Next bubble to burst - Lafite (Andy Xie)

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Last Call For Lafite?
January 12, 2011  PrintShareThis Font Size: [ T  T  T ] By ANDY XIE
A few months ago I wrote that Carruades de Lafite wine is a bubble, because it is misconstrued in China as being the little brother to Lafite, similar but a bit less good. I thought, though, that one could still make a case for the skyrocketing price of Lafite being a revaluation caused by new demand from China. However what I have seen and heard in the past few months convinces me that the whole fine wine market, not just Lafite, is a bubble. Like many other assets, the force driving the bubble is the low interest rate environment. Bernanke is more of a reason for high fine wine prices than 1.3 billion Chinese.

In the 2000 Internet bubble, many worthless companies were trading at billions of dollars of market capitalization. Some were genuinely good companies but were priced several times higher than their intrinsic worth. It's the same with Lafite.

It's never easy to call the top in a bubble. I believe China's tightening due to inflation marks the peak for Lafite, as well as for Chinese property. What will follow is sluggish trading volume and sideways prices. The crash in the wine and property sectors will come when the US treasury market crashes, forcing the Fed to tighten monetary policy. That will probably occur in 2012. So now is the right time to sell your Lafite.


LAFITE HAS OUTPERFORMED

The price of gold has more than quadrupled in the past decade. The price of 2000 vintage Lafite has done 100% better - it's up about nine times. By weight, Lafite is more expensive than silver - even for a bad vintage - and a great vintage like 1982 is almost ten times as expensive. If the next decade is as good for Lafite as the last was, it could become as valuable as gold by weight.

Moreover, Lafite has been resilient to shocks. It sailed through the 2008 financial crisis with merely a blip in prices and began to reach new highs before almost anything else, outperforming all other great wines by miles. For example, 2000 vintage Lafite debuted for about the same price as Latour but now sells for almost twice the price. In traders' jargon Lafite is truly an 'alfa' asset - it delivers loads of upside in a good market and but has little downside in a bad market.

Wine performance isn't just about Lafite. After all the Liv-ex 100 Fine Wine Index has tripled in five years, even as the world suffered the biggest financial crisis in six decades. Lafite has done 100% better than the index and the fine wine market has performed better than any major class of financial asset out there.


WINE DRINKERS BECOME HOARDERS

Fine wine is an investment asset because it can last for a decade or two with improving drinking value. But the transaction cost is very high, for example there is usually a 10% transaction fee for turning it over in the market. Storage costs are another burden, and even with the best storage conditions some wine turns bad. Compared with other collectibles like paintings or antiques, wine is more perishable and therefore it can never be a main investment asset.

Fine wine can be a great speculative asset. The small volume from each chateau is perfect for allowing some people to corner the market and create momentum to suck others in. The main hoarders are probably chateaus themselves plus wine merchants and, maybe, some Chinese speculators.

The top Bordeaux chateaus behave like Internet companies did in 2000. They initially sell only a small portion for each release and the shortage triggers a market frenzy. They then sell more into it, bottle by bottle, over time.

Wine merchants behave like investment banks in a bubble. Seeing their buyers making a lot more than their own commission, they have become 'investors' themselves, like proprietary trading on Wall Street. Wine merchants nowadays sell wines like investment banks sell gold. The pitch usually starts with money losing value and ends with 'Chinese would buy from you at higher prices.' Overtime they believe their own story and instead of selling to their clients, they hoard themselves.

Statistics on where all the Lafite is kept are impossible to get. My suspicion is that the above three groups account for most of the recent vintages, say, since 2005. The real picture will only emerge when the bubble bursts. When Bear Stearns and Lehman Brothers went under, the world realized that the banks kept much of the toxic assets at home.

THE CHINA FACTOR

'When it goes down a government official's throat, the Lafite bubble just vanishes. No more bubble!' said a Wenzhou Lafite hoarder recently, in response to the Lafite bubble chatter.

Whenever an asset defies gravity for so long, millions of pet theories pop up to explain or justify it. The explanation for Japan's high stock and property prices in 1989 was that Japan had found a better economic model. In 2000, too much demand was the popular answer for the unusually high prices for Internet stocks. The favorite theory for the high and rising price of Lafite is that China is buying.

When it comes to China, everyone has a theory. China is big and opaque and anyone can claim to be a China expert. When it comes to a drinkable asset like wine, 1.3 billion people come in especially handy for justifying any price: 200,000 bottles of Lafite a year, 1.3 billion people drinking. Wow!

But why would anyone want to drink something for recreation that is ten times as valuable as silver and may become as valuable as gold in a decade? After all, people are hoarding silver and gold. Could hoarding be a better explanation for the Lafite phenomenon? As Lafite begins to deteriorate after a decade or two, hoarding can't work forever. Hence, if this is the right explanation, the Lafite phenomenon is just a self-fulfilling bubble.

Those who know China better will disagree. The Chinese are crazy about Lafite. A friend in Guangzhou got a few cases of 2005 Lafite through another friend of mine. A few days later he called for more. "The leaders drank it," he complained.

When Chinese businessmen treat government officials, Lafite is the drink of choice. The popular drinking style is 'fill it up and bottom's up'. Quite a few businessmen have gone bust entertaining government officials this way. Some look for more cost effective strategies. 'After a few cases, I feed them fakes,' a businessman once remarked to me. It is a high risk strategy. If found out, you may lose more than just business.

Money worship in Chinese culture sometimes manifests itself in money burning. People who become rich overnight in China are called gushers or mushrooms. Some mushrooms are so big that they want to burn money to prove it. One very big mushroom flew in oak casks filled with Lafite for a dinner. "Today we drink Lafite like beer," he announced.

There are many theories on why Lafite has gained cult status in China. One is that its Chinese translation sounds like promotion. The LV bag has gained such status in China too. It is just a self-fulfilling prophecy.


THE CHINA FACTOR CAN BACKFIRE

China is the fastest changing country on earth. Cognac was the biggest deal for them two decades ago. Shark fin soup was hot a decade ago. Lafite is today's darling. Who knows what lies down the road.

Competition from fakes has a serious impact. Most antiques and artworks in China are fakes; they may have been created a long time ago, but they are fakes nonetheless. The tradition for faking valuables is well established. Some mushrooms recently served me 1982 Lafite. It tasted quite suspicious, though I'm quite sure my hosts paid top dollar for it. The forgers are just too skillful.

The fakes will not only eventually cap the price, but can completely destroy the demand for it. Some wine merchants estimate that over 70% of Lafite consumed inside China is fake. At some point it will give a bad name to Lafite. When one's first response upon seeing a bottle of Lafite is to wonder whether it's a fake, the demand may decline.


LAFITE PRICES PEAK AS CHINA FIGHTS INFLATION

China is facing an inflation problem. The government is blaming speculation for now. The real cause is a fivefold increase in China's M2 supply over the past decade. China has to raise interest rates. Cracking down on speculation isn't likely to work when the negative real interest rate is so big. If the government locks up Wenzhou people, what about Quanzhou or Chaozhou people?

China has to raise interest rates. They should go up three percentage points now. The government won't do it, and will only raise rates gradually. Still, when the interest rate goes up, the Lafite in the cellar shines a bit less. While the overall fine wine market is tied up with the US treasury market, Lafite prices are sensitive to the China factor. Its price is affected by China tightening.

If I had a lot of Lafite, I would be selling.

Poo

who is Andy Xie? the name is familiar ...

livefreakss

who is Andy Xie? the name is familiar ...
Poo 发表于 2011-1-14 23:08

    谢国忠。。。。

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