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Like most professional investors, we diligently await the latesteconomic indicators – be it the jobs report, consumerspending data or PMI surveys – to provide insight as to wheremarkets are headed. These indicators are, of course, meant to bereliable metrics enabling us to make an assessment of aneconomy's trajectory. For example, the overall financial healthof a country might typically be determined by an analysis of GDPgrowth rates, unemployment numbers, industrial production andretail sales; whilst a purchasing power review might focus on tradevolume trends and real interest rate differentials, based onprevailing expectations around inflation. A surprising data pointcan foster hours of discussion and debate, but before you entirelydisengage with this edition of VFTD – and make a note toyourselves never to invite us to a dinner party – we do, onoccasion, gain economic insights from discussing lipsticks, maleunderwear and Mars bars.
In the autumn of 2001, Leonard Lauder, of cosmetics giantEstée Lauder, drew attention to an 11 per cent rise in USlipstick sales following the September 11 attacks, which heattributed to consumers' desire for small luxuries during hardtimes. Since then, the number of lipsticks sold – theLipstick Index - has been a much-cited statistic for gaugingeconomic health. Disciples of the index have also drawn attentionto a 25 per cent rise in American cosmetic sales during the GreatDepression of the 1930s. Unfortunately, in recent years, it hasbeen acknowledged lipstick sales have become an increasinglyunreliable indicator; albeit supporters of the theory have switchedtheir attention to the sales of foundation and nail varnish, intheir quest for that 'magic make up metric'.
The volume of male underwear sales was a favourite indicatorused by former US Federal Reserve chairman Alan Greenspan, formonitoring consumer confidence. A dip in sales suggested the USeconomy was in trouble. Why should this be? Followers believe menview underwear as an essential, but mundane, purchase and salesfigures very rarely fluctuate; men don't spend more in thisarea when times are good, nor do they cut back when they start tofeel the pinch. Therefore, when purchases of briefs or boxers startto slide, Greenspan took this as an indicator that men were makingsevere cuts to their outgoings, suggesting tough times ahead.Critics of this metric argue most men are reluctant to replacetheir stocks of undergarments regardless of their financialsituation – moreover, a significant amount of male underwearis purchased by women. Therefore, it is a truer reflection of thelatter's spending priorities, which may be very different tomen – see Lipstick Index above.
Turning to Mars bars, for many of us this chocolateconfectionary occupies a special place in our childhood memories,as we ran to the nearest corner shop to spend our pocket money.What we paid for the Mars bar, assuming it was your favoured treat,is a reliable indicator of two things; firstly, your age (!) andsecondly, the subsequent rate of inflation or – moreaccurately - the change in your personal rate of inflation. Beforedelving a bit deeper into why the price of a Mars Bar might be auseful economic indicator, the invoking of childhood memoriesaround treats did prompt us to run a summertime office surveyaround favourite sweets of our youth. The results were; 1. foambananas, 2. drumsticks, 3. cola bottles, 4. Jazzies, 5. Refreshers,6. Anglo Bubbly, 7. wine gums, 8. flying saucers (for all you PeterKay fans), 9. chocolate limes and 10. the good old gobstopper.
Foam bananas – Julia's favourite
Anglo Bubbly – Russell's favourite (because itblows bigger bubbles)
Unfortunately, data on the changing price of our favouritesweets has not been easy to find, however, the historic price paidfor Mars bars has been a keenly observed and constantly recordedmetric. It has, therefore, become a standard default measure ofinflation. The price of a Mars bar in 1970 was 3 pence and in 1980it was 15 pence. We both remember paying single digit pence for oneand the first day we got no change from the shiny new silver 10pence piece we handed over is, for one of us at least, as cleartoday as if it were yesterday.
With a Mars bar typically costing 65 pence today, we can easilycalibrate inflation through time – or can we? There are anumber of globally traded commodities making up the ingredients ofthis chocolate bar – cocoa and sugar, for example – andcost-push inflation can be calculated. However, many will be awarea second order derivative of inflation, namely shrinkflation (thinkToblerone) – is reflected in that price. Mars bars, liketubes of toothpaste and bars of soap, have become smaller andlighter over time, as manufacturers have sought to maskinflationary pressures by controlling costs and increasingmargins.
In common with our annual August edition of VFTD, we have takena light-hearted approach to our subject matter, but the topic ofinflation is a very serious one. We do not imagine the price ofMars bars is an agenda item at Jackson Hole - the forthcomingannual get together of central bankers - but inflation, or the lackof it, will be. Despite coordinated efforts across the globe, pricerises remain elusive and there is an increasing focus on why thisshould be the case. Moreover, persistent low inflation and highcorporate profit margins are unusual economic conditions and mayhelp explain why US equities continue to breach new highs.
Reasons why inflation is not rising are many and varied, but webelieve the growth of the gig economy; increased automation throughrobotics; the secular deflationary forces of changing demographicsand debt are at the core of the issue. More and more economists andresearchers are also pointing the door at a single company; onethat 'generated an estimated $225bn in global gross merchandisevalue in 2016 and is growing at 29% year-over-year, with thediscipline to operate at a 1% margin'.
This company is, of course, Amazon and John Authers, writing inlast weekend's Financial Times, eloquently summarised theimpact it is having on margins (and, by inference, inflation);"Post crisis, margins in the US have been high and stayedhigh. Whether this is because of reductions in costs (due tocompanies like Amazon), or rising monopoly power (due to companieslike Amazon) or repetitively low wages (due to companies likeAmazon) – margins are still high."
Whilst investors may love this, the implications are verycomplex and it is a subject we will likely return to in the comingmonths. In the interim, we wish all our readers a relaxing summer;perhaps treating yourself to the odd ice-cream, Mars bar or even afoam banana.
The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.
