size and strength of our forces, he has ensured that future wars will be longer, and put more American lives at risk.

Meanwhile, the threat from global terrorist organizations has grown. Nicholas Rasmussen, director of the National Counterterrorism Center, told the House Homeland Security Committee in July that, “As we approach 15 years since 9/11, the array of terrorist actors around the globe is broader, wider and deeper than it has been at any time since that day.”

Despite Mr. Obama’s claim that ISIS has been diminished, John Brennan, Mr. Obama’s CIA director, told the Senate Intelligence Committee in June that, “Our efforts have not reduced the group’s terrorism capability or global reach.”

The president’s policies have contributed to our enemies’ advance. In his first days in office, Mr. Obama moved to take the nation off a war footing and return to the failed policies of the 1990s when terrorism was treated as a law-enforcement matter. It didn’t matter that the Enhanced Interrogation Program produced information that prevented attacks, saved American lives and, we now know, contributed to the capture and killing of Osama bin Laden.

Mr. Obama ended the program, publicly revealed its techniques, and failed to put any effective terrorist-interrogation program in its place.

We are no longer interrogating terrorists in part because we are no longer capturing terrorists.

Since taking office, the president has recklessly pursued his objective of closing the detention facility at Guantanamo by releasing current detainees—regardless of the likelihood they will return to the field of battle against us. Until recently, the head of recruitment for ISIS in Afghanistan and Pakistan was a former Guantanamo detainee, as is one of al Qaeda’s most senior leaders in the Arabian Peninsula.

As he released terrorists to return to the field of battle, Mr. Obama was simultaneously withdrawing American forces from Iraq and Afghanistan. He calls this policy “ending wars.”

Most reasonable people recognize this approach as losing wars.

When Mr. Obama took the oath of office on Jan. 20, 2009, Iraq was stable. Following the surge ordered by President Bush, al Qaeda in Iraq had largely been defeated, as had the Shiite militias. The situation was so good that Vice President Joe Biden predicted, “Iraq will be one of the great achievements of this administration.”

Today, Iraq’s border with Syria has been erased by the most successful and dangerous terrorist organization in history. ISIS has established its “caliphate” across a large swath of territory in the heart of Syria and Iraq, from which it trains, recruits, plots and launches attacks.

On Aug. 20, 2012, Mr. Obama drew a red line making clear he would take military action if Syrian President Bashar Assad used chemical weapons. A year later, Mr. Assad launched a sarin-gas attack on his own people in the suburbs of Damascus. Mr. Obama did nothing—a failure that destroyed America’s credibility and strengthened the hand of our adversaries.

We now know that the president’s refusal to act came as the Iranians and the U.S. were engaged in secret talks about Iran’s nuclear program. In his new book, “The Iran Wars,” Wall Street Journal correspondent Jay Solomon writes that according to Iranian sources, “Tehran made it clear to the American delegation that the nuclear negotiations would be halted if the U.S. went ahead with its attack on Assad.” The Iranians were now in the driver’s seat, not just regarding their own policy in the Middle East, but in determining America’s.

President Obama and Secretaries of State Hillary Clinton and John Kerry were so concerned with pleasing Iran’s ruling mullahs that they were willing to overlook the American blood on Iranian hands and decades of Iran’s activities as the world’s leading state sponsor of terror. In pursuit of the nuclear deal, they made concession after dangerous concession.

Every promise made to the American people about the Obama nuclear agreement has been broken. We were promised a “world-class” verification process. Instead, the Iranians are allowed in key instances to verify themselves.

We were promised the agreement would “block every pathway” to an Iranian nuclear weapon.

Instead, the Obama-Clinton agreement virtually guarantees an Iranian nuclear weapon, gives them access to the latest in centrifuge technology and will likely usher in a nuclear arms race across the Middle East.

We were promised that non-nuclear sanctions, including those that block Iran’s access to hard currency and our financial systems, would remain in place. Instead, the Obama administration has paid the mullahs at least $1.7 billion in cash, which includes at least $1.3 billion in U.S. taxpayer money, the first installment of which was ransom for the release of American hostages.

In case there is any doubt that the regime will use these funds to support terror, Iran’s parliament recently passed Article 22 of its 2016-2017 budget, mandating that all such funds be transferred directly to the Iranian military. Fifteen years after 3,000 Americans were killed by Islamic terrorists, America’s commander in chief has become the money launderer in chief for the world’s leading state sponsor of terror.

Iran isn’t the only adversary benefiting from the age of Obama. Russia is threatening NATO, invading sovereign territory, selling air-defense systems to the Iranians, using its military to defend the Assad regime, bombing American-backed rebels in Syria, and playing a larger role in the Middle East than at any time since Anwar Sadat expelled his Soviet advisers from Egypt in 1972.

Across the region, nations that previously were strong American allies are making different calculations. Russia is seen as a reliable ally standing with Mr. Assad, while the U.S. walks away from its friends. The steady stream of visitors from the Middle East to Moscow, including most recently Israeli Prime Minister Benjamin Netanyahu, is evidence of Moscow’s growing role in the region. Neither Russia nor Vladmir Putin shares America’s interests.

