Vice Index Points To Strong Consumer Spending

The Vice Index has been revised and is now chained to January 2009. The data itself goes back to 1993.

Vice spending is where the desire to spend meets the ability to spend. As the heart of consumer spending, vices adhere nicely to more conventional economic benchmarks like retail sales. Retail is one of the top benchmarks eyed by Wall Street and it comes in two flavors: Total Retail Sales and Retail Sales ex-autos and gas. The latter speaks more to the day-to-day consumer spending habits – gas prices can be pretty volatile and consumers buy it regardless of price. Autos are not really tied to everyday spending.

Moneyball Economics’ Vice Index, forecasting economic strength based on leisurely and sinful spending, is pointing to continued consumer strength through 3Q.

The Vice Index is strongly correlated – factoring in a multi-month lead – with retail sales (ex-autos and gas). It is pointing to a slight uptick for May, followed by steady growth of about 4 percent year over year (Y/Y).

Keep in mind that the total retail Y/Y growth will come at a slower pace (due to lower gas prices).

Note the surge in retail sales that began last summer. That’s when gas prices started to plunge. It’s also when Obamacare began to hit its stride. With those things helping to pad some wallets, consumer propensity to spend remains strong.

While the correlation is evident, the Index has recently diverged from total retail spending.

Drilling down, total retail has slowed faster than otherwise indicated by the Vice Index. That’s mostly because of oil prices.

Question: Why isn’t the gas price dividend showing up in other pockets of retail spending? Shouldn’t retail ex-autos and gas be increasing if falling prices at the pump have put money into consumers’ pockets?

Answer: Retail figures exclude a big chunk of consumer spending. Spending on fun (food services and drinking) continues to surge.

Except for food services and drinking, retail figures do a lousy job of tracking recreation. Disneyland’s multibillion dollar ticket sales are not included. Neither are airline tickets and hotels. Neither is gambling, prostitution and drugs. That’s where we come in and set the record straight.

Hookernomics: Price Inflation Is Spreading Slowly

Price elasticity of demand is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price, ceteris paribus.

-Source: Wikipedia

As a cash-based business, prostitution is very sensitive to real-time changes in supply and demand. Raising prices is extremely meaningful.

Last month we noted a sudden spotty outbreak of price inflation among higher-end escorts. It left us wondering if a nasty bout of inflation was catching. It is. This month we’re seeing more price hikes. They are nominal (~$25) and sporadic. How contagious is the inflation? Right now only higher-priced escorts are showing the symptoms.

If prices are going up, it’s because customers can afford it and will pay it.

For those into futures trading, sex is sold as both a non-perishable and a perishable commodity. While actual transactions and pricing reflect today’s demand, price hikes are typically communicated as a hedge against future expected demand and pricing. It’d be best to book an escort today and lock in the grandfathered rate before future list prices rise.

Here are the main points:

6 percent price inflation is less severe than indicated. Although escort list prices are rising 6 percent, existing clients never pay the latest asking prices. They get grandfathered in at typically lower prices. If 50 percent of an escort’s income is repeat customers (Moneyball Economics’ estimate), then a 6 percent price hike translates into an effective 3 percent raise in hourly wages since only half pay the higher rate.

Prices are sticky upwards. Only prolonged and sustained downturns in business conditions will push escort prices down. The price rigidity comes from the fact that business fundamentals rule in Hookernomics. Once a published price is raised, it rarely gets lowered (the exception being special promotions, but list prices rarely drop). If a seller lowers prices, expect even further price erosion as buyers try to take advantage. Raising and then lowering prices is a sign of failure to attract necessary demand (over-supply). Taken together, this means that escorts raise prices carefully and in a well-considered manner.

Price hikes are both opportunistic and indicate future expected demand. When it comes to pricing, Hookernomics follows the airline pricing model. Price hikes are led by one seller and, if the market accepts them, the other sellers join in. That’s what we’re seeing right now. (Note the escort market is more fractured, so price hikes spread more slowly than the oligopolistic air travel market.)

