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June 19, 2015

Bubble Watch: Peak Benz after Peak Picasso

In May, Pablo Picasso’s De Women of Algiers (Version O) sold for a record $180 million at auction prompting us to remark that if the Fed's bubble busting team led by Stanley Fischer was looking for runaway inflation, it could have easily found it without any particular effort at Christie’s. 
We went on to compare what may eventually be go down in history as “peak Picasso” with what looks like a bubble in $100 million homes: The nearly $200 million price tag for the “riot of colors focused on scantily dressed women” is, according to WSJ, reflective of the work’s “trophy” status which it earned as a result of its “ownership pedigree”. Translated from high-end art world parlance to plain English: for billionaires who have seen their obscene fortunes balloon under monetary policies designed to inflate financial assets at the expense of everything else (including market stability), purchasing art affords the buyer an even greater opportunity to “boast” than hoarding $100 million homes because after all, there a lot of mega mansions, but there’s only one vibrant, multi-hued Picasso riff on a Delacroix, so really, $180 million is a bargain, especially when most of the purchase price will be recouped by S&P 2,500, or SHCOMP 6,000 (depending on the nationality of the unnamed buyer).
But it’s not just rare art and obscene homes that appear to be reaching peak insanity, it’s collector cars as well which, incidentally, speaks to the same dynamic that’s driving the art and mega mansions markets: namely, the relentless, central bank-fueled run up in financial assets has given the ultra rich more money than they know how to spend, leading directly to hyperinflation in the types of things billionaires buy when they get bored. Take the 1955 Mercedes 300SL Gullwing, which has outpaced the six-year US equity rally:  
Here’s some color from Jalopnik:
What you're seeing here, courtesy of the collector car market wizards over at Hagerty, is the price of a 1955 Mercedes 300SL Gullwing as compared to three major stock market indices and the price of gold. While the economy has been soaring for some, it's been a rocket ship to the greater reaches of the Universe for the world's obscenely wealthy.  
And perhaps nowhere is that reflected greater than the price of one little old German car. For reference, one sold last August for $2,530,000.
1955 Mercedes 300SL Gullwing
So we're left to wonder the reasoning reasoning behind all the massive jump in valuations, and with much of economics, it's complex. First, and perhaps most apparent, there looks to be some sort of bubble economics at play. As Hagerty analyst Dave Kinney points out:   
There continues to be some speculation that prices simply cannot continue this arc for much longer, though the "if" of this question is less insightful than the "when." That million-dollar answer is yet to have consensus.   
[One big factor] .. is the .. rise in income inequality. As the wealthiest get even richer, they can afford to bid higher and higher prices on the highest-end of collector items. 
As for broader market trends, here’s a look at how well German collector cars have fared in the now ubiquitous Keynesian trickle down ‘wealth effect’ monetary regime…  
...and 1950s American “classics” have done even better...
But the bubble may now be showing signs of fatigue as Hagerty's "market rating" (a weighted algorithm to calculate the strength of the North American collector car market), just suffered its largest one month decline in 14 months.
Via Hargerty:
  • Following May’s record high, the Hagerty Market Rating recorded its biggest decline of the last 14 months, falling a third of a point.
  • May saw a 1/3 reduction in the number of cars offered at auction compared to May 2014, primarily due to single-collection sales tapering off.
  • Following a strong year, private sales recorded the smallest gain this past month of the past 12 months.
  • Insured values again set record highs, but month-over-month changes in both the broad and high-end markets slowed for the second consecutive month.
And some specifics from Jalopnik:
Hagerty uses its own proprietary market rating system which takes into account the difference between the value cars are insured for and how much they actually sell for, and according to the insurance company, the dip is fueled mostly by a drop in single-collection big sales. But it’s also fueled by big drops in sale prices of specific, popular cars as well:   
1967-1973 Mercury Cougar - average sale price dropped 21% year-over-year and percent selling above insured value fell from 36% to 23%  
Jaguar XJ-S - average sale price dropped 15% year-over-year and percent selling above insured value fell from 40% to 4% 
Still, as you can see below, the bubble looks to be largely intact, and why shouldn't it be? After all, there was no surprise 'liftoff' today and based on the record $141 billion in buybacks US corporates announced in April (that's up 141% Y/Y in case you were wondering), stocks may trend even higher on the way to their date with 1937.
(Hagerty Market Index)
*  *  *
We'll leave you with what we said last month about greater fool-driven, billionaire trophy hunting: Neither art nor cars pay any dividends, so any purchase is merely a gamble on further price appreciation driven by even greater asset bubbles in the future.
Rest assured DM central banks will do their very best to ensure that these gambles pay off.
Courtesy Tyler Durden, founder of ZeorHedge (EconMatters author archive here)    
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle
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