China is also ascendant—threatening freedom of navigation through the South China Sea and developing weapons systems that directly threaten American military superiority. North Korea represents a growing nuclear threat to the U.S. homeland. Mr. Obama’s announced pivot to Asia turned out to be hollow, further alienating our allies and emboldening our enemies in the region.

Undoing this damage will require an effort of historic proportions. Our next president must abandon Mr. Obama’s fantasy that unilaterally disarming, retreating and abandoning our allies will bring peace and security. We must begin at once to rebuild our military. This means ending sequestration and returning to a Defense Department budget built around defeating the threats to our nation. We must remedy readiness shortfalls, modernize and upgrade our nuclear arsenal, develop and build a robust missile-defense system, and invest in technologies necessary to maintain our military superiority, particularly against advances by adversaries like Russia, China, Iran and North Korea.

Among the most important lessons of 9/11 was that terrorists must be denied safe havens from which to plan and launch attacks against us. On President Obama’s watch, terrorist safe havens have expanded around the globe.

Our next president must recognize that Islamic terrorists pose an existential threat to the U.S., and must instruct the military to provide plans necessary to defeat them and deny them safe havens. These should include expanding the pace of our air campaign against ISIS, removing the onerous rules of engagement, and dedicating additional special operators and other American forces as necessary to defeat our enemies.

Winning the war against Islamic terrorists will also require that we rebuild our intelligence capabilities. Our next president should reinstate the Enhanced Interrogation Program, ensure that Guantanamo remains open so we have a facility to hold enemy combatants, and increase our intelligence activities so we can identify and disrupt plots before they are carried out.

We must make clear that we will not allow Iran to obtain a nuclear weapon or become nuclear capable. Our next president should renounce the Obama-Clinton nuclear agreement, develop a strategy in consultation with our allies in the region to address Iran’s state sponsorship of terror, and make clear that all options are on the table where Iran’s nuclear program is concerned.

We must also rebuild our relationships with allies across the globe so that we can build the coalitions necessary to defeat Islamic terrorism and restore our strength and power. This includes reinvigorating NATO and affirming America’s unshakable commitment to the most effective military alliance in history.

Generations before have met and defeated grave threats to our nation. American strength, leadership and ideals were crucial to the Allied victory in World War II and the defeat of Soviet Communism during the Cold War. It will be up to today’s generation to restore American pre-eminence so that we can defend our freedom and defeat Islamic terror.

Since World War II, America has been freedom’s defender—for ourselves and for millions around the world. We do this because our security depends upon it and because there is no other nation that can.

As Americans calculate the costs of leadership, we must remember that the costs of failing to lead—or of inaction—are much higher. Imagine a world where Russia, Iran, China and North Korea set the rules; where militant Islam spreads its evil ideology unchallenged across the globe; where parts of Europe are once again enslaved by Russia, our NATO alliance impotent; and where China achieves military superiority over the U.S. and dominates Asia and beyond.

Finally, imagine a world where the terrorists and their leading state sponsor have nuclear weapons.

Fifteen years after 9/11, we can say with certainty that this is the world that will be created by withdrawal and retreat—by Barack Obama and Hillary Clinton’s policies—if we don’t reverse course.


Mr. Cheney was U.S. vice president from 2001-09. Ms. Cheney is the Republican nominee for Wyoming’s at-large seat in the House.


Presidential Debate: Financial Markets Declare Winners and Losers

Investors offered their own grades for Hillary Clinton and Donald Trump following Monday’s debate

By Steven Russolillo



Democratic nominee Hillary Clinton and Republican nominee Donald Trump leave the stage after the first presidential debate on Monday night. Photo: Timothy A. Clary/Agence France-Presse/Getty Image


There was no need to wait for pundits to grade Donald Trump and Hillary Clinton on their Monday debate performances. Financial markets’ judgment was swift.

Currencies, gold and some individual stocks had sharp moves Tuesday that suggested Mrs. Clinton was the victor. After months of conjecture, investors now have a real-world template for what may rise and fall as the election approaches and the candidates’ fortunes shift.

Consider the Mexican peso. It jumped 2% against the U.S. dollar during the debate, a remarkably swift move in currency markets. Mr. Trump has called for scrapping the North American Free Trade Agreement, which would hurt Mexico’s export economy. He also has advocated building a wall along the U.S.-Mexican border. Both could hurt Mexico’s economy and currency.

Then there is gold, considered a haven during market turmoil. Wall Street has long speculated that a Trump presidency might pressure the dollar’s value and raise geopolitical risks, boosting demand for gold. Mr. Trump has also touted the gold standard and the merits of a gold-backed currency. Gold fell more than 1% Tuesday.

And a specific sector, for-profit prisons, drew fresh scrutiny from Mrs. Clinton. “You shouldn’t have a profit motivation to fill prison cells with young Americans,” she said. Her warning comes after the Justice Department last month said it plans to phase out the use of private prisons.

Private-prison companies Corrections Corp. of America CXW -7.39 % and GEO Group Inc. GEO -3.82 % fell 7.4% and 3.8%, respectively, on Tuesday. The risks facing these companies “should be clear,” said Andy Laperriere, a political strategist at research firm Cornerstone Macro.

