Luxury resilience and operation twist

The mainstream de-leveraging consumers continue to struggle in face of persistent high unemployment and housing market slump. The great recession hit both their income and their wealth hard. Low-end retailers such as JC Penny and Walmart are not doing well.

The mainstream consumer is powerless in driving the recovery.

Consumer spending is now overwhelmingly the story of the luxury shoppers. While a small segment of consumers, they wield an outside impact on the broader economy, earning roughly 50% of the total income in the U.S. and making about 48% of total expenditures.

The newly rich in emerging economies are also making their spending power felt around the globe from luxury accessories to luxury cars and homes. Here are some interesting recent reports:

Hermès cannot meet demand for luxury.

LVMH Sees No Slowdown in Luxury Goods Demand.

Urban luxury homes are back in demand, aided by new foreign buyers from Russia, China and Brazil.

Luxury spending picks up even as economy sputters (The Detroit News).

Even the recent market volatility hasn't affected their mood to spend.

The stock market recovery since 2009 has a lot to do with it. The Fed's easy money policy has a lot to do with it.

If the Fed wants to stimulate the economy, the wealth channel is both obvious and effective. This segment of the consumers are credit-worthy, cash-rich and asset-rich. They're the most likely candidate to lever up somewhat. If the banks want to lend, who else would they want to lend to?

Businesses catering to their needs are expanding, both domestically and internationally (see the recent earnings reports from Tiffany, Raulph Lauren, Nordstrom for example).

The recovery on the highend will trickle down. The Fed must pay a lot of attention to this most promising pillar of economic recovery where monetary policy has been and will continue to be effective.

If the Fed twists this Wednesday, risk-premium would be lowered. Investors would be chased out of safe-haven to take on more risks. Risk assets would be supported to some extent to counter the fear of Euro/Banking crisis and the fear of recession. This is not to create another asset bubble, but to ensure the recovery is in-tact.