Businomics Blog

Recession Hits the Luxury Market: Yacht Business Sinking

That headline overstates the situation, but who can resist?  I especially want to take on the oft-heard remark that luxury goods businesses are recession proof because "the rich will always have money."  I debunked this myth in my book, Businomics, but it bears repeating--because I keep hearing the same idiocy.

The latest debunking comes from Megayacht News (hat tip to the Wall Street Journal's Wealth Report, which has a nice summary).

Megayacht sales are weak because many buyers are having trouble selling their old boats.  Let's say you want to spend $8 million on a yacht.  You may very well have to sell your present $5 million yacht.  And the cheap side of the market is soft, which hurts the upper end.  (You didn't know that $5 million is not the upper end?  You need to get out more.)

This weakness due to recession is partially offset by the widening income distribution, which is helping the very upper end of the market in general.  But be very careful before you pronounce any business "recession-proof."  (I elaborated on this for an article in Luxury Hotelier magazine.  The article is not available online, but I send a draft to anyone interested.  Just email me.)

Government Debt: Defaults through Repudiation and Inflation

There's nothing like a good financial crisis to make me yearn for historical perspective.  I got just that in a paper called "This Time Is Different: A Panoramic View of Eight Centuries of Financial Crises" by Carmen Reinhard (University of Maryland) and Kenneth Rogoff (Harvard).

Countries default on their debt fairly often when the countries are young, but tend to become more responsible as their economies mature.  England, for example, defaulted in 1340, 1472, and 1594, but fulfilled its obligations after that.  France had eight defaults in the 16th, 17th and 18th centuries, but after 1812 had no more.  France, the authors tell us, had a habit of beheading its domestic creditors, which one imagines could make it more difficult to underwrite a new round of debt.  Newfoundland, I had not realized, was an independent country up until its 1936 default.

Defaults tend to be associated with the lows in commodity price cycles.  This should make us nervous as commodity prices are in an up-cycle.  Bankers will tell you that they never make bad loans in bad times; they make bad loans in good times.

Inflation is another way to repudiate debt.  The old inflationary mechanism was to reduce the silver (or gold) content of coins, but the invention of paper money facilitated the process.  Here's their conclusion on inflation:

As with debt defaults, the last few years have been a relatively quiescent period in terms of very high inflation, although many countries (including Argentina, Venezuela and of course Zimbabwe) still have very high inflation. Many observers, following the same logic as in commenting on external default, have concluded that “this time is different.” Perhaps, but, as with debt defaults, experience suggests that quiet periods do not extend indefinitely.

The paper is good, though written in an academic style.  However, the authors omit the mathematics that make most economics papers inpenetrable to the layman.

Business Spending Up: A Nice Sign

Companies increased their orders for durable equipment last month, a very nice sign.



















Surveys of business confidence have shown a lot of gloom, both among Fortune 500 CEOs as well as small business owners.  The actual placement of orders, though, says more than surveys of attitudes.  Especially strong is communication equipment.

In my economic forecast, I don't have business capital spending improving until late in the year.  If we get another good monthly number, I'll adjust my forecast upward.

Is "Free" the Future of Business?

Chris Anderson argues in Wired: "Free!  Why $0.00 is the Future of Business."  (Hat tip: Club for Growth)  Take a look at the short video if you don't feel like reading the entire article.  Anderson makes the point that when things become digital, they eventually become free.  Email, search, storage, content.  Free, free, free.

He asks us to think about a world in which services are increasingly free.  All I can think about is that when the paradigm shifts, all of us highly schooled in the old paradigm are now on an even footing with people ignorant of the old paradigm.  We all have to learn from scratch.  Hmmm.  Free is good, but it can also be challenging.

What Does Consumer Confidence Say About the Economic Forecast?

The Conference Board reported their latest survey of consumer confidence, and it's no surprise that their results mirrored the gloomy report issued last week by the University of Michigan:
 


















What does consumer gloom mean for the economic forecast?  Let's look at some history:



















Two obvious conclusions:

1. Growth of retail spending tends to correlate with attitudes, but
2. The correlation is sporadic.  Specifically, the two concepts diverged in the early 1980s and again in the early 1990s.

For my money, I'd rather look at consumer fundamentals that surveys--we economists are trained to look at what people do, rather than what they say.  Right now the fundamentals are not as dour as consumers are:

• Employment roughly flat (down by tenths of a percent the last few months)
• Wage rates rising about in line with inflation (just tenths of a percent lower than total inflation)
• Unemployment rate below its long-run average.