One sector surprisingly not hit by the debate: biotechnology and pharmaceutical stocks. After singling them out for criticism over drug pricing, Mrs. Clinton didn’t mention the issue in the debate.

Exchange-traded funds for those stocks had been beating the market in recent weeks as Mrs. Clinton’s poll numbers slipped, but they didn’t give up any gains Tuesday.

Portfolios designed to benefit from the election’s outcome are also offering telling signs.

Research firm Strategas Research Partners says its Democratic portfolio has outperformed its Republican portfolio by some 3% this year, implying a 59% probability of a Mrs. Clinton victory.

Not only did investors get to vote early but they will have plenty of recounts before Nov. 8.      


Barron's Cover

Penta Millionaires: The New Rising Class

Families with over $5 million in investible assets surpass one million for first time

By Stacy Perman

It is fair to say that at no time in history have so many Americans become so rich—or amassed their wealth so quickly. When John D. Rockefeller took title as the country’s first billionaire, in 1916, it was as rare an event as sighting a white whale, and seven decades later, the number of billionaires had still only reached 44. Since then, however, the ranks of the megarich have surged ahead with a caffeinated velocity.

At every level of the wealth pyramid, according to Penta’s research partner Boston Consulting Group, the ranks of millionaire and multimillionaire households have expanded. Last year, for example, there were 492 U.S. billionaires, meaning that 100 new billionaires were created in the past five years alone. But the most interesting trend is a little further down the pyramid: The number of households with more than $5 million in investible assets just crossed the one million mark, up 5% from 2014.

“This is the first time that has happened since we started measuring these markets in the mid-1980s,” says David M. Thompson, managing director of Phoenix Affluent Practice, a Rhinebeck, N.Y.–based firm that tracks the wealthy and their financial interests. Thompson calls this million mark a “historical threshold.”
THE WEALTH PYRAMID Two million families became millionaires in recent years, as penta millionaires and above surpassed a million. The biggest percentage growth: $20 million to $100 million. Source: Boston Consulting Group
 
 
We might have warm memories of the U.S. economy’s prerecession years, compared with the plodding growth of our recent times, but let’s put these two wealth-creation periods in context. Penta millionaires saw overheated spikes in their ranks during the go-go years—a 31% rise between 2003 and 2004 alone, according to Phoenix, as households jumped from 498,000 to 650,000. This excessive wealth creation then corrected itself in the Great Recession, when the penta-rich ranks fell by 191,000, or 22%, over two years. (See chart below.)

Flash forward to recent times. The rank-and-file rich have grown by just 5% a year recently, but this steady if modest climb over seven years has actually delivered better results. We now have a million-strong army of very rich emerging from the ho-hum, low-inflation economic growth that has been coupled with robust capital markets. Many have, in this calm environment, quietly sold off their private business or cashed in their stock-option windfalls.

“The $5 million to $20 million is the sweet spot,” says Bruce Holley, a senior partner and managing director at Boston Consulting Group. “At that level, there’s a lot of movement largely due to money events”—consultant-speak for a payday after a life of hard work.

In short, the days when the 400 massively rich families of the Gilded Age could fit inside Caroline Astor’s Manhattan ballroom have given way to a broader, younger, more geographically diverse group of self-made moguls. And yet, while their sizable fortunes, for the most part, have insulated them from the sort of blows that would fell the less flush, such lucre has not, it appears, inured them to a host of fears and insecurities.

Having shaken off the Great Recession, they find themselves rocked by ultralow interest rates, stock market gyrations, and a cascade of anxieties. They worry about how their portfolios are invested and whether they’re spending more than they are earning; they fret over their security, both financial and personal; and, above all, they worry about the effect that their wealth will have on their children’s lives.

But America’s affluent have gained significant ground. According to the Boston Consulting Group, the nation last year minted 6,789,666 millionaires, up 41.5% from 2010. That’s impressive, but still below the astounding growth rates clocked at the highest wealth levels.

In just a five-year span, the number of folks in the $20-million-to-$100-million band jumped 63.5%; those occupying the $100-million-to-$1-billion strata, grew by 61%.

The times are changing—often in good ways. More women than ever are climbing the wealth pyramid, both as entrepreneurs and as the heads of families—women like Abigail Johnson, CEO of Fidelity Investments; Facebook COO Sheryl Sandberg; and Sara Blakely, founder of body-shaper lingerie Spanx. According to a recent UBS study, from 1995 to 2014, the number of global female billionaires grew by a factor of 6.6, versus 5.2 for men. More than 80% of female billionaires hail from the U.S.; 19% of them were self-made.

And while the moneyed set is likely to be married, the wife is no longer always a stay-at-home spouse; dual-income couples are equally on the rise. According to the Spectrem Group, which releases various reports on ultrahigh-net-worth individuals, last year 62% of those in the $25-million-and-above category were dual-career spouses, up from 39% in 2012. That’s a huge shift in how wealth is created and in the makeup of the nation’s social fabric.

For proof, just look at some of the marquee working couples these days, such as Facebook founder Mark Zuckerberg, married to Harvard University graduate Priscilla Chan, a pediatrician, philanthropist, and CEO of The Primary School; and the latest Yahoo! CEO, Marissa Mayer, married to lawyer and investor Zachary Bogue.
 
