2 months ago
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Economic forecasting models are innumerable. But when it comes to forecasting business cycles, the output isn't as plentiful, barring Joseph Schumpeter's innovations theory and William Jevons' sunspot theory. While those may not be easy for the common man to understand, there's a 'lipstick' theory of business cycles. It says during times of economic recession, the sale of cosmetics surges.
Why the lipstick theory now?
Berkshire Hathaway's Warren Buffett is the bellwether of investing. Investors who go by the fundamentals to buy or sell shares, keep a keen track of what he's doing. Although Buffett has been skeptical of the valuations in the equities market and has been publicly lamenting about the absurd prices, he has done something that should worry investors - buying stakes in a cosmetic company called Ulta Beauty Inc.
Is this an indication of an impending recession in the US?
For the past few weeks, economists expect the US economy to slip into a recession as high interest rates crip businesses and consumption. While the receding inflationary pressure and rising unemployment is what the economists looked at, now comes Buffett's purchase of Ulta Beauty that sells lipsticks. Some believe that he's putting his money where his mouth is.
How did lipstick begin to signal economic recession?
Juliet Schor, a professor of sociology and economics propounded the theory that during tough economic times, women spend money on affordable luxury than other expensive consumption. She described it as a 'hope in a bottle.' "Women's psychologies may have been shaped to respond to economic resource scarcity by allocating more effort into securing a financially secure mate in an environment where such mates are scarce,'' says Professor Sarah Hill, in a discussion posted on Texas Christian University website.
Is there evidence to support such a claim?
During the great depression in the US between 1929 and 1933 when the production of industrial products crashed, the contrary happened with the production of cosmetics which rose. Leonard Lauder, chairman of Estee Lauder in 2001 said cosmetics sales rose post the 9/11 terror attack. He said a similar jump happened during the recession triggered by the Global Financial Crisis in 2008.
Is Buffett looking to benefit from his investments in Ulta Beauty when the US gets into recession?
Buffett, as a student of value investing giant Benjamin Graham, may be spending more time on studying balance sheets than reading lips. But given his slashing of holdings in Apple and Bank of America, his purchase signals that there's a compelling reason behind investing in Ulta Beauty. Is it the attractive valuations (fell about 30% in 2024), or the future earnings climb during a recession?
Isn't Buffett an investor whose job is to buy assets? What is different this time?
He has been uncomfortable about the valuations of stocks, including, Apple. Berkshire has been steadily selling down equities and raising cash holdings to invest at the opportune time. His cash pile has risen to a record $277 billion which he's holding in short-term Treasury Bills leading to posts on social media how he's owning more T bills than the Federal Reserve.
English (US)