Looming Inflation...

In Money Week this week I have been writing about how the soaring price of luxury goods is a sign of inflation on the horizon. Here's a taster....

Sixty thousand pounds, or 726,000 Hong Kong dollars, is a lot to spend on a bottle of wine, even if it is 1982 Chateau Petrus, and even if the bottle is question contained six litres rather than just one. Still, that was the price fetched at a recent Hong Kong auction, a record price for that wine.
And it was far from alone. Right around the world, the prices of rare, luxury and collectible items are starting to soar again. There is an interesting message in that for anyone trying to gage the state of the world economy – and what is likely to happen next to asset prices. Fearful of inflation, the rich are moving their money into the few assets that are likely to survive it. And they may well be right.
There are plenty of signs for of life returning to the market for luxury goods. A rare Ming dynasty Chenghua bowl sold this month for $4.7 million, whilst a large blue-and-white Qianlong moon flask went for $5.1 million. An 8.74-carat blue diamond just fetched $5.7 million, a record for a stone of that type. Classic cars are soaring in value: prices have risen by 60 percent since 2006, beating most other investments. In August, a 1938 Bugati sold for $1.3 million, and more than 15 classic cars have fetched more than $1m so far this year, according to figures compiled by the auctioneers Bonham’s.
Meanwhile, the prices of top-end London houses, a market now largely the exclusive preserve of the world’s super –rich, are starting to look lively once again. Prices in central London have now gone above their 2007 peak, according to the agents Rightmove. That upward surge is being led by buyers right at the very top end of the market, drawn in by the cheapness in the pound.
But just about anything with any kind of scarcity value or collect ability seems to be soaring in price right now. A clump of Elvis Presley’s hair, believed to have been shorn from the singer’s head he joined the Army in 1958, just sold for $15,000. Barbra Streisand just raised $600,000 for her charitable foundation by auctioning off memorabilia from her singing career. Even the art market has recovered its verve. After going through a bubble as intense as anything that the banking industry experienced it froze completely after Lehman Brothers collapsed, with sales down almost 80%, but has started recovering in the last few weeks.
So what is all that telling is about the state of the world economy?
What the rich are doing with their cash is always instructive. After all, they are clever with money: if they weren’t, they wouldn’t have been able to accumulate so much of the stuff in the first place.
There are three big signals in the way the luxury market is starting to boom again.
First, there is a lot of spare money splashing around the place (much of it in China, which is where the really fancy prices are being paid). In a world where people are paying a million dollars for an old car there has to be. The programmes of quantitative easing, or what used to be known as printing money, implemented by most of the world’s main central banks may not have done very much to boost bank lending or economic activity. But they have created a lot of spare cash that is now swirling around the financial system. The way the luxury market is now booming again tells us that most of that newly-minted money is likely to go into creating a series of mini-bubbles in asset prices – and very little of it is likely to go into reviving economies, saving jobs, or creating new industries.
Next, the rich foresee inflation. With interest rates at record lows, the stock markets recovering strongly, and the banking bonus system back to its old ways, it is not just that there is plenty of money around. Inflation is certain to be making a return as well. The gold price is one clue to that. But gold – whatever its armies of devoted fans will tell you – isn’t much of a hedge against inflation any more and hasn’t been for the last three decades. Real assets are the one really safe place to park cash that you fear will be eroded by rising prices. Your money in the bank may gradually lose its value. Your investments in gold may never respond to rising prices. But the bottles of fine wine in the cellar or the Chinese antiquities on display in the hallway will go up along with the general price level – and probably even faster. They are growing any more 1982 Bordeaux’s and they aren’t making any more Ming vases. Like farmland, they are one of the few investments where the supply is completely fixed: the only thing that varies is the demand. And those assets survive inflation.
Lastly, it tells us that the rich don’t have much faith in productive assets. They could be putting their money into new companies or venture funds seeding the industries of the future. Instead, they are bidding up the value of items whose only real worth is their scarcity value. The world is awash with idle factories. Real wages are stagnant in most of the developed world, and consumers are over-indebted. Share prices might be rising for now, but is going to be very hard for corporate earnings to keep pace with the expectations markets are now putting on them. The luxury boom is suggests that the rich don’t think there is much money to be made from stocks in the next few years, and don’t want to tie up too much of their cash in them.
Indeed, if you wanted to think of the perfect investment for a world characterised by rising inflation and low growth, you’d probably decide it was luxury, collectible items. The rich have already figured that out. They are almost certainly right – and heck, if they are wrong, they’ll still have some decent wine for the cellar, and some fine antiques to admire in the hallway.