But the fantastically wealthy rank and file aren’t just becoming more female; they’re also getting younger.

The Spectrem Group finds that among the very rich, only 4% are younger than 48, but they have an average net worth of over $10 million, roughly the same level of wealth as some 60% of those who are 65 or older. “You’re seeing a lot of superwealth being created in this country around technology and social media,” says George H. Walper Jr., Spectrem’s president, noting it as a factor contributing to the trend toward younger wealth creators. “If you look at the age of those in the $5-million-to-$25-million range, what you are seeing is not that the youngest are the wealthiest, but that the wealth of younger people is now equal to those who are older in the same band.”

This youth trend is transforming the politics of wealth in all sorts of ways. For one, younger folks are tipping the philanthropy scales to more high-engagement giving, helping push social-impact investing from the feel-good periphery to $6.57 trillion in assets in 2014, up 76% from just two years earlier. (See Penta’s “Impact Investing Done Right,” Nov. 28, 2015.) These younger wealthy folks also have a unique take on everything from how private-banking services should be delivered to the role that art plays in their financial lives.

U.S. Trust asked respondents in its 2016 survey, Insights on Wealth and Worth, whether they viewed art as a way to build significant wealth. They found that 29% of millennials and 36% of Gen Xers answered in the affirmative. “This is an area, as a private bank, we’re just starting to approach more aggressively,” says Chris Heilmann, U.S. Trust’s chief fiduciary executive and a managing director of Bank of America. “We were kind of surprised at the numbers we saw coming out of the survey, in terms of the interest the wealthy have in art.”

Shifting alongside that is wealth’s geography. Traditionally, wealth was concentrated along the industrial corridors of the West and East coasts, but, according to Capgemini ’s United States Wealth Report, from 2008 to 2013, three of the four fastest-growing cities for wealth creation were Dallas, Houston, and San Jose, Calif. New fortunes created in the energy, software, and technology industries pump up these local and regional economies.

What does it all mean? Wealth tracker Thompson nicely summarizes all of these changing forces and fortunes when he says, “The high-net-worth market has continued to grow since the downturn and hasn’t looked back, in terms of steady growth.” And, it should be noted, this growth isn’t likely to come to an abrupt halt anytime soon, even as politicians and thought leaders fret over the fact that the wealthiest 400 Americans now have more wealth than the bottom 61% of the population combined, according to the Institute for Policy Studies. “Based on historical patterns,” says Thompson, and “barring any significant downturns, there is no reason to believe that growth won’t continue.” One reason, he says, is that the $5-million-plus crowd has “access to asset classes that less-wealthy households don’t have,” and that competitive advantage will help propel their growth.

That doesn’t mean that the wealthy don’t have their own set of unique and very real concerns. Five years ago, Boston College’s Center on Wealth and Philanthropy released a report titled, “The Joys and Dilemmas of Wealth.” Bankrolled by the Bill & Melinda Gates Foundation, it took a deep dive into the inner lives of the megarich; the majority of respondents had at least $25 million in assets and an average net worth of $78 million. The study enumerated a catalog of anxieties—from feelings of social isolation to dissatisfaction over their place on the wealth hierarchy—but the biggest flash point was concern over whether their fortunes might sap their progeny of motivation and prevent them from living meaningful lives. “How consistent and how sincere respondents were about the future of their children surprised me,” says psychologist Robert Kenny, one of the study’s authors and a founding partner at North Bridge Advisory Group.

Anthony Alves, 54, faced such apprehension after he sold his New Jersey firm, Oasis Foods, to Sweden’s AAK in 2012. At the time, the company was generating about $130 million a year. With a 50% stake in the company, the sale catapulted him from “upper-middle class,” with a Honda minivan and nice family vacations, to a net worth well over $25 million. “It was life-changing,” says Alves.

He needed help figuring out how to live with this elevated level of wealth, so Alves’ advisors at Wells Fargo Private Bank had him assess short- and long-term goals, and then established a budget pegged to seven- to 10-year cycles. After making some initial lifestyle upgrades—a Maserati and a $2 million yacht for him, a new Mercedes-Benz for his wife, a new swimming pool, and a vacation home—Alves says his priority was his four children’s futures. They ranged in age from 10 to 17, and he enrolled them in a top-flight private boarding school with $50,000-a-year tuition per child. “For me, my biggest concern was for them to have an education to give them the ability to reach their goals and opportunities,” he says.
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Advisors are telling the wealthy they can’t afford all their toys in this low-return environment. Author G. Bruce Knecht has written about the Lady Linda yacht and ?the millionaire who can?t really afford it.? Photo: Rupert Peace
           
 
But Alves also worried that while his wealth offered his children countless opportunities, it also had the potential to mess them up. So he came up with a plan. He and his wife started by setting up trust funds for their children, to be accessed only when they reached age 40. “It was important for me that they understand there is this other part of life, that they should overcome challenges and not have a soft cushion to fall on every time,” he says. “I didn’t want to rob my kids of their own character.” The couple then launched a charitable trust, something that Alves half-jokingly calls the “forced family fund.” This vehicle is intended to bring the children together, with the goal to disburse $300,000 annually, and also to be a means of infusing the family’s wealth with meaning. “This brings everyone to the table to participate in giving,” he says. Hopefully, the charitable trust will be a “tool to understand the value of the money,” while also helping them understand the importance of doing “something to help others with the money they have.”