The key takeaways from all this:

Price inflation at the high end indicates escorts perceive that more affluent customers can swallow it.

No price inflation at the low and middle tiers means the rest of the economy is not experiencing similar growth in household finances.

Against this background of established providers raising prices, new supply is entering the market. It’s summer vacation and things are about to get tricky. School is out and that means more escorts. SeekingArrangement.com is a website with 2.5 million wannabe kept women and men, or Sugar Babies. Of those, 1.4 million are self-declared college students. Let’s not split hairs about the distinction between an escort and a Sugar Baby. In both cases, the primary purpose is to exchange money for sex. The only difference is duration of the transaction – an escort’s engagement is measured in hours whereas a Sugar Baby/Daddy arrangement lasts for months.

The point is that many of the students seeking a Sugar Baby arrangement will also escort.

It’s very likely that the new supply will prevent further price inflation. Regardless of where prices go next, the market is signaling that consumer spending is strong at the high end.

Gambling Shows The Spring Rebound Has Been Underway

As you can see, gambling revenues are up.

Last month we predicted that April would show continued growth in gambling revenues and that’s exactly what happened.

Compared to last year, April gasoline sales are down $10B. Where did that savings go?

Some went to gambling. Weather washed out February and March gambling excursions but a spring rebound has started to bring them back. May’s gambling figures will include the Mayweather-Pacquiao fight, which is bound to boost results even further.

The US consumer has all the stuff they need. Now they are buying experiences.

Gambling is only one part of the revenue that will go uncounted by the retail figures, including the associated airfare, hotel bookings, room service and shows. None of the billions of dollars spent will be factored into retail.

How big is consumer demand? Every hotel and airline beat expectations for 1Q on strong US demand. Marriott, for example, reported EPS of $0.77, far above the high end of its guidance ($0.72). The results were driven by strong demand and occupancy rates as well as strong RevPar (the money spent in the hotel beyond the room rate).

The US consumer is spending, gambling and having fun, but you won’t see it in the retail figures which only track what a store sells.

Cannabis Sales Continue To Blaze Away

• ~$100M in monthly sales
• 2x last year’s sales

Meanwhile Washington state is about to stumble. Seattle is the largest city in Washington (population 652,000), but the two largest cannabis retailers are located in Vancouver (pop. 167,000), which is on the border with Oregon. Vancouver, WA is a one mile drive over the bridge from Portland (pop. 610,000) and a mere 15 minutes by car from Portland State University.

Unfortunately for the Vancouver shops, Oregon retailers will start selling recreational marijuana next month. The shift will hit Washington’s tax revenues by an estimated $1.5M. This is one example of the tortured impact of the regulation-driven marketplace. Colorado is doing nearly $1B in cannabis sales each month. The sales are all cash because banks face fines for handling “drug money”.

Nothing will change for at least three years. First, politicians will focus on the 2016 elections. Then big business lobbyists will spend two years making sure that any regulatory changes favor them. That leaves three to four years for local businesses to prepare for the professionals. Philip Morris can’t ignore Colorado’s $12B annual market. Throw in the potential legalization in California, Florida and other states and this is beckoning Big Tobacco like a moth to a flame.

A lot of hot money is chasing cannabis investments. Most of this is money being thrown away because today’s supply chain will be totally different in four years, and current players will not survive the onslaught of better managed and capitalized companies.

Vice Index Shows The Big Picture

While the correlation between retail sales and the Vice Index is undeniable, retail does not always present the full story. Yes, both indicators show the willingness and ability of consumers to spend their money on discretionary goods and services. However there’s so much more to account for when measuring vice spending than what can be told through a chart of same-store sales.

Vice spending tells the story of hot money flowing or slowing, and that gives the Vice Index incredible insight. It’s the canary-in-the-coalmine for consumer spending. Right now it is saying that consumers are spending at a steady pace, but momentum isn’t rising. Stable is not a good buzz-word for investors who are interested in companies dependent on consumer spending.