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Market Pulse
Monday, June 5, 2023

A Luxury Paradox, can GenAI help J. Powell and the economics of VR headsets

Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team. 

In this week’s edition we have:

  1. The Luxury Paradox: Selling exclusivity by the billion
  2. Can GenAI make Jerome’s Powell job easier?
  3. The economics of VR/AR headsets

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

1) The Luxury Paradox: Selling exclusivity by the billion

The Luxury sector is to Europe what Big Tech is to the US: a small group of large, successful companies with wide moats whose growth has defied economic fluctuations. It's no coincidence that the two people taking turns at the top of Bloomberg's Billionaire Index are Tesla's Elon Musk and LVMH's Bernard Arnault[1]. So, when the blistering Luxury rally took a $30 billion[2] market capitalization hit last week, fortunes changed (quite literally), putting Musk in the lead again.

The correction has found its culprits in a Chinese slowdown (China is 40% of the Luxury Market by nationality[3]) and a weaker US consumer, duly noted by Morgan Stanley and Deutsche Bank analysts. Still, a larger, more fundamental question haunts the sector. 

Consumers buy luxury products to experience a sense of individuality, as these brands encapsulate their values and affirm their identity. But how can mega-brands reconcile their growing scale with consumer perceptions of scarcity?

Once centred around humble artisans crafting pieces for the likes of the Bonapartes, modern luxury has been transformed into an industry where the illusion of exclusivity takes centre stage. The artistry, originating from the brilliance of anonymous craftsmen, has been skillfully channelled into pricing architectures, preserving the brand's allure while catering to the aspirations of a more extensive consumer base.

European luxury companies have expertly mastered this transition using a range of strategies that maintains desirability even as sales tripled. By deliberately limiting the quantity and accessibility of the product, they create an air of exclusivity that fuels consumer desire. By resisting the temptation to dilute their pricing structure through frequent discounts or promotional offers, they blur the line between price and value and keep that aura of prestige. And by staying in control over how their products are presented and sold, they ensure that each customer interaction is unique and memorable.

It's a delicate balancing act but one which has been executed perfectly. Still, no matter their past successes, as they grow even larger, the luxury mega-brands face an ever-increasing headwind that demands relentless efforts to maintain relevance. And that is perhaps the most significant difference vs Big Tech.

2) Can GenAI make Jerome’s Powell job easier?

(It has nothing to do with his prompting abilities)

The Fed’s Chairman, Jerome Powell, has a difficult job. He has to keep careful track of employment levels, consumer prices, wages, the water levels in the Panama Canal[4] and numerous other metrics and then make an educated guess about where inflation will be next year. Get it right, and it’s business as usual. Get it wrong, and shoulder the blame of the whole society[5]

On Friday, Mr Powell got another data point from the Bureau of Labor Statistics showing that despite his efforts to cool down the economy, the Labour market remains strong, with 339,000 jobs added in May[6], 45,000 more than in April and about 149,000 more than economists had expected[7]

Suppose higher capital investments from corporates are not offsetting the tightness in the labour market. In that case, there’s a risk that companies will push labour costs through the economy resulting in higher structural inflation for longer. In such a scenario, the Fed’s Chair has a problem. 

However, GenAI may help him. Even if the adoption rate doesn’t quite live up to the current hype, white-collar jobs represent about 42% of US civilian employment[8]. Most of those are candidates for significant efficiency gains[9] and so the technology could fuel a productivity super-cycle that will cool the labour market and bring inflation back to the Fed’s target.

Those productivity gains are hard to quantify, but a study from Microsoft and MIT[10] found that using GitHub Copilot led to a 55.8% reduction in completion time for professional programmers tasked with writing a program in JavaScript. That’s a massive increase in productivity, even if for a small part of the labour market.

Although there’s a long way from studies to direct real-world impact, the productivity opportunity gives The Fed a glimmer of hope in their ongoing fight against inflation. Mr Powell may indeed reign it in, but his job won’t get easier.

3) The economics of AR/VR headsets

After years of speculation, Tim Cook appears to be ready[11]. His boldest move since the 2014 unveiling of the Apple Watch is set to be revealed this week at Apple’s Annual Worldwide Developers Conference[12]. The much-awaited mixed-reality headset will be an ultra-premium device focusing on immersive FaceTime in VR, Apple TV+ content and gaming[13]. Will it be worth the hype?

A recent paper[14] by Joshua Gans from U Toronto and Abhishek Nagaraj from UC Berkeley explores the economics of AR/VR technologies within decision-making contexts, intending to identify areas where immersive technologies can significantly impact and distinguish those that may be overhyped. 

They argue that AR is about reducing complexity (Context Entropy) while VR is about making context easier to access (Context Immersivity). Their analysis suggests that the value of AR/VR will be the highest in areas where it provides access to complex, high-value, hard-to-access, and novel contexts like designing the architecture for a new building or planning and navigating a rover’s path on Mars. Consequently, virtual rooms and workspaces for meetings are a poor use case for showing the value of these technologies as they solve simple problems.

Of course, Apple’s headset is not meant to be primarily purchased by managers making rational economic decisions. Even if it were, the rumoured $3,000 price tag would make many use cases hard to justify. But the largest company in the world launching into a new product category could turbocharge adoption and investment that could reverberate across industries with different economic consequences.


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[1]  https://www.bloomberg.com/billionaires/

[2] https://www.bloomberg.com/news/articles/2023-05-23/luxury-stocks-take-30-billion-hit-as-lvmh-hermes-lead-slump

[3] https://www.bain.com/insights/renaissance-in-uncertainty-luxury-builds-on-its-rebound/

[4] https://www.bloomberg.com/news/articles/2023-06-02/inflation-rates-may-stay-high-if-panama-canal-drought-snarls-supply-chain#:~:text=Just%20as%20the%20world's%20delivery,to%20a%20four%2Ddecade%20high

[5] https://www.theatlantic.com/ideas/archive/2022/06/what-is-causing-inflation-janet-yellen-jerome-powell/661237/

[6] https://www.dol.gov/newsroom/economicdata/empsit_06022023.pdf

[7] https://tradingeconomics.com/united-states/non-farm-payrolls

[8] https://www.bls.gov/cps/cpsaat11b.htm

[9] https://www.accenture.com/content/dam/accenture/final/accenture-com/document/Accenture-A-New-Era-of-Generative-AI-for-Everyone.pdf

[10] https://arxiv.org/pdf/2302.06590.pdf

[11] https://www.reuters.com/technology/challenge-meta-apple-expected-unveil-mixed-reality-headset-2023-06-02/

[12] https://www.macrumors.com/roundup/wwdc/

[13] https://www.bloomberg.com/news/articles/2023-06-02/apple-wwdc-2023-mixed-reality-headset-ios-17-and-other-products-to-expect#:~:text=The%20headset%20will%20feature%20many,watching%20portal%20are%20also%20coming

[14] https://arxiv.org/ftp/arxiv/papers/2305/2305.16872.pdf

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