The Hedonism Index
You may have missed a fascinating article last week in the WSJ on a new breed of indice: Those based on luxury goods.
We have noted the bifurcated economy many times in the past. These new measures show exactly how much more freely spending the higher income demographics are versus the masses.
A 2005 Citigroup research note quantifies it rather precisely: The top 20% of American earners now account for between 37% and 70% of total consumption. That's quite a broad range, and like asset ownership, it is very disproportionate in numbers. You can clearly see the difference in spending patterns in the chart at right, showing the Merrill Lynch Lifestyle Index versus the Morgan Stanley Consumer Discretionary Index.
The higher end goods are selling much more briskly than the non-luxe brands.
Here's an excerpt:
"The luxury boom is spilling into the investment world, as Wall Street firms and stock exchanges launch a slew of indexes tied to the spending of the rich.
Merrill Lynch, Goldman Sachs and the German stock exchange are among the players hoping to hitch a ride on the rising demand for designer handbags, luxury resorts, wine, art and $300,000 cars, by launching indexes assembled to reflect the highest end of the consumer economy. In many cases, these new yardsticks are linked to financial products, in the same way that many mutual funds track the S&P 500 or the tech-heavy Nasdaq 100 Index.
For spectators, the indexes offer a useful new barometer to measure the increasingly separate economy of the rich. And that economy is booming. Most of the luxury indexes have posted an average increase of at least 13% between 2001 and 2006. The Dow Jones Industrial Average, by comparison, has increased an average of 4.7% annually during the same period . . .
Merrill's index, a group of between 15 stocks and 50 stocks, includes car makers BMW and Porsche; luxury conglomerate LVMH; fashion brands Bulgari, Coach and Burberry; jeweler Tiffany; auctioneer Sotheby's; and private-banking firm Julius Baer. The index increased 23% in 2005 and 12.5% in 2006 -- above the 14% and 7% posted for the Morgan Stanley's MSCI World Consumer Discretionary Index, a widely used measure for global consumer stocks."
There are numersous versions of what WSJ called "Hedonism" indices. In addition to the aforementioned Merrill Lynch Lifestyle Index, Citigroup has the Plutonomy Index. The Deutsche Börse has the World Luxury Index, and includes stocks that derive 50% of their revenue from the luxury sector (Bulgari, Sotheby's and Hermès International). The index annual average gains from 2001 to 2006 were 14%; over the same period of time, the Morgan Stanley Consumer Discretionary Index was essentially flat.
Warning: Horrifying attempts to hip up these indices comes from God knows where (iBankers? PR flacks?), leading to a word that leaves aghast readers in its awful wake: "blingdexes"
"Still, the new crop of "blingdexes" offer further proof the wealthy are increasingly creating their own consumer economy. The number of millionaire households in the U.S. has more than doubled since 1995, according to the Federal Reserve. The total wealth held by the nation's richest 1% has increased more than 50% since 1998, to $16.7 trillion in 2004, the latest period measured by the Fed."
Interesting stuff.
~~~
NOTE TO MIDDLE-AGED WHITE PEOPLE, ESPECIALLY BANKERS, INDEXORS, PR FLACKS AND MEDIA STILL USING THE WORD "BLING": Stop. Right now. For your own sakes. It does not make you look hip if you use hip-hop, urban, or black expressions -- most especially those that are circa 1998. Please stop it immediately. All it does is reveal you to be a clueless middle-aged white guy.
The term Bling long ago jumped the shark. And because I am a middle-aged white person, I was more than a year late in making that observation -- over two years ago. (See RIP Bling-bling for more details).
>
Source:
The Hedonism Index
As Luxury Spending Soars, Banks Add New Yardsticks; BMW, Bulgari -- and Gap?
April 20, 2007; Page W2
http://online.wsj.com/article/SB117702825463476245.html
Tuesday, May 01, 2007 | 06:30 AM | Permalink
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Comments
So, the questions are:
Are these luxury expenditures significantly skewing the governments statistics on consumer spending?
