When The Top Goes Over-The-Top: What The Soaring Price Of Ferraris, Wine And Art Tell Us

 By Jeffrey Harding

You’ve got to be able to read the signs to know when markets are crazy so you can be ready to bail when the economy tops out. If you can’t or won’t do that then the chances are that your future financial bliss will be less blissful.

In my experience a pretty reliable sign that something is wrong is when the stock market is at an all-time high and vintage Ferraris prices are in the stratosphere.

Everyone will tell you that the economy has recovered and that things are fine so go ahead and spend and enjoy your newfound wealth. But we continue to have a bifurcated economy and that's not doing much for average folks.

Most folks who were homeowners or who just racked up a lot of debt pre-Crash have spent the last 6 years repairing credit, paying down debt, and refinancing high interest loans. Great. Thanks to Fed-induced cheap interest rates, low interest credit has bailed us out. Unfortunately the income of the majority of workers (on a national basis) hasn’t gone up. There are reasons why and you should be really pissed off about it.

Rich folks don't have the same kind of problems. Sure, they racked up even more debt, some even lost homes and pensions, but they have the ability to make it back quickly in a booming financialized economy. I overstate the case here, but rich people are rich because they have a lot of assets. And the Fed, as we continue to point out, has been creating new money at a fierce, unprecedented rate, thereby inflating financial assets to a fare-the-well.

This has rather unfortunate consequences for the economy. It actually causes real wealth (the stuff that money buys, like equipment, factories, goods) to be funneled into things that later turn out to be bad investments when the Fed stops printing. The economy might be improving but bad investments eventually go broke, people lose jobs, and our economy stagnates. We all witnessed this when housing and all its related enterprises crashed in 2008.

Will it happen again?

By most measures stocks are overvalued. For example, the popular CAPE and Shiller stock market valuations are way high. Margin debt (traders borrow to buy stocks) is at an all time high. I have also noticed that weird financial structures are being revived or created (shades of the Great Recession!). The collateralized debt obligations that plagued the economy in the run up to the Crash of ’08 are reappearing. The single-family housing market is being securitized into a financial product. The notorious Cov-Lite cheap debt loans are re-emerging as investors chase yield.

Money chases money when an economy is financialized. Can it last? When the experts on CNBC talk every day about whether we’ve reached a top, you can bet that we are close. It might be well to recall the old Wall Street saying that no one rings a bell when the market tops.

In my opinion a very reliable sign of economic craziness is the luxury market. As Wall Streeters enjoy the fruits of their labors (bonuses) they like to buy toys: art, vintage cars, watches, rare wines, big houses. You would not be surprised to see major hedge fund investors, money managers, and bankers being the ones bidding high at the NY auction houses. It is getting crazy … again.

Let me give you some examples:

Last October a 1963 Ferrari 250 GTO race car sold for $52 million breaking all records for a Ferrari. OK, so they only made 39 of them but … $52 million? Why I say the car market is getting crazy is that last at Sunday’s Barrett-Jackson auction a 1973 Porsche 911S sold for over $100,000. Yours truly had one of these beauties a few years back (fly yellow Targa) and sold it for … $12,000. Yes, sour grapes. Nice car, but $100,000? Nope.

A Patek Philippe watch made in 2013 just sold for $873,000 at a Sotheby’s auction. Not a record grant you ($11 million back in 1999) but it was a watch with no “provenance” as they say.

The art market has been no less frothy. Last November Francis Bacon’s Three Studies of Lucien Freud, a remarkably ugly triptych painted in 1969, sold for $142 million. 2013 was a banner year for art sales, reaching a record $64 billion in auction sales, an 80% increase over 2012.

Homes? The most expensive home sale so far this year was Copper Beech Farm in Greenwich, Connecticut, a 50-acre estate right on the water. As you may know, Greenwich is within commuting distance of the Big Apple. Price: $120 million. But it was a steal because the buyer originally wanted $190 million. The garish Fleur de Lys estate in L.A. (Bel Air) just sold for $102 million. It was modeled on Louis XIV’s Versailles palace, and has 12 bedrooms, 15 bathrooms, a ballroom, two kitchens, a massive movie theater, a pool, tennis courts, and a nine-car garage.

The money craze hit the wine market as well. After all, if you can’t afford the big estate or the Ferrari, you can still have the best wines. Like 12 bottles of Domaine de la Romanée-Conti Grand Cru 1978 vintage for $39,500 per bottle. In all fairness this went to a thirsty Chinese buyer at a Hong Kong sale last September. In a recent New York auction someone paid only $14,000 for 3 bottles of Romanée-Conti, 1999 vintage.

By the way, at an auction of Chinese art in Hong Kong a few days ago, prices went through the roof. A tiny Ming dynasty porcelain cup, a rarity called the Meiyintang “chicken cup” (it had little chickens painted on it) sold for $36 million. I’m a fan of Chinese art, but really, $36 million?

Marginal cars, marginal art, marginal properties, marginal watches, and overpriced wine. That tells me that there is too much money sloshing around. When money like that is tossed around by those who have benefited from the Fed’s largesse, there is something wrong. I’ve seen too many cycles to be fooled again by money steroids. These phenomena repeat themselves over and over with every cycle and nobody seems to notice or even care while the markets are hot. They think the party will last forever. But it never does.

These are bad signs for those who are fully invested and highly leveraged.

Jeffrey Harding is a real estate investor and former publisher of The Daily Capitalist, a free market financial blog. He is also an Adjunct Professor at Santa Barbara City College where he teaches real estate investment.

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