Wealth managers across the nation, catering to the rising tide of the newly wealthy like the Alves family, are coming up with services dedicated to the specific issues of the inheritors. Such programs offer the basics when it comes to budgeting, investing, and estate planning, but they also help families to establish a set of shared values over their wealth and how that might be manifested through the generations.

Such services will only grow in importance as the decade progresses. U.S. Trust’s recent insight survey found that among the wealthy set, 77% originally came from middle-class or lower backgrounds, including 19% who grew up poor. But as our population ages, and dual-income parents funnel their wealth down to one or two kids, inherited wealth will become increasingly important in a nation that has historically prided itself as a nation of self-starters. Over the next 20 years, for example, it is calculated that some $1 trillion a year in wealth will be transferred to the next generation. “The No. 1 concern I hear from clients is the impact of their wealth on the next generation,” says Charlie Mueller, a Trust & Advisory Practice executive at Chicago-based Northern Trust. “Wealth planning is incomplete unless and until it takes into account the family and prepares them for wealth.”

Of course, for every trend, there is a countertrend. Entwined with these concerns about offspring and inherited wealth, there is the fact, unfathomable to some, that many of the wealthy don’t consider themselves financially secure. “I’m hearing from people with assets between $5-and-$10 million and $10-and-$20 million,” says Anthony McEahern, head of wealth planning at Wells Fargo Private Bank. “They don’t think of themselves as financially independent.”

That’s not as outlandish as it sounds. Consider an individual with a $5 million portfolio. With low interest rates, market volatility, and the bond market’s 35-year bull run slowing to a sputter, $5 million doesn’t stretch as far as it once did. Lisa Shalett, head of investment and portfolio strategies at Morgan Stanley Wealth Management, says a low-risk, primarily cash portfolio today generates an average yield of 1%; a bond-oriented portfolio might earn 2% to 3%; a 60/40 portfolio will, realistically, get you to 5.5%.

That means our wealthy individual, even if he or she takes the 60/40 option, will be earning some $275,000 a year from his or her portfolio. But that’s pretax, of course, so take away half of that amount in taxes, and our wealthy individual is left with $138,000 of income a year. Renting a nice three-bedroom apartment in New York City or San Francisco could entirely wipe out that income stream. “In this environment, you’re really not that well-off in terms of annual expectations,” says Shalett. “Particularly for those who are retired, if they don’t have a pension or any other income and they are just living off their investment income—you are talking about a more modest life.”

Simply put, the wealthy, like many families with far less resources, are confronting the fact their lifestyles are costing more than they are actually earning. Doris Meister, president of U.S. Markets-Tri-State at Bank of New York Mellonsays that she is frequently engaged in client discussions about lowering their return expectations and how their financial plans need to take into consideration the cost of their current and projected lifestyles.

“I have one client with $15 million in assets, the result of a divorce settlement,” says Meister.

“She has a pretty high lifestyle for that level of assets, and while you might say $15 million is a lot of money—and it is—the infrastructure supporting it is not. We had a conversation that, if she continues at this level, she is going to run out of money in 12 years.”

Wells Fargo’s McEahern also has frequent talks with clients about their modeled burn-rate projections. “It forces people to rethink how they live their lives,” he says. Recently, he had to inform a client that the service costs of maintaining his three jets were draining his liquid assets, and suggested he sell two of them. Meister says that real estate portfolios, in particular, offer a crucial area for strategic rethinking for clients feeling squeezed or alarmed about their spending levels.

“Often clients have more than one residence, and properties are expensive,” she says. “We talk about selling or renting them out. If the property is in a desirable area, they can turn the asset into an income producer, as opposed to being a cost, or sell it outright and add money to their portfolio.”

The wealthy are also rattled by security issues, from potential cyberthreats to the impact social media can have on turning private family moments into public fodder. Northern Trust’s Mueller says helping clients come up with a security plan is becoming as significant as estate planning.

After a pair of new clients in the Midwest with school-age children sold their business in excess of $250 million, Mueller customized a strategy. “They had not thought about how the news release would come out and how it would change their lives and how they were viewed within their small community,” he says. So the firm came up with a plan advising them about how to handle not only their own personal security, but also their children’s activity on social media, and how to respond to friends and neighbors. And they made sure the announcement of the sale did not mention the dollar amount of the acquisition.

When it comes to wealth, says psychologist Kenny, “people can grow up with a lot of money, but they can’t buy themselves out of the human condition.” That’s a wise thought for the very wealthy to keep in mind as they navigate the unchartered waters of their life.


Turkey’s Changing Freedom Deficit

Timur Kuran
. Newsart for Turkey’s Changing Freedom Deficit



DURHAM – Turkey’s Justice and Development Party (AKP) rose to power in 2002 on the promise that it would give pious Muslims religious freedom. Fourteen years later, “freedom” is the last thing the AKP has delivered.
 
