Sell Lafite now / 謝國忠
2010-11-30 16:18 
I wrote a few months ago on why Carruades de Lafite is a bubble, because it is misconstrued as the little brother to Lafite in China, similar but a bit less good. I thought that one could still make a case on skyrocketing Lafite price as revaluation due to new demand from China. What I have seen and heard in the past few months convince me that, not just Lafite, the whole fine wine market is a bubble. Like other assets, the force for the bubble is the low interest rate environment. Bernanke is a bigger reason for the fine wine price than 1.3 billion Chinese.
In the 2000 internet bubble, a lot of companies were worthless but were trading at billions of dollars of market capitalization. Some were really good companies but were priced several times higher than their intrinsic worth. Lafite is like the later.
There is a China angle to Lafite. The same goes for LV bags. But LV bags don't appreciate forever. The China angle makes Lafite more susceptible to the liquidity bubble. Its outperformance against other fine wines should be viewed more as beta rather than alfa in the investment jargon.
It's never easy to call the top in a bubble. China's tightening due to inflation marks the peak for Lafite, I believe, just like for China property. What follows is sluggish trading volume and sideway prices. The crash happens when the US treasury market crashes, which forces the Fed to tighten monetary policy. That is probably in 2012. Still, now is the right time to sell your Lafite.
Lafite has outperformed
---------------------------------
Gold price has more than quadrupled in the past decade. The price of 2000 vintage Lafite has done 100% better, up about nine times. By weight Lafite is more expensive than silver even for a bad vintage, and almost ten times as expensive for a great vintage like 1982. If the next decade is as good for Lafite as the last, for a great vintage 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 and began to make new highs before almost anything else. It has outperformed all other great wines by miles. For example, 2000 vintage Lafite came out for about the same price as Latour but goes for twice now. In the traders jargon Lafite is a truly alfa asset, i.e., it delivers loads of upside in a good market and but little downside in a bad market.
Wine performance isn't just about Lafite. After all the fine wine index-Liv-ex 100 has tripled in five years, even though the world suffered the biggest financial crisis in six decades in the meantime. Lafite has done 100% better. The fine wine market has done 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, like 10% transaction fee for turning over in the market. The storage cost is another burden. Even under the best storage condition some turn bad. Compared to other collectibles like paintings or antiques wine is more perishable. Hence, it can never be a main investment asset.
Fine wine could be a great speculative asset. The small volume from each chateau is perfect for 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 in 2000. They sell a small proportion for each release. The shortage triggers market frenzy. They then sell more into it bottle by bottle overtime.
Wine merchants behave like investment banks in a bubble. They saw their buyers making a lot more than their commission and 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 ending with 'Chinese would buy from you at higher prices.' Overtime they believe their own story and, instead of selling to their clients, hoard themselves.
There are Chinese hoarders, especially from Zhejiang. The land price there has appreciated by about one hundred times in the past decade. Their view towards Lafite is different from other people's. When your main asset has appreciated 100 times, everything else seems cheap to you. Indeed, you may expect everything else to rise that much. Hence you become a speculator in everything else. The land price at home is the main force driving Zhejiang speculators.
Even wine lovers have become hoarders. They used to gather for a glass of fine wine. Now they talk about how much money they are making on their collections over a glass of bad wine.
The statistics on where all the Lafite are 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 come out when the bubble burst. 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!' a Wenzhou Lafite hoarder recently responded authoritatively to the Lafite bubble talk.
Whenever an asset defies gravity for so long, millions of pet theories pop up to explain or justify it. In 1989 the explanation for Japan's high stock and property prices 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 Lafite price is China buying.
When it comes to China, everyone has a theory. China is big and opaque. Anyone can claim to be a China expert. And you can't disprove it. When it comes to a drinkable asset, 1.3 billion people come in especially handy for justifying whatever price. 200 thousand 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 doesn't work forever. Hence, if this is the right explanation, the Lafite phenomenon is just a self-fulfilling bubble.
People who know China better will disagree. Chinese are crazy about Lafite. A friend in Guangzhou got a few cases of 2005 Lafite through a friend of mine. A few days back he called for more.
'The leaders drank it.' He complained
When Chinese businessmen treat government officials, Lafite is the choice of alcoholic drink. The popular drinking style is 'fill it up and bottom is up'. Quite a few businessmen have gone burst 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 Lafite in oak casks for a dinner.
'Today we drink Lafite like beer.' He announced at the beginning of the dinner.
There are many speculations on why Lafite has gained cult status in China. One is that its Chinese translation sounds like promotion. LV bag has gained such status in China too. It is just a self fulfilling thing. If Lafite is really about Chinese mandarins, it reflects China's political reality. If Lafite is a bubble, then China's political power is a bubble too. The two should burst together, i.e., Lafite investors should all become experts on Chinese politics.
