In today’s Exponential Investor:

  • Lifestyles of the rich and the famous
  • For Main Street this means…
  • UK already in a recession

In a world far removed from you and me, grows a crisis.

An appropriate sign of the times if you will.

As some people dump stocks or crypto – or both – and move to cash, other investors are struggling to sell their assets… wondering if they made a mistake investing in them at all.

Yes, some folks really are on struggle street right now.  

In fact, as the markets continue to head south, so it seems does people’s desire for luxury goods.

Tumbling markets haven’t just hit us mere mortals.

Word has it that some are struggling to sell their Rolex now that air has come out of the stock market.  

The once-thriving second-hand Rolex business is having its own “wobbles”, as one dealer put it. Less than a year ago, many limited-edition Rolex watches could easily command over six-figure sums.

Now the six-figure sums are reserved for only the very-rare luxury watches. In fact, the same dealer said that the “deluge” of Rolex watches coming to the second-hand market is driving prices down and making last year’s eye-watering prices a thing of the past.

This isn’t surprising, however.

A quick look at the Amundi Luxury index (LUXU) – based on the S&P Global Luxury Index which tracks the share price performance of 79 luxury firms such as Hermès and LVMH Moët Hennessy Vuitton ­– reveals, unsurprisingly, that the value of the luxury goods market tends to track the performance of the market reasonably well…

FTSE 100 (blue line) v LUXU (orange line)

Source: Trading View

If you look closely, you can see that LUXU could even be a leading indicator of market sentiment as its price peaked several months before the stocks markets took a turn.

Few outside the rich and famous are going to be watching the price of luxury goods closely enough to pick the markets mood. After all, if you can’t afford to drop ten thousand quid on an entry-level Rolex – let alone spend six figures on a second-hand one – why would you bother paying attention to it?

We could argue that watching the value of luxury goods is a good way to identify the top in a bubbly stock market… but there’s an even better way to gauge the overall of health of the economy.  

No Rolex needed…

No fancy watches here

Bad news ahead it seems.

The Bank of England (BoE) has warned the UK will be in a recession by the end of the year and says that inflation will reach double digits by Christmas. With the BBC writing:

The economy is forecast to shrink in the last three months of this year and keep shrinking until the end of 2023.

Interest rates rose to 1.75% as the Bank battles to stem soaring prices, with inflation now set to hit over 13%.

The traditional definition of a recession is two negative consecutives of gross domestic product (GDP). In other words, two three-month periods in a row where the value of a country’s goods and services were less than the quarter before it.

There are two problems with the BoE’s inflation prediction.

Firstly, government statistics lag the real world.

And secondly, this is the third time this year that the BoE has revised its inflation forecast.

In March, the BoE said that inflation would peak at 8% annually. Come May, the BoE said that the peak was more like 10%…

… and three months later, it has bumped it up to 13%.

I wouldn’t put much faith in 13% being the peak annual inflation rate either…

… or being right for that matter.

As I said in the Exponential Investor podcast last week, “commodity prices feed into producer prices which feed into consumer prices”. Meaning we are still yet to have the worst of the high commodity prices come down the supply chain.

The immediate pain is being felt at the petrol pump, and prolonged energy prices may have started to ease, but the impact of food prices and rising interest rates are to remain for many more months.

More to the point, the UK is already in a recession, it’s just that the data hasn’t caught up with consumer habits yet.

A nation of shoppers

This is part of the problem when the BoE tells people the UK will be in a recession by the end of the year. The central bank is only looking at a recession as measured by GDP.

If you look at the individual components, the UK is already in a recession.

Whether we want to admit it or not, much like the United States, the UK is a consumerist society. In the UK, 72% of gross domestic product in the UK comes from the services sector. In the United States, it’s 76%.

The services sector is massive – it covers arts and entertainment, food and beverage consumption, essential and non-essential retail, finance, and insurance to name a few of the categories.

Essentially, the UK is a country of buying and selling things.

While GDP was up for the month of May, like all things, the devil is in the detail.

The reason GDP rose was because of the large increase in the number of GP appointments in England for the month. This boosted the human health activities component, making GDP data look more positive than it really was.

As for everything else? Most of it had fallen.

Accommodation and food spending? Down.

Arts, entertainment and recreation? Also down.

Wholesale and retail trade? Massively down. 

The junk you buy at the shops and the services you pay for – so you don’t have to do the job yourself – are vital to the UK’s economic growth. Which is why understanding consumption within the services sector is so important.

Throw in stagnant wage growth, inflation data that doesn’t match with individual expenses, and a heavily indebted population… and future consumption was already looking strained.

The GDP numbers in May reveal the average Joe is scraping by.

We’re spending more and more on what we have to buy, rather than what we want to buy.

This means that consumption growth – a key driver of economic growth in the UK – is coming from the essential stuff like food, utilities and insurance costs, rather than from the fun things like eating out and buying new shoes.

In other words, the GDP you see in the headlines isn’t as useful as understanding consumer behaviour.

Knowing this gives you an edge in today’s market.

The UK’s economic fortunes rest on what the consumer does next. Chances are, it will be to tighten the purse strings a little more.

Until next time,

Shae Russell
Co-editor, Exponential Investor