Monday, October 18, 2010

High End Consumption


I remember pre-crisiss retail was in its hey day back in 2007, not just the high end brands, but pretty much retail across the board. I've never been a retail expert but, thats the sentiment I was getting at the time from the retail analyst I knew.

Going into the end of 2007, post sub-prime explosion/implosion, I clearly remember the nature of debate revolving around the systemic nature of the catastrophe and often found myself debating state of the macroeconomy myself. Typical interest rates, inflation, households and the consumer were the stars of the show. To an extent, these have taken a backseat in light of the new exotic and non-traditional monetary policies of QE and the current so called "currency wars," we see in the daily news. Not that the former are not of severe importance, but the media certainly have found new toys to play with.

From what I can recollect, I was trying to argue if the consumer was strong enough to absorb the crisis and continue their abnormally over leveraged lives. My main rationale at the time was that the middle middle class and upper middle class(prime borrowers) were the ones driving consumption and were somewhat insulated from the then recent sub-prime woes. To an extent I was right as the SPX continued to make higher highs all the way into early October 07 after the sell off from the summer months.

Well, fast forward through one year, and it turns out I was completely wrong as all assets ended up tanking along with the economy in 2008. A complete miscalculation and misunderstanding of the financial/economic/social systems at hand. As the economies tanked savings rates hit all time highs and continue to persist today, we now are seeing close to 10% un-employement, stagnant housing, weak consumer demand, tight supply controls, and uncertainty in the global economy.

Accordingly, how does this high end retail picture fit in this weak economic environment. A lot of intersting facts and figures are thrown around in the article:

  • Luxury sales to increase by 10% in 2010 vs -8% in 2009
  • US luxury sales up 12% for 2010
  • Euro luxury sales up 6% for 2010
  • Asian Luxury sales up 30% for 2010
  • The rise of Chinese global consumption for such goods

It is hard to believe that US high end sales will be sustainable given the current state of consumption, unless it is really only the rich consumers who are driving this trend. The article hints similarly with the recent dollar weakness soft sales are expected going into 2011. It would be interesting to see how a big dollar correction could affect US consumption if there is a correlation at all. Given the supply and demand constraints of credit, it may have limited effects unless more middle class consumers start unleashing some of their savings. Indeed the holiday spending coming up may provide some broader interesting insights as to how the consumers are behaving.

On the whole I wouldn't read into these high end sales numbers as indicative of anything strong for the US economy, though the Asian dynamic mentioned may be worth exploring for further insights into the Asian growth story and its own sustainability. Perhaps another blog for another time…

-A. Lê

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