Tiffany results give excellent insight into the luxury market mania. At the flagship US store in New York sales were down 3%. It was up a modest 8% in the US as a whole. Japan was up 2%, but the rest of Asia was up a whopping 24%. Growth for sure, but Chinese consumer consumption is $2 trillion, or one-tenth the size of Europe and the US combined. I am not quite sure what to make of the 22% increase in Europe. Sales of items under $500 declined, but high end jewelry and diamond sales drive expensive purchases much higher. That, ladies and gents, is the foundation of the luxury boom of 2010.
The TIF result couldn’t be more clear. This mania is directly correlated to the Chinese speculative real estate mania, which I originally covered in a report in Russ Winter’s Actionable (a subscription service). This one makes the US real estate bubble look like child’s play. The Chinese authorities have taken measures to check this, but the mania has just spilled over into Hong Kong . As with all great manias, people feel that they have hit the jackpot, but in reality there are less than a million millionaires in China, suggesting that much of this fleeting bubble-mania wealth is driven by Wannabees. Wannabees drove the US housing bubble, and we are still dealing with the aftershocks. For those who wished they had played the US bust aggressively, now you have an even bigger mutha to play as China will be much worse.
A prevailing myth is that even in the US the wealthy are now carrying the consumer based economy. Usually when the discussion is centered around the US, the bottom 60% are dismissed as irrelevant, as if the US was really a banana republic of sorts. Nor is there particular concern about how this indebted lower tier affects the holdings (largely bonds and stocks) of the 5% who hold the securities that represent their debts. The belief is that the Fed or the government will take care of most of the risk of holding investments dependent on, drum roll please, debts owed by the lower 60% or 80% in the banana republic. Incidentally, despite the Ministry of Truth barrage going into Black Friday about improving employment, there were 1,651 mass layoff events (at least 50 workers) in October, resulting in 148K job losses – 121 more mass layoffs than in September.
Further aggravating the myth is that the retail sector is full of quasi-luxury retailers like JWN and COH who are getting the luxury bubble bath treatment. Apparently the idea here is that the top 20% are now doing great as well. I would suggest the obvious: excluding the top 5%, the rest of the top 20%, holds a much higher percentage of their wealth in housing rather than in financial assets. Therefore, that group is largely missing in action.
For sake of argument let’s consider that the top 5% are the drivers of this wealth and luxury theme. These people hold 72% of all the financial assets in the country. Obviously with the stock market having recovered a large portion of their 2008-2009 losses, these people are feeling somewhat wealthier compared to a year ago. The only problem with this is that if we use mutual fund flows as a surrogate for where these folks put their money, their participation was muted.
The wealthy have put money into the aforementioned mania induced emerging market bubble to the tune of $83.3 billion in 2009, and $79.9 billion so far in 2010. Connecting the dots, a bust in inflated luxury stocks should correlate well to an emerging market equity and debt bust.
The wealthy have also put money into tax free bond funds ($30 billion in 2010) as part of some misguided derisking play, and to squeeze out a little extra yield. A half a trillion is parked in these funds, although last reported week 1% was pulled out. I suppose a plutocrat opening his monthly statement at the end of August and September and on the eve of QE2 might feel smug enough to engage in some luxury spending hysterics. That has now come and gone, as any benefit or gain from investing in tax free bonds in 2010 has also come and gone.
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