The "Lipstick Effect"

 When there is a downturn in the economy it is termed the "lipstick effect" because while cosmetics are still sold lipstick is not a necessity.  Costco is warhing its investors that people are buying less red meat and are turning to pork and chicken.  Another indicator is that more Costco brands are being sold, which costs less than name brand items.  Costco is warning its investors of these trends and that Costco might lose upwards of 4% of its current value.

Another trend I am seeing is car dealers who go to auto auctions are now seeing more bank repossessed cars.  Banks are not car dealers so they need to unload these cars at the best auction price they can get.  A dealer might find a good value if they don't have to spend a lot to get it showroom ready.  And some cars are severely damaged and might go for pennies on the dollar and might require some work, but can be sold at a good price.  

I had never heard of the "lipstick effect," but it's true that an economic downturn has its indicators.  But like Costco has done, corporations will warn investors of trends they ate seeing in the buying habits of consumers.  This does not mean one pulls out of an investment, but one has to make lifestyle adjustments if growth is not on the horizon.  Investors then might put off buying that larger yacht for example.  Or if one wants to buy an exotic sports car one might buy a Porsche instead of a Ferrari.  Same with any big ticket item.  That just means a smaller market for Ferrari.  

We're on a sort of fixed income and I am looking at cheaper tobacco and might put off buying a pipe or buy cheaper pipes.  And as I said yesterday, the same is true with coffee and I'll buy less wine.  I refuse to buy cheap wine, but our local market has a buy one get one free offer for some items and that includes wine.  Often I can get excellent deals on wine down here, but inflation dictates cost.  Wine is much cheaper here than it was in either Ohio or NY.  

Costco says people are eating more fish and stocking up on canned meats.  A full pantry of stored foods can go a long way for consumers.  As I said in yesterday's post, I might consider buying 14 ounces in a tub instead of spending more for less.  And I might put off adding a pipe to my collection.  The interest on the US debt was practically nothing, but if the US can't afford the higher interest rates, then the country is broke.  But investors are the driving force behind interest rates.  An economy with high unemployment might seem bad, but it's strange that for investors high unemployment is good.  Because then the interests rates goes down.  

There was some good news in the economy last month with jobs added and talk the Feds won't raise interest rates, but we have to see.  It's just that major retailers like Costco ate informing their stockholders of the inevitable.  Many of those jobs last month were higher paying jobs.  But is the worst over?  We just don't know.  I tend to think not.

Our economy is broken.  The lipstick effect has now happened and inflation will be out of control if the US can't afford to pay the interests.  I'm watching this closely as I see what others say about market trends.  In the last recession of 2008 realtors were bailing out on the housing market.  We have to see if housing becomes more of a problem.  Big purchases like cars and houses are leading indicators on the health of the economy.  A rise in homelessness is never good, particularly when unemployment is high.  Hang on.  It seems we're in for a bumpy ride.  Meanwhile I'll smoke my Rosedale pipe this morning, relax with some Tropical Export, and see what happens next.  Thank you for your time and Peace to each one of you.

Dave