Thinking "Out of the Box" to Invest and Survive in the Next Recession Lombardi Letter 2018-08-07 10:48:22 stock market crash recession income inequality walmart dollar general ferrari louis vuitton LVMH nestle Exploiting the growing income gap between the rich and the poor—and the very demise of the middle class—might be another strategy to prepare for the inevitable stock market crash and the next recession. Stock Market,Stock Market Crash,U.S. Economy

Thinking “Out of the Box” to Invest and Survive in the Next Recession

U.S. Economy - By |

Exploit “Income Inequality” to Beat the Next Recession

Exploiting the growing income gap between the rich and the poor—and the very demise of the middle class—might be another strategy to prepare for the next stock market crash and recession.

It may be unorthodox (and certainly politically incorrect) to consider investing in companies that derive profits from higher numbers of poor people, but it’s unrealistic to expect investors to shun this concept.


It turns out that seeking out companies whose business benefits from the ever-growing, if dubious, rise of poverty levels might be an excellent hedge against falling “into poverty.”

At Lombardi Letter, I’ve often discussed the value of defense sector stocks as a hedge against recession. And I continue to subscribe to that concept.

Income Inequality Is a Sad But Growing Problem

Now, for the record, allow me to state without reserve that I think income inequality is the biggest economic problem of our time.

Still, it’s impossible to analyze markets, business, economics—or the world in general, for that matter—with rose-colored glasses, sipping a refreshing “Campari” on the Côte d’Azur, listening to Edith Piaf.

Income gaps are as inevitable as another recession.

Analysis, especially when it comes to matters of defense, from both military and financial developments must often be ruthless.

When it comes to a stock market crash, fortunately, being ruthless in defending your portfolio does not mean having to jettison ethics.

Taking advantage of the fact that most people’s incomes in America and other advanced economies are dropping is good-old-fashioned realism.

Moreover, there’s a flip side to this “income inequality” coin. If the middle class is eroding, and many are becoming poorer, then the rich are getting richer.

There Are Two Sides to the Income Inequality Coin

In other words, investing in “rich people” stocks is as valid a strategy as investing in “poor people” stocks.

Thus, a portfolio designed to hedge against the next stock market crash would include a good mix of stocks representing companies that sell to the rich and those who rely on the poor.

One of the most obvious examples representing this apparent contradiction might be Ferrari NV (NYSE:RACE).

To be sure, this is almost by definition a stock that relies on there being a rich enough global clientele to afford their cars.

Considering that Ferrari tries hard to keep supply low—the company makes fewer than 10,000 units a year to ensure exclusivity—there’s plenty of demand.

Ferrari NV made its Wall Street debut in October 2015, closing at $56.00/share on its first day of trading.

Almost three years later, Ferrari stock is worth $123.00/share. And the company has plans to maintain exclusivity while also adapting to the times.

It plans to launch a new series of all-electric supercars in the near future, while always ensuring its cars will have the highest possible usable performance, luxury, innovation, and style.

Luxury, high net worth, or plain old rich-people stocks are more plentiful than you can imagine.

If you’re considering Ferrari stock, think like the actual owner of a Ferrari automobile.

Luxury Is Always in Demand…Somewhere

Outfit that beautiful blue V12 “GTC4Lusso” with a set of Louis Vuitton luggage and get yourself some LVMH Moet Hennessy Louis Vuitton SE (OTCMKTS:LVMHF) stock while you’re at it.

The advantage of Louis Vuitton is that, while selling mostly to high-net-worth individuals, it’s also an aspirational company. It’s recession-proof.

In other words, while only the very richest can afford to buy a Ferrari, making sure they get the proper oil change and service, even the poor, if they are “aspirational” or impulsive enough, will make the effort to buy a Louis Vuitton—or any number of brands under the LVMH umbrella—item.

It can be a tee-shirt or a keychain, but it will still add to the company’s bottom line. And then there’s always China.

If the middle class is shrinking in the West, it’s growing in China (and India). Luxury personal objects can only gain in popularity. It’s only fitting, therefore, that LVMH stock has been performing at record levels.

