Tag Archives: economy

Why Have Luxury Stocks Perfomed So Well The Last Few Years?

Luxury stocks have shown some very stunning results over the last few years. Making new all-time highs the past few months. Which is, of course, very surprising because we are supposedly in a modern day depression with high unemployment and high defecits. You would expect luxury brands to perform very poorly. But the opposite seems true.

I’m going to first show you some charts of luxury stocks and then give you a possible explanation for this.

Compagnie Finaciere Richemont SA. Key brands: Cartier, Montblanc, Chloe, IWC, Piaget, Vacheron Constantin, Baume & Mercier and Lancel.

Compagnie Financiere Richemont SA stock price

LVMH Moët Hennessy Louis Vuitton. Key brands: Louis Vuitton, Marc Jacobs, Guerlain, Givenchy, Moet & Chandon and Hennessy.

LVMH stock price

Burberry Group PLC. Key brand: Burberry.

Burberry Stock Price

Why have luxury stocks performed so well? I tend to think we should look at the buyers of luxury stuff. The top 10% of wage earners and people with a high net worth.

This is an interesting article about income and wealth distribution in America of which I will use a few tables here.

The table below shows the distribution of income and wealth in the US between the different percentiles of the population.

income and wealth distribution

This table shows how the income is divided:

Income distribution in the United States

From the article: “In terms of types of financial wealth, the top one percent of households have 35% of all privately held stock, 64.4% of financial securities, and 62.4% of business equity. The top ten percent have 81% to 94% of stocks, bonds, trust funds, and business equity, and almost 80% of non-home real estate.” This is shown in this table:

Stocks owned by top percent

So we can conclude that the richest 10% of the country own almost all stocks (81%), while the middle and lower class are more dependable on their principal home (60%) for their net worth. While of course a large portion of American society has no or even a negative net worth.

If we now look at how stocks, houses and wages have performed since the 2009 bottom we can see why luxury stocks are doing so well.

The S&P 500, makeing a new all-time high as I write this. Don’t forget dividends:

S&p 500 chart 5 year

House prices in the US (Case-Shiller index):

House prices us Calculated Risk

Wages in the US. Percent change from previous year. You can easily spot that on average wages have grown very slow in the last few years. Barely keeping up with inflation.

Wages US percent change from year ago

The rich 10% of America have profited the most the last few years because stock prices went up while housing and wages remained low. This in turn has resulted in higher stock prices for luxury brands.

Where Will Interest Rates Go In The Next Few Years?

I love long term charts. I think they are a great refreshment from all the short term thinking that is going on in the financial world on a daily basis. Those long term charts really show you some perspective.

Most of the time that we are shown the US 30 year treasury bond yield’s people will come up with this chart:

30 year us treasury bond yield st louis fed

Judging from this chart rates are exceptionaly low now. Some would say that bonds at these level are a bubble and that they will have to crash soon.

But then there also is this chart.

This is a long term chart, covering 222 years, of the interest rate on US 30 year treasury’s: (Source Ritholtz)

ritholtz long term us treasy bond yields 30 year 222 years

Here is one for the treasury’s for the Dutch State. Again a very long term chart. (Source in Dutch)

lange termijn rente nederlandse staats obligaties bonds 500 jaar

These charts really shows how exceptionally a 30 year bond yield of 6% actually is. Most of the time in the last 100 years bond yields were under 5%.

Will interest rates really shoot up to 6% maybe 7% soon? That’s an event that is highly unlikely in the low-growth, paying-down-debt environment we are in now. People are not spending and borrowing enough. Rates will go up when inflation(-expectations) go up or when there is fear amongst investors that a government will not pay down its debt.

Examples of this can be found in the 70’s when inflation was really high and bond yields went up to keep up with that inflation. Nowadays inflation is very low.

long term inflation dshort cpi

The only countries that pay a high yield on their bonds right now are countries of whom investors are afraid that they may default (partially) on their debt in the future. The higher yield is simply a risk premium.

My take is that interest rates will remain low the coming years. Probably stay between 2% and 4% on the 30 year bond.

I’ll leave you with Japan’s bond yield. Which has been below 2% for more than 15 years. I talked about Japan´s Huge Debt in another post found here. In Japan there has been almost no inflation the last two decades and there hasn’t been any fear that the government can’t pay down its debt. So far.

japan government bond yield long term

This Chart Of Bitcoins Looks A Lot Like An Average Bubble

I love reading about bubbles. It’s the psychological aspect of it that I like the most. Greed and human beings.

The price of Bitcoins has gone parabolic in the last few days. The price went up 152% this month alone! The value of all Bitcoins outstanding is now $ 1 billion.

Some say that the way the Cyprus bailout handles depositors and the capital controls forced on savers is the cause for this rise in the last month.

Too much people are flocking into Bitcoins out of fear for another Cyprus style bailout and it is starting to make the Bitcoins chart look like an average bubble. Compare these two charts.

Bitcoin price in USD at Mt.Gox:

Bitcoins mt gox

How an average bubble forms:

average bubble chart

My take is that we are pretty much near the end of the parabolic rise. But ofcourse these things can continue longer than most can imagine..