How Do Luxury Goods Predict Economic Recession?
What happens when luxury goods rise, or when they fall? Today, we're going to talk about the luxury goods sector. I know you associate it with famous brands like Louis Vuitton, Hermès, Rolex, and so on.
If you remember, some time ago, I told you that inflation was coming, and during inflation, it's best to buy luxury goods. And it turned out to be true—Louis Vuitton reached historic highs, and Bernard Arnault, the owner of Louis Vuitton, became richer than Elon Musk for a while, becoming the richest man in the world.
Why Are Luxury Goods Falling?
Now, luxury goods are in freefall. And if luxury goods are in freefall, a recession is likely to follow.
Why?
Well, do the rich no longer have money to buy a Hermès bag? Does Zuckerberg no longer have money to buy 2, 3, 4, 5 Rolex watches?
You see, luxury goods aren't just bought by wealthy people. When Bernard Arnault created Louis Vuitton, was precisely to get the middle class to buy luxury goods to appear more affluent.
Because, in the end, those who buy very expensive things, which don't necessarily have quality equal to their price, do it to appear wealthy. They want those around them to believe they are very rich.
If you buy your wife two Hermès bags, a Louis Vuitton bag, and an Armani suit, you're convinced your neighbor envies you.
If you look closely, Steve Jobs, Mark Zuckerberg—they don't flaunt a Rolex or wear shirts with brand logos. Although, if you pay attention, those famous black t-shirts of Steve Jobs weren’t just any shirts—they cost around $500 and were a mix of cashmere and silk.
Mark Zuckerberg's t-shirts also cost about €400, and they’re from Brunello Cucinelli, a brand that doesn’t display its name.
Luxury brands like Ralph Lauren, which I don't consider very luxurious but are more expensive than others, have been increasing their logos on shirts and jackets.
The little polo player on horseback is getting bigger and bigger. Even Lacoste's crocodile has grown larger. Why? So people can see that you bought a shirt, a jacket, or a bag from brand X or Y.
Hermès even decided that, for the middle class dreaming of one day buying a Birkin bag when they make some money, they won’t sell Birkin bags to just anyone anymore.
You need to have a purchase history with Hermès first. So, the girl who wants to buy a Hermès bag might have €15,000 in her pocket, but they won’t sell it to her. First, she needs to buy two scarves for €600 each, then a wallet for €2,000, and after six months of purchases, she might get the Birkin bag.
Let me tell you, if you go to the Hermès store on Bahnhofstrasse in Zurich, and I bet someone on this and won, if you put an American Express Platinum card on the table, you can get a Hermès bag without needing a purchase history.
I entered a Hermès store for the first time in my life, and they told me they would sell me the bag. All these things have been done so that the middle class can feel affluent. They feel rich and take selfies with their purchases to post on YouTube, Instagram, TikTok, or wherever.
If the middle class buys luxury goods, then the economy is booming, and luxury grows. If the middle class stops buying, as sales at Hermès and Louis Vuitton have dropped, it's not because Zuckerberg stopped buying Rolex. Because, let's be honest, Rolex isn't such an exceptional watch. But if every Arab billionaire wants a gold Rolex, or some other rich person flaunts a Rolex, then everyone wants to buy one.
At one point, Roger Federer was advertising Rolex, but I can tell you that in his daily life, Roger Federer wears a Jaquet Droz, which you probably haven't heard of, or a Franck Muller, also not widely known, or a Breguet, watches that cost more than two Mercedes cars.
At one point, the peak of snobbery was said to be having a watch more expensive than your car. With Rolex, it doesn't work, but with Breguet, it does—you can find a Breguet that's more expensive than a Ferrari.
This snobbery has even reached the point where you can drink a bottle of wine more expensive than your car. I have to admit, that happened to me—I haven't bought a Rolex, and I haven't bought a car more expensive than a Mercedes S-Class, because I don't like them, but I have drunk expensive bottles of wine.
The idea of "old money" and "new money" is that old money, those who don't need to flaunt what they wear or the car they drive, are people whose families have been wealthy for five or six generations. They don't need to show off, just like Steve Jobs, Zuckerberg, or Gates don't need to.
Everyone knows they are billionaires, just like everyone knows Elon Musk is very rich—he doesn't need to buy a Hermès wallet or a Louis Vuitton bag, or a Rolex watch. He could buy all of Rolex if he wanted.
These things are important to highlight, especially given the current craze in Est Europe, where any man saves money to buy his wife the famous Birkin from Hermès to seem truly wealthy, while at the same time, they still have 20 years of mortgage payments, and both cars are on lease. But hey, they have a Hermès bag.
What I want to emphasize in this article is that the middle class drives the economy up and the middle class drives it down. As the middle class has started to stop buying luxury goods, if you look at Louis Vuitton, Moët Hennessy, Hermès, Ferrari, they've started to decline massively on the stock market.
This could be the best sign of the recession we've been expecting for two years but hasn’t come. I don't think it will be a recession, though, but rather stagflation.
I agree with Jamie Dimon on this—an inflation of 3-3.5%, sticky and persistent, with zero economic growth. Neither a recession nor economic growth, just a GDP that hovers between -0.1% and +0.1% for 2-3 years.
The worst scenario for the global economy. And, of course, the middle class will suffer, prices will rise, but salaries won't, and the middle class will reduce their luxury purchases.
But you should know that when the middle class throws itself back into luxury goods, we will see a spectacular economic recovery and a stock market surge. The stock market follows the economy—a little earlier when it falls and a little later when it rises.
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