Are these expenditures enough to keep the "recession" word away?
And, is this the source of the "resilient consumer" meme?
Posted by: Neal | May 1, 2007 7:50:33 AM
So that's what "Bling" means. We non-TV watchers tend to miss the occasional cultural reference.
Posted by: Tom B | May 1, 2007 8:28:55 AM
To mention a possible negative response to Neal's question about whether or not luxury consumer spending can keep the economy afloat: rather than keeping the recession away, this divergence between rich and non-rich consumer spending may indicate that the next bear is going to occur soon. Remember the Roaring Twenties? I'm not too familiar with the history of the period, but I seem to remember that economic conditions were excellent especially for the wealthiest. I wonder if anyone could dig up comparable data from back then.
Posted by: Brian | May 1, 2007 8:59:21 AM
Apparently I am as late with the economics jargon as BR was with Bling. I thought we were all Keynesians and we were going to solve the world's problems by taxing money away from the RICH and spending it for them because they don't spend enough.
Now we'll probably have to flog the poor for not spending their share. What is a layman economist to do?
Posted by: REW | May 1, 2007 9:05:11 AM
I wonder if this(finally!) points to the proverbial maxed-out
Consumer. We all know that debt has permeated our society,
and especially the consumer. Between the Hedonism Index and
Time magazine choosing YOU as the person of the year, I
have to conclude that we are very close.
In my blog, wrahal.blogspot.com “ The Generation Gap” ,
I point to 25-years cycles of important stock market lows.
I am leaning to this generation’s debt appetite, as the cause of the
next 25-year cycle low. Coming soon!
Posted by: will rahal | May 1, 2007 9:15:11 AM
At the risk of sounding like some kind of closet commie... this divergence of wealth has, through history, generally come to very bad, and very messy, ends. The historical strength of the US was to have a strong middle class. However, we now have an upper-middle and a lower middle (as well as super-rich and not-a-prayer-in-the-world classes).
A few decades ago anybody who worked had a chance for a reasonable life. That is no longer true in the US - many jobs now simple do not pay a living wage.
Posted by: wally | May 1, 2007 9:17:15 AM
This polarization between well-to-do and the great unwashed should come as no surprise - it is the endgame of central banking and fiat currency.
Posted by: Winston Munn | May 1, 2007 9:29:40 AM
wally,
It's not commie-ish; at least, not to me (and I abhor commies).
Capitalism should never be confused with crony or crooked capitalism.
The finanical system has been arranged to the increasing benefit of those who already have pretty much everything, to the increasing detriment of everyone else. This is no way to create a stable and prosperous society.
The answer is not Marxism. The answer is a thorough fumigation of the Halls of Power, to eradicate the self-serving, career crony cockroaches that currently infest those halls and rig the game in favor of those who are already winning it.
Posted by: John | May 1, 2007 9:33:43 AM
Thanks for the posts and ...
REW - flog the poor for not spending?
gotta have to spend - and I guarantee they would if
Balance __/\__
Posted by: Greg0658 | May 1, 2007 9:45:49 AM
With a graph (and divergence) like that we are well on our way to creating this hemisphere's next mexico. The rich will save our economy by spending more and more of YOUR money. Welll it was yours until.....nevermind.
Ciao
MS
Posted by: michael schumacher | May 1, 2007 10:00:02 AM
The higher end goods are selling much more briskly than the non-luxe brands.
Just to be clear, those two indices track the stocks prices right? They don't necessarily equate with revenues of one versus the other.
Posted by: Michael C. | May 1, 2007 10:02:10 AM
The video that started it all.
http://www.youtube.com/watch?v=WbLd5IRte54
Posted by: Dan | May 1, 2007 10:11:31 AM
An offbeat but fun index that was highlighted in the most recent edition of Business Week. Tooth Fairy giving is down 15% in 2007. Interesting as this index pretty closely mirrors the overall economy.
http://pbp.typepad.com/economy/2007/05/tooth_fairy_giv.html
Posted by: Michael Donnelly | May 1, 2007 10:19:43 AM
Barry...that was an exceedingly funny plea on MSM using the term Bling.
