Wednesday, September 8, 2010

I suspect the Hemline Index is flawed, but has merit

Saw an off-the-wall article in one of the newspapers today (sorry I looked for it, but couldn't find it, so cannot credit the publication) about using women's hemlines as a guide to the health of the economy. Some bod has taken the trouble to search through back copies of fashion magazines dating back to the pre-1930s Depression years to test the theory that, as the economy declines, so hemlines get longer.

This outstanding test of perserverence and hemline gazing revealed that if you invest on the basis of  the Hemline Index as a measure of economic trends, then you're probably going to be buying or selling at the opposite ends of the cycle to what you should be or, more likely, about half way through the next cycle.

You see, the researcher discovered that adjustments to hemlines actually lagged the economy by three to four years - the lead time in fashion being about that time. So a financially stretched version of Armani would sew the seeds of repression in time for a garment to blossom about half way through the next economic upswing.

Of course, I believe this research is fatally flawed because, like any other manufacturing endeavour, the lead time to market for fashion has been compressed since the Depression years, so the lag may only be about six months. But that is my instinct talking, rather than capacity to provide you with any tangible data on this.

In any event, the Hemline Index is just one of many indices with flaws. But as a purveyor of all things economic, I have to say studying the Hemline Index just after the economy has boomed sure beats the hell out of looking at the VIX or the Baltic Dry Shipping Index!

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