So much so that its CEO Bernard Arnault (who owns just five percent of LVMH stock) became wealthier than Mark Zuckerberg of Facebook, Inc. (NASDAQ:FB) fame. (Source: “Luxury Goods Titan Arnault Now Richer Than Zuckerberg After Record LVMH Results,” Forbes, January 25, 2018.)

Luxury Stocks Don’t Care About Tariffs

Moreover, stocks like LVMH, Ferrari, and others have stronger antibodies against President Donald Trump’s tariffs.

The average consumer will avoid a “Toyota” because of a 10%-20% higher sticker price, but the Ferrari buyer will still get his Ferrari. And if he or she cancels the order, there’s someone more than happy to advance in the waiting list.

Luxury goods are expensive by definition. Whether the products are cars, watches, or leather luggage sets, they tend to be made by well-paid craftsmen in rich countries.

Adding five percent, 10%, or even 20% to their already exorbitant cost will not hurt sales in the long run.

Even if the middle class is shrinking, the number of millionaires and billionaires is increasing worldwide—not just in America.

The big opportunity for luxury goods is in China and India, after all.

Besides, the richest Americans just got a major tax break. They won’t budge to spending a few thousands more for their Ferrari or a few hundred more for their Tag Heuer (part of LVMH) chronograph watch.

“Lower-Income People” Stocks Require More Thinking

The obvious stocks may not necessarily be the best—at least, not all the time.

Walmart Inc. (NYSE:WMT) has made its fortune selling the basics, from clothes to electronics, detergents, and food at the lowest possible price.

Such is its lowest-cost model that when a community welcomes a new Walmart store, it soon says goodbye to longstanding independent retailers on Main Street.

In the latest recession, many Americans who saw their social status drop from the middle to the lower classes came to rely on Walmart.

Indeed, Walmart stock did not budge in 2008 when Lehman Brothers Holdings Inc. imploded and the Great Recession began.

Thus, Walmart remains an invaluable hedge against a stock market crash. And it’s even better during a recession.

Before you go out and get yourself some Walmart shares, consider that these could suffer if Trump intensifies the trade war with China.

To sell the best possible goods at the lowest possible price, Walmart has notoriously relied on products made in China and other countries where labor costs are many times lower than in the United States.

Trump’s Tariffs Could Make Many Walmart Goods Too Expensive

Unlike wealthier Americans, those already counting every penny won’t even be able to afford Walmart stocks after tariffs are applied.

My recommendation in the Walmart case would be to wait until after the 2018 mid-term elections.

Trump is doubling down on his anti-China rhetoric to fulfill his 2016 election campaign promises. If there’s one thing we’ve learned about Trump’s style as president, it’s that he follows the “checklist” approach.

That is, he has a list of the things he promised to do. And he tries to follow through on each of those promised. That list will get updated after the mid-terms. Until then, bringing back jobs to America by imposing tariffs on foreign goods will be a priority.

Yet, Walmart is hardly the only stock that will benefit from income inequality.

The Low-Income Specialists

Consider Dollar General Corp. (NYSE:DG). Now, there’s a stock with a bright—if built on misery—future. Demand for its type of products and prices will only increase.

Indeed, this is the kind of stock whose value can grow in a recession, as people will look for stores able to beat even Walmart’s prices.

Dollar General is increasing its number of locations and this pattern is set to continue as the lower class starts welcoming more former middle-class members to its ranks.

Moving away from retail, there’s a company that has dominated the market in the crucial food sector in the world’s poorest countries.

That company is Nestle SA (OTCMKTS:NSRGY, SWX:NESN)

Few Americans are aware of Nestle as they are of Hershey Co (NYSE:HSY) or Cadbury.

Yet, Nestle makes the famous “Aero” and “KitKat” chocolate bars. Nestle also sells specialty powder milk and a variety of other products to Africa, Asia, and Latin America. In other words, the company has built its enviable empire selling to the poorest countries in the world.

Nestle is one stock that can survive the next recession.

Most investors tend to think of short-selling stocks during a recession. But that’s a risky—and even possibly immoral—strategy that can add more risk than it’s worth to any portfolio.

Rather, consider maintaining a “long” outlook on carefully chosen stocks that exploit the wider socioeconomic and political trends. They are the ones that ensure good returns and nights of pleasant sleep for the long haul.

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