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2014 And Beyond: Contrasting Opinions

And finally, what's in store for 2014? We decided to ask two influential market observers their opinions, and you'll be interested in what they have to say. Read on...

Roger Morrison, Longstanding American Collector and Pebble Beach Judge

Is the car market in a bubble?

On NPR's "Morning Edition" there was an interesting story about two gentlemen who will be sharing the Nobel Prize for Economics.  They each have opposing views on what constitutes a bubble and if a bubble can be predicted. Right now there is not a text available for the four minute story.  You can go to www.npr.org for Planet Money and look for "What's a Bubble?" to listen.

Robert Shiller (Yale University) claims credit that he predicted the dot.com and housing bubbles.  He lists the following symptoms which can lead to a bubble.

  • Rapid increase in prices
  • People telling each other stories to justify the higher prices
  • Envy and regret in not participating in the increasing prices

With the above three factors there is what he calls "An impulse to buy in because of the swirl of emotion."

Shiller added one more bullet point.

  • News media coverage

Eugene Fama (University of Chicago) believes the markets are basically rational.  He says at any one moment prices reflect the collective wisdom of everyone in the market.  If it were clear that prices were irrationally inflated, investors would stop buying en masse and prevent a bubble from becoming out of control.

Rolex fever gripped Christie's recent record sale in Geneva

When McKeel Hagerty was my co-driver for a day on The Quail Rally he said they watch Mercedes Gullwings and Roadsters and the Ferrari 275 GTB as market indicators.  There are enough of those cars that trade in sufficient numbers to track their performance.

I think it is obvious that it is in the best interests of the auction companies to maintain the prices for those cars and other significant cars.  If they fall significantly, it could have a negative ripple effect on the lesser cars.

I really believe that there is some truth in Shiller's bullet points.  There are a few cars which I did not buy that I now "have envy and regret."  Luckily they are too high priced for me to buy now anyway.

I do think there are certain cars that are more bubble prone than others.

A knowledgeable friend of mine made two additional comments.

  • When people start asking if we are in a bubble, then we are likely in one.
  • When ugly Ferraris double in such a short time, that could indicate a bubble.

The run-up in prices for cars is certainly not alone. Christie's just auctioned 50 Rolex Daytona watches in Geneva.  Each one far exceeded its estimate:  some by three and four times the estimate.  Expensive residential real estate in New York City is booming.  You can pick numerous other areas which have had rapid price escalation.

I have been the beneficiary of some price escalation in my cars; although none have been the runaway superstars, so I certainly cannot complain.

I hope the market can sustain itself.  You continue to be a rational voice of reason with objectivity which I appreciate.

New York real estate: booming almost as much as Maranello machinery

And in the other corner, American motoring journalist, concours judge and historian Winston Goodfellow

The collector car world had a banner year in 2013. How else to describe auction sales of a $30 million Mercedes, $27.5 million NART Spyder, and a rumoured $52 million GTO transaction? Plus Aston Martin celebrated its centennial, and Lamborghini and Porsche's 911 had their golden anniversaries.

I'm expecting more of the same next year. Undoubtedly the main event headliner will be Maserati's 100th anniversary, celebrated in Modena, and at Pebble Beach. On an entirely different note, in March Goodwood will honour one of the greatest race series ever, the WRC's Group B from the 1980s. It's unlikely a more fanatical fan base has ever existed, so it's nice to see these intriguing, radical machines get their due.

 

Expensive, yes, but try to find another

In the collector car market, A-list car values should remain incredibly robust. There's a saying in financial circles that "money goes where it is treated well" and, as I have chronicled over the past three years, A-list cars have become their own asset class, a favoured method of diversification.

So what's behind the parabolic surge in values, and interest in high-end collector cars? Before 2008, you could get a safe 5% return with a savings account or money market fund; now, the return isn't 1/100th of that. In a number of conversations with very deep-pocketed individuals, this paradigm shift has drastically affected their mentality on how to preserve wealth. With market forces no longer determining interest rates, thanks to unprecedented bond purchases by the Fed and other central banks, the old rules of investing that existed for decades have been thrown out the window.

Plus there seems to be a race to the bottom with many Western currencies, as central banks have initiated unprecedented expansionary monetary policies. Though no one is saying it, over time big hitters and even average Joes and Josephines are quietly, almost imperceptibly losing faith in what is in their wallet, and the system that backs those pieces of paper. The recent hoopla about Bitcoin, a currency you can't even hold in your hand, probably illustrate this better than just about anything.

The question has thus changed from where will A-list car values go, to what will come on the market. The auction companies (which have recently increased their number of venues) and big name dealers are all trolling the same limited selection pool, hoping to get high dollar machines into their sales and showrooms. A lack of merchandise is pulling up values on non A-list cars, as money looks for a place to-excuse the pun-be parked. 

Moveable trophy assets follow the money around the world

This has completely distorted what I call the "intrinsic historic value meter," where old time collectors and market participants could compare different marques and models to come up with an idea of what a car should be worth. To show how skewed everything has all become, a decade ago a $1 million-plus sale at auction was a big deal. Now there are multiple $1 million lots every auction, and you need $10 million for people to get truly excited.

The early Scottsdale promotions reflect this trend, as a good number of B and C-rank cars are featured in the teasers. Could this be a sign that a market top, or at least a respite in the parabolic upward move, is somewhere on the horizon?

Needless to say, Arizona will be tantalizing. One thing remains certain, though-as long as central banks keep printing money, and interest rates remain below 5%, the upper end of the market will stay red hot. It's just how high the rest of the market goes that could prove to be 2014's most intriguing question.

Images courtesy of Tom Wood, Corsa Research, Steve Wakefield, Bianchi-Piras and Peter Marshall 

Roger Morrison, US collector and concours judge
Winston Goodfellow, motoring journalist and historian