The bad attitudes are certainly not good news; but the bad news is moderately bad, not terrible.

The Food Crisis: Get the Incentives Right

My old friend Tim Kane has a good comment on the Food Crisis over at Growthology.  He notes that the obvious solution--grow more food--is often thwarted by government policies in both the developed world and the less developed world.

The logic is pretty simple if you want to encourage entrepreneurship in poor, rural areas.  Get the incentives right!

If you want something more general about incentives within the corporation, try this.

Sales in a Weak Economy: Honor Diversity

I see the stream of anecdotes coming across the news: this company's sales are down, another company is holding its own.  Business leaders should understand the wide variation of sales performance by businesses all experiencing the same economic underpinnings.  Here are two examples I've noticed lately.

The upscale restaurant chain McCormick and Schmick's (MSSR) reported weak earnings, with same-store sales down while operating costs rose.  Seeing that news item, it's easy to think that consumers across the board are cutting back.  But a better gauge is to look at ALL the restaurants.  One way to do that is via the Census Bureau's retails sales data for restaurants.  An easy way is to drill down (free subscription required) on www.FreeLunch.com. 
















There's a flattening in the past six months, but no real decline.  Another way to look at the data is through a compilation of the industry, such as Yahoo Finance's.  Take a look at their "leaders and laggards" on restaurant industry revenue growth.  You see that other upscale chains, such as Ruth's Chris (RUTH), is doing pretty well.  I also noticed that Rick's Cabaret (RICK), the chain of strip clubs, is doing well.  Now that strikes me as a pretty discretionary purchase.  (But maybe there are some who view it as a necessity.  No telling.)

Or consider automobile sales.  Good data are available from Motor Intelligence.  Here's what I learned from them:  Bentley sales are way down this year, proving that the luxury market is not immune to economic slowdown.  However, sales are up at Rolls Royce, Mercedes and Maserati.

Understanding the economy is important, but even in a weak economy, good companies grow sales and profits.

Economic Forecast: Federal Reserve Says It's Not So Bad

Fed Vice Chairman Donald Kohn gave a speech that was actually intelligible--must have been some big blunder among the PR staff.  The general thrust was that the economy was not doing too badly, and the economic outlook was mildly positive, which is a lot like my forecast.  Here are a couple of interesting points from Kohn:

"The pace of activity should continue to improve next year, with an important part of the gains coming from the abatement of the forces currently restraining activity."

This is an important insight into the economy.  It normally grows, all by itself (that is, without governmental stimulus).  Just removing the negatives is enough to get it re-accelerating, in all but the most extreme cases.

Kohn also mentioned that there was a lot of stimulus in the pipeline.  The public could use regular reminders of the time lags involved, which mean that after the Fed eases, it takes six to twelve months to feel the effect.  Finally, on a different subject,

"Securitized assets need to be simpler, more transparent, and less reliant on the imprimatur of a credit rating agency."

I made this point in part 5 of my Why Did the Mortgage Crisis Happen series.  Always nice to see a smart person agreeing with me.

Recession: How Independent Contractors Prepare

Here's a cute YouTube video by a "model" working in the sex industry talking about how she is preparing for recession.  Good point: book as much work as you can now, saving as much as you can.

She quotes a friend who says that in a recession, people will stay in more, watching TV and using the computer, which means more paid porn.  I say "no," (though not from personal experience).  People will cut back by meeting their desires with free porn.  I know, I know.  If you're an Internet "model" you cannot imagine anyone satisfying themselves with free porn, but I'm guessing that it happens a lot.

Recession Buy Indicator Says: It's a Recession So Buy Stocks

That's contrarian, of course.  Barry Ritholtz over at The Big Picture has a good explanation.  Here's the nutshell: the "Recession Buy Indicator" looks at the four indicators in the Index of Coincident Indicators, and signals when each of these has declined over the past six months.  That's a rough measure of whether the economy is in recession, and the signal says buy stocks.

Right now the signal says BUY.

Why would it do that?  The stock market tends to be a leading indicator of the economy.  By the time it's obvious that we are a recession, we're stocks are already down.  Once everyone realizes we are in recession, the market is ready to look forward to the recovery.  As Ritholtz notes, there are some exceptions that would clobber an investor who mindlessly followed the rule.  Nonetheless, it's another bull signal.