Commentary
I’ve been writing about inflation lately, and based on the comments, it’s obvious that higher prices are creating hardship and anxiety in many American homes. Today, let’s take a look at the lighter side of the topic and examine the factors causing huge increases in the prices of collectibles and luxury goods like exotic cars, watches, wine, and art.
One trend we’re seeing in the luxury and collectible space is sale prices far exceeding expert estimates. In 2021, a 1995 McLaren F1 sold for $20.5 million, exceeding the $15 million estimate by over 30 percent. The McLaren is a spectacular car capable of speeds in excess of 240 miles per hour and in 1995, the F1 won the 24 Hours of Le Mans. However, the sale price is both high on an absolute basis, and compared to expectations.
The collectible card market has also seen spectacular returns with the PWCC 100 Index which tracks the sale prices of the 100 most valuable trading cards up almost five times since the beginning of 2020.
A graph showing the increase in the prices of collectible cards since 2008. PWCC Marketplace
In the wristwatch market, Daniel Pritsker of Providence Diamond Co. told us that there isn’t enough supply of at the high end to fill demand. Some people who have been stuck at home for much of the last two years haven’t spent much on dining out, travel, or experiences so they’re buying jewelry and watches. Pritsker said that two years ago the official retail price on a Rolex Daytona was $13,150, but that model was selling on the secondary market for $22,000. Now, the retail price is $14,550, and those watches are selling on the secondary market for $42,000. Despite very little change in manufacturers’ retail pricing, the cost to acquire one has almost doubled in two years.
A call with New York-based private art adviser Warren Winegar provided more detail in the art space. Like the watch market, Winegar also talked about people being stuck at home and not spending on their lifestyle. He explained that there’s a shortage of supply combined with significant demand from people who are focused on beautifying their homes. At an auction last November featuring young contemporary artists, art experts had priced paintings at $60,000 to $80,000 per piece. However, once the auction began, each of the first 15 lots sold for three to ten times the high end of the estimate.
Howard Freedland is the Food, Restaurant, and Spirits Advisor to Deep Knowledge Investing and a 25-year veteran of the wine and spirits business. He spoke about the reason he thinks the Liv-ex Fine Wine 100 Index is up 30 percent in the last two years. Years ago, you needed to be present at a wine auction to bid for wine, but now that wine sales and auctions have moved to the internet, he’s seeing bidding from all over the world. The internet has made wine both more accessible and more expensive.
A graph showing the increase in the price of 100 fine wines over the last 5 years. Liv-Ex.com
The trend of asset accessibility translating to higher pricing is something we’re also seeing reflected in Decentralized Autonomous Organizations (DAO). These DAOs allow collaboration among groups of people who don’t know each other and don’t have a designated leader. In 2021, ConstitutionDAO bid for the only original copy of the U.S. Constitution that is in private hands. Anyone in the world could have invested funds and owned a piece of the Constitution, and 17,000 people collectively joined ConstitutionDAO and raised $40 million to bid on the document. Kenneth Griffin outbid the group paying $43.2 million, but now the whole world of ultra-expensive cars, jewelry, and art is now open to everyone instead of a relatively small number of wealthy people.
Our experts talked to us about buyers who had excess cash from two years of staying home and emphasized the increased accessibility of collectibles for people who weren’t previously on the invitation list for auction parties and gallery openings. I think there’s one additional factor influencing pricing. Purchasers of high-end luxury goods are aware that the Federal Reserve has been printing trillions of dollars, and that, combined with negative real interest rates are creating inflation. Many people don’t want to be holding cash right now, and treasury bonds have a negative real return because the yield on treasuries is below the rate of inflation.
Just as we recently recommended using cash to buy food to get through potential shortages and higher future prices, wealthy people are parking cash in hard assets. It might seem crazy to spend more than $20 million on a car, or half a million on an emerging artist. Perhaps those items will hold their value over time, or perhaps they’ll decline in a market downturn, but many of these purchasers are convinced that holding cash is a guaranteed loser over the next few years.
Perhaps the best proof that wealthy people are unwilling to hold cash right now is the high prices we’re seeing in digital assets. Non-fungible tokens (NFTs) allow buyers to claim uncontested ownership of digital assets. Think about them like the high-tech equivalent of getting the registration paperwork when you buy a car. One buyer just paid nearly half a million dollars to be musician Snoop Dogg’s neighbor in a virtual world. There’s no physical real estate involved. Similarly, Sotheby’s just had an auction of Bored Ape Yacht Club NFTs. These are a collection of digital cartoon images of apes that sold for $26.2 million.
These are just a few examples of the trends we’re seeing in investing in collectibles. To us, this all seems like clear proof that people are desperate to do anything to avoid holding cash right now. We’re curious: Would you rather own a McLaren F1 or be Snoop Dogg’s virtual neighbor?