Today, even AKP supporters need to measure their words carefully, lest they be perceived as criticizing the government or siding with its enemies. This imperative has intensified since the failed coup against President Recep Tayyip Erdoğan’s government on July 15. Now, destroying any evidence of association with the AKP’s foes – especially Fethullah Gülen, the reclusive Pennsylvania-based imam whom the government accuses of masterminding the putsch – is a matter of self-preservation.
 
Erdoğan’s government is by no means the first to compel Turkish citizens to hide their preferences and beliefs. Under the secular governments that ruled Turkey from the 1920s to 1950, and to some extent until 2002, pious Turks seeking advancement in government, the military, and even commerce had to downplay their religiosity and avoid signaling approval of political Islam.
 
The leaders of the three Islamist parties that preceded the AKP resented the barriers to religious expression. They held that French-style secularism had perverted Turkish culture. Though careful not to challenge the constitution openly, from 1971 to 2001, they were successively banned as threats to secularism. In 1999, Erdoğan himself was jailed for reciting a poem deemed an incitement to sectarian violence. In the same year, Gülen, under investigation for advocating an Islamic state, moved to the United States.
 
As fellow opponents of secular governance, Gülen’s Hizmet (Service) movement and the AKP were natural allies. Indeed, they spent a decade working together to undermine Turkey’s secular institutions. After a constitutional referendum in 2010 terminated the staunchly secular military’s guardianship of the Republic, they saw an historic opportunity for overhauling Turkey’s institutions, though there was some disagreement – and, indeed, tension – over how that should occur.
 
Erdoğan, who was then Prime Minister, began to transform Turkish society according to his own conservative interpretation of Islam. Religious education was intensified. Alcohol restrictions were tightened. Women were instructed to have at least three children and, later, not to laugh loudly in public. What news media the AKP did not buy off were subdued through threats of punitive taxation and jail time for uncooperative journalists. Secular Turks, once the politically dominant vanguards of modernity, were characterized as lacking in morality, decency, and even Turkishness.
 
But devout Muslims were not free from fear, either, not least because of the ensuing power struggle between the Erdoğan and Gülen camps. Though Gülen’s supporters initially shared the privileges of power under AKP rule, including preferential treatment in government hiring and contracts, tensions came to a head in 2013, when Gülenists tried to implicate Erdoğan in a corruption probe. Erdoğan responded by initiating a purge of suspected Gülenists from state institutions.
 
With two academics having already revealed that several sensational legal cases against the old secular establishment rested on fabricated evidence, AKP officials began to blame Gülen for all judicial improprieties. While there was no doubt that the AKP knew that the victims of the lawsuits, including hundreds of generals, were framed, few Turks said a word, for fear of being labeled part of Gülen’s “parallel state.”
 
Two months after the bloodiest coup attempt in Turkish history, Turks still talk incessantly about the surreal bombardments, the televised images of tanks in the street, and the ferocious government response, which has included tens of thousands of arrests. Some wonder whether Erdoğan staged the coup to justify the epic purge. Of course, any such questions are raised in private, amid assertions of antipathy to the “Fethullah Terror Organization,” the new official designation for Hizmet. Turks know that the government may equate the slightest connection to Gülen, however old or tenuous, with treason.
 
Alleged sympathizers are being summarily dismissed from their jobs, if not also jailed. People educated on Gülen scholarships are prime suspects, as are millions who have had dealings with a Gülenist-owned business. Gülenists’ assets are being seized, in the biggest wealth grab since the 1940s. Under the circumstances, extolling the merits of the Gülenist charities that are being destroyed would amount to professional suicide.
 
This is beyond excessive, not least because, whatever the involvement of Gülen himself, the putsch was not the work of Gülenists alone. Disaffected officers of many persuasions participated, as did opportunists seeking promotion. The putsch’s failure may have stemmed from the fact that information about it was leaked in advance, inducing many conspirators, including some key military units, to withdraw from the plot.
 
Many generals, intelligence officers, and other officials hesitated when it became known that a putsch was underway. Erdoğan’s top generals and intelligence chief kept him uninformed for hours, even as an assassination squad made its way to his vacation residence. The wait-and-see approach adopted by many Turkish security officials ended up landing some in jail. Among other Turks, too, there are doubtless many who decided to wait to see how the putsch would end, before turning against Gülen.
 
The AKP and many of its opponents agree on one thing: had the putsch succeeded, the repression would be far worse. And, indeed, AKP supporters far outnumber Gülenists. But the AKP has made bitter enemies over the last 14 years, and millions of Turks would have applauded the jailing of its leaders, even as many of those leaders plausibly claimed that their support for Erdoğan was feigned.
 
Today, Turkey is further than ever from creating a society whose members feel free to speak openly and honestly. The ongoing witch hunt causes citizens of all persuasions to fear for their jobs and their lives. They seek refuge in dissimulation – social, political, intellectual, and religious. This pervasive untruthfulness reinforces the underpinnings of Turkey’s recurrent political crises.
 