I always preferred the "Mr. T Starter Set".
Oye!
Posted by: Fred | May 1, 2007 10:24:31 AM
BR, VH1's strange turn into "Charm School" has brought words like bling into the public lexicon.
I weep for the old VH1 and the "Behind the Music" days. Ratings, more than ever evidently, drive content these days and intellectual material has been shelved in favor of reality television lapping at the heels of little girls lost because they make great train wrecks.
Posted by: Chief Tomahawk | May 1, 2007 11:19:48 AM
Greg,
The Keynesian idea is to tax the wealth away from the rich (because they don't spend it) and then give it to the poor who will. But if it turns out that the rich are the real spenders, then are we supposed to reverse the process?
Maybe a better idea would be to focus on the incentives to production instead of spending.
Posted by: REW | May 1, 2007 11:27:03 AM
My theory is that Nixon's "plumbers" fixed the leak in the faucet (by abandoning the gold standard), and thus Reagon's "trickle down" theory was mute before it started.
Posted by: Winston Munn | May 1, 2007 11:40:03 AM
An article in The Atlantic several years ago discussed the desire for the US to be a global economic crossroads (can't remember on the part of exactly whom, but I suspect those with views similar to Mr. Bush). This can only happen through decentralization of economic might from the American middle class to global elites. I think we're well on the way. Being troubled by the trend is not for commies only. I recall seeing a speech in which Alan Greenspan expressed concern about the "bimodal distribution" of wealth in the U.S.
Posted by: AR | May 1, 2007 12:07:37 PM
It's getting much more difficult by the day for us in the Upper Lower Class to project the inmage of being rich. My classic 1984 Caddy just took it's last drive down Worth Ave. and I think that I am going to have to replace it with my moms 1996 handicap accessible Dodge mini-van.
Woe to me..... :-)
Best regards,
Econolicious
Posted by: ECONOMISTA NON GRATA | May 1, 2007 12:21:09 PM
Is there an alert service so that middle-aged white persons can find out when terms like "bling" are past their expiration date? It has commercial possibilities, despite the obvious drawback that subscribing would be deeply unhip. I'd still sign up, as long as it was on the down low.
Posted by: Roger Bigod | May 1, 2007 12:27:11 PM
REW: It's not just a matter of who will spend (i.e. circulate) a given amount of currency. To some approximation, the broader population (and to some extent the govt.) will spend the money for things that will show more "bang" in terms of actual economic activity, "real" employment, and tangible result (e.g. better maintained public infrastructure and private housing stock) whereas the marginal spending of the "rich" (beyond needs of subsistence and upkeep of a reasonable lifestyle) tends to be for frivolous consumption and services that create substantially less economic activity of value. That's a value judgement of course.
In simpler words, circulation of currency on account of spending by the rich has a low degree of value creation.
Posted by: cm | May 1, 2007 12:45:43 PM
Roger,
It's difficult to say when a word like 'bling' expires. I think it's well into mainstream now, and has passed its "sell by" date.
If you wanna stay hip though, try this site:
http://www.urbandictionary.com/
Posted by: Idaho_Spud | May 1, 2007 1:07:39 PM
What Wally and John said.
Posted by: me | May 1, 2007 2:13:50 PM
Mistah Spud,
Thanks for the url. I pointed my browser to it and got some X-TREME vocabulary intervention.
Posted by: Roger Bigod | May 1, 2007 2:54:45 PM
BANKERS, INDEXORS, PR FLACKS AND MEDIA STILL USING THE WORD "BLING": Stop. Right now. For your own sakes. It does not make you look hip
THANK YOU. thank you for saying this. we stopped using this long ago. it's annoying.
and for those who want to know, by the time those "hip" words first make it mainstream, it's already played out... hate to break it to you, but it's true.
Posted by: m3 | May 1, 2007 2:58:50 PM