 


Get Your Children Good and Dirty

Researchers are discovering how crucial microbes are to our health and to avoiding a range of newly common diseases. So it’s time to get dirty, eat better and stop overusing antibiotics

By B. Brett Finlay and Marie-Claire Arrieta

By preventing babies and children from following their innate impulse to get dirty, we shield them from the microbial exposure that is essential for the development of a healthy immune system Photo: Getty Images


Our friend Julia moved to a small free-range pig and poultry farm when her first child, Jedd, was a preschooler. When her second baby was born, she would strap him on her back every morning so that she could go to the chicken coop to pick up eggs. Jedd would chase and ride the chickens—and sometimes taste their feed and touch the fresh eggs. A couple of times, she even caught him chewing on something he had picked up from the ground.

At first, all of this caused Julia to freak out. But once she realized that Jedd wasn’t getting sick from these encounters with the chickens, she relaxed a bit. Her second child, Jacob, soon followed suit and never hesitated to get dirty on the farm. She once found him knee-deep in a cesspool of pig waste.

Her early worries that her children were going to contract diseases from all this messiness dissipated, and she was pleased to see that they remained healthy.

Was Julia being an irresponsible parent—or might we all have something to learn from her example?

For most of the past century, we have considered microbes bad news, and for good reason:

They cause disease, pandemics and death. Most human communities have experienced the benefits of medical advances like antibiotics, vaccines and sterilization, which have radically reduced the number and severity of infections that we suffer throughout life. Dying from a microbial infection is now a very rare event in the Western world, and, in the U.S., lifespans have increased by some 30 years since 1915—in large part because of success against infectious diseases.

Unfortunately, this progress has come with a price, as news reports have been telling us for some years now. Our anti-microbe mission has been accompanied, in industrialized countries, by an explosion in the prevalence of chronic noninfectious diseases and disorders. Diabetes, allergies, asthma, inflammatory bowel diseases, autoimmune diseases, autism, obesity and certain types of cancer are at an all-time high. The incidence of some of these disorders is doubling every 10 years, and they are starting to appear sooner in life, often in childhood.

All of these diseases have a genetic component, but their alarming growth cannot be explained by genetics alone. Recent studies find a direct link between the presence and absence of certain bacteria and all of the chronic diseases mentioned above. It turns out that the microbes within us are much more than quiet residents; they are an inherent part of our physiology, and altering them leads to disease.

Our own 2015 study (published in the journal Science Translational Medicine) found, for example, that 3-month-olds who had four particular microbes in their feces were much less likely to get asthma later in life. When those four microbes were introduced into mice, they protected against experimentally induced asthma, showing for the first time that alterations in gut microbes can drive the development of the disease. Lab experiments also have found that obese mice lose weight when they get a transfer of gut microbes from lean mice (and the reverse holds true as well, with lean mice growing fat after a transfer from obese mice).

The practical upshot of all this research is clear: Our health depends to a large degree on maintaining a robust and diverse community of microorganisms in our bodies—and establishing good gut-health as children is especially important.


During the first few months of life, the microbe community in our bodies is considerably less established and stable than later in life. Any drastic changes to it have a much higher chance of permanently altering our microbiota (as specialists call this world of tiny organisms within us) and our long-term health.

From the moment we are born, we begin getting colonized by bacteria, which kick-start a series of fundamental biological processes, including the development of our immune system. Before birth, the lining of our gut is full of immature immune cells. When bacteria move in, the immune cells react to them, changing and multiplying. They even move to other parts of the body to train other cells with the information they have acquired from these intruders. If deprived of this interaction, the immune system remains sloppy and immature, unable to fight off diseases properly.

Never before in human history have babies and children grown up so cleanly. Photo: Gallery Stock
 

Scientists haven’t figured out exactly how microbes do this at the molecular level, but we do know that most bacteria will teach these immune cells to tolerate them, whereas some bacteria—the pathogens that cause diseases—prompt strong resistance. The result is to make the intestine a relatively controlled and harmonious place.

Another fundamental function of microbes is to aid in the regulation of our metabolism. Like other animals, humans obtain energy from food that is digested and absorbed in the intestines.

Besides helping us digest certain foods that the intestines can’t handle on their own, bacteria produce compounds that help to define how we use or store energy in our bodies. New research also shows that our microbiota plays an important role in neurological development and even in the health of our blood vessels.

Such discoveries have led scientists to call our microbiota a “new organ,” perhaps the last human organ to be discovered by modern medicine. Most of this knowledge is still relatively new and many pieces of the puzzle remain unsolved, but protecting the initial developmental stages of our microbiota clearly has a significant impact on our health.

Inflammatory diseases (such as asthma, allergies and inflammatory bowel disease) and metabolic diseases (such as obesity and diabetes) are characterized by alterations in our immune system and our metabolic regulation. Knowing what we do now about the role of the microbiota, it is not surprising that these diseases are being diagnosed in more children. They are, to a great extent, a consequence of relatively recent changes in our lifestyle—modern diet, oversanitization, excessive use of antibiotics—that have altered the specific microbes that affect our metabolism early on. We urgently need to find ways to modify our behavior so that our microbes can function properly.

Never before in human history have babies and children grown up so cleanly, and our diets have lost many of the elements most crucial to the health of our guts. We have become very bad hosts to our microbes.

What to do about it? The U.S. Food and Drug Administration took one helpful step earlier this month when it banned some chemicals used in antibacterial soap, but the most important changes need to take place in our everyday routines.

Parents can expose their children to an array of microbes by encouraging them to spend time outside, like our friend Julia on her farm (but not necessarily with chicken and pig waste).

Today children spend much less time outside than they did only 20 years ago.

Babies and toddlers often aren’t allowed to play in the dirt or sand, and when they are, they are wiped clean immediately. Phrases like, “Yuck! Don’t play in the mud!” or “Don’t touch that bug, it’s dirty!” have become second nature.

We need to unlearn these habits. By preventing babies and children from following their innate impulse to get dirty, we shield them from the microbial exposure that is essential for the development of a healthy immune system.

Parents can also promote good gut-health in their kids through diet. It is well established that the Western diet—high in fats, sugars and highly refined grains—is very strongly associated with a number of diseases, especially obesity and the closely linked disease of type-2 diabetes.

Our ancestors grazed on a variety of foods, which ensured a variety of microbes in their intestines: Eating a range of different foods provides a hospitable environment for a range of different microbes. Today, 75% of the world’s food comes from just 12 plant species and five animal species.

Amazingly, just three species—rice, corn and wheat—account for 60% of the calories that humans obtain from plants. Except for regions where a lack of economic development has preserved older farming and dietary practices, more people are eating refined white sugar, white flour and processed fats, instead of our ancestral diet of vegetables, fiber, fruit and nuts.

A 2010 study in the Proceedings of the National Academy of Sciences compared the microbiota of children living in rural Burkina Faso in West Africa to the microbiota of urban, city-dwelling children in Italy. The African children ate a high-fiber diet of vegetables, grains and legumes, with no processed foods, whereas the diet of the European children was full of sugars, animal fats and refined grains. The gut microbes of the children from Burkina Faso were very different from—and much more diverse than—those of the Italian kids.

We wouldn’t want to say that children in Burkina Faso have a healthier lifestyle than Italian children.

They are more likely to suffer severe infections and malnutrition, and they have a lower life expectancy than children born in Western Europe. But they also have a decreased risk of suffering from the immune diseases that are epidemic in the Western world.


In an ideal world, children would harbor a rich and diverse community of microbes without the threat of severe infectious diseases, but our current practices only address half of this equation.

Given how well bacteria respond to diet, eating a variety of foods is perhaps the best way to increase microbial diversity, and there’s no better time to do this than during the first few years of life.

As a practical matter, this means that we shouldn’t feed a baby only rice cereal for weeks until the package is finished. We should offer a variety of grains, including oats, rice, barley and quinoa. It’s also important to offer whole grains instead of refined ones. The Western diet is extremely low in fiber, and refined grains contain very little of it.

Protein-rich legumes, such as lentils, beans and peas, have an abundance of fiber and can be easily mashed for babies. Also try nontraditional starchy vegetables such as sweet potatoes, parsnips or cassava (tapioca) rather than just sticking to low-fiber veggies such as potatoes. For older children, add fermented foods, such as yogurt, kefir, sauerkraut and other pickled vegetables.

Most people in developed societies won’t crave these foods the same way that they crave the texture of macaroni and cheese or the like, but infancy is the best time to introduce good dietary practices.

For children, eating healthy foods becomes a habit in the same way as cleaning their room does: by doing it frequently.

Food isn’t the only way that we have altered our microbiota, however. Our microbes have perhaps taken the biggest hit from one of the best things humanity has ever invented: antibiotics. These wonder drugs have saved millions of lives and will save millions more in the future.

But antibiotics aren’t targeted missiles that kill only the bad bacteria causing infections; they are carpet bombs that kill good and bad bacteria indiscriminately. Research now suggests a link between the use of antibiotics in early childhood and problems such as obesity, diabetes, asthma, allergies, autism and inflammatory bowel disease.

We ought to become more restrictive with the use of antibiotics in children. Photo: Roberto Machado Noa/LightRocket/Getty Images


We ought to become more restrictive with the use of antibiotics in children. Parents shouldn’t assume that all infections have to be treated with these drugs. Upper respiratory tract infections and colds are often caused by viruses, so antibacterials won’t cure them. Most sore throats, especially if the child also has a runny nose and cough, are caused by viruses and don’t need antibiotic therapy. If a child has a mild ear infection, it’s reasonable to watch and wait for a few days to see if it gets better on its own before starting antibiotic therapy. Also, parents should consider giving probiotic supplements (with live bacteria and yeasts) to a child if he or she is being given antibiotics.

With the scientific information now available, parents can make informed choices about helping their children to develop a thriving microbiota. We are still years away from learning the whole story of how microbes contribute to our physical well-being, but what we know today is pretty convincing evidence that they are crucial, especially early in life.

For much of the past century, we have ignored, and often destroyed, the microbes that keep us healthy. It’s time now to correct the balance.


Dr. Finlay is a microbiologist specializing in bacterial infections and the Peter Wall Distinguished Professor at the University of British Columbia. Dr. Arrieta is an assistant professor in the Department of Physiology and Pharmacology at the University of Calgary. This essay is adapted from their new book, “Let Them Eat Dirt: Saving Your Child From an Oversanitized World,” published by Algonquin Books of Chapel Hill.