China factor can backfire
---------------------------------
China is the fastest changing country on earth, taste included. Chinese government officials change too. Cognac was the biggest deal for them two decades ago. Sharkfin soup was hot a decade ago. Lafite is today's darling. Who knows what lies down the road.
Competition from fakes is a serious force. Most antiques and artworks in China are fakes, maybe created a long time ago, but fakes nevertheless. The tradition for faking valuables is well established. Some mushrooms served me 1982 Lafite lately. They tasted quite suspicious. I'm quite sure the hosts paid top dollars for them. The forgers are just too skillful for them.
For LV bags Chinese buyers can go to the official LV shops. You can't do the same with Lafite. The real Lafite bottles go for hundreds of dollars each in the market. Never know what goes into the bottle that circulates back in the market.
The fakes not only cap the price eventually. They can destroy the demand for it completely. 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 if it's a fake, the demand may decline.
Lafite price peaks on China fighting inflation
---------------------------------------------------------
China is facing inflation problem. The government blames speculation for now. The real cause is fivefold increase in China's M2 supply in the past decade. China has to raise interest rate. Cracking down on speculation isn't likely to work when 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 rate. It should go up three percentage points now. The government won't do it and will only raise it gradually. Still, when interest rate goes up, Lafite in the cellar shines a bit less. While the overall fine market is tied up with the US treasury market, Lafite is sensitive to the China factor. Its price is affected by China tightening.
If I had a lot of Lafite, I would be selling.
In the 2000 internet bubble, a lot of companies were worthless but were trading at billions of dollars of market capitalization. Some were really good companies but were priced several times higher than their intrinsic worth. Lafite is like the later.
There is a China angle to Lafite. The same goes for LV bags. But LV bags don't appreciate forever. The China angle makes Lafite more susceptible to the liquidity bubble. Its outperformance against other fine wines should be viewed more as beta rather than alfa in the investment jargon.
It's never easy to call the top in a bubble. China's tightening due to inflation marks the peak for Lafite, I believe, just like for China property. What follows is sluggish trading volume and sideway prices. The crash happens when the US treasury market crashes, which forces the Fed to tighten monetary policy. That is probably in 2012. Still, now is the right time to sell your Lafite.
Lafite has outperformed
---------------------------------
Gold price has more than quadrupled in the past decade. The price of 2000 vintage Lafite has done 100% better, up about nine times. By weight Lafite is more expensive than silver even for a bad vintage, and almost ten times as expensive for a great vintage like 1982. If the next decade is as good for Lafite as the last, for a great vintage 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 and began to make new highs before almost anything else. It has outperformed all other great wines by miles. For example, 2000 vintage Lafite came out for about the same price as Latour but goes for twice now. In the traders jargon Lafite is a truly alfa asset, i.e., it delivers loads of upside in a good market and but little downside in a bad market.
Wine performance isn't just about Lafite. After all the fine wine index-Liv-ex 100 has tripled in five years, even though the world suffered the biggest financial crisis in six decades in the meantime. Lafite has done 100% better. The fine wine market has done 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, like 10% transaction fee for turning over in the market. The storage cost is another burden. Even under the best storage condition some turn bad. Compared to other collectibles like paintings or antiques wine is more perishable. Hence, it can never be a main investment asset.
Fine wine could be a great speculative asset. The small volume from each chateau is perfect for 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 in 2000. They sell a small proportion for each release. The shortage triggers market frenzy. They then sell more into it bottle by bottle overtime.
Wine merchants behave like investment banks in a bubble. They saw their buyers making a lot more than their commission and 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 ending with 'Chinese would buy from you at higher prices.' Overtime they believe their own story and, instead of selling to their clients, hoard themselves.
There are Chinese hoarders, especially from Zhejiang. The land price there has appreciated by about one hundred times in the past decade. Their view towards Lafite is different from other people's. When your main asset has appreciated 100 times, everything else seems cheap to you. Indeed, you may expect everything else to rise that much. Hence you become a speculator in everything else. The land price at home is the main force driving Zhejiang speculators.
Even wine lovers have become hoarders. They used to gather for a glass of fine wine. Now they talk about how much money they are making on their collections over a glass of bad wine.
The statistics on where all the Lafite are 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 come out when the bubble burst. 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!' a Wenzhou Lafite hoarder recently responded authoritatively to the Lafite bubble talk.
Whenever an asset defies gravity for so long, millions of pet theories pop up to explain or justify it. In 1989 the explanation for Japan's high stock and property prices 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 Lafite price is China buying.
When it comes to China, everyone has a theory. China is big and opaque. Anyone can claim to be a China expert. And you can't disprove it. When it comes to a drinkable asset, 1.3 billion people come in especially handy for justifying whatever price. 200 thousand 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 doesn't work forever. Hence, if this is the right explanation, the Lafite phenomenon is just a self-fulfilling bubble.
People who know China better will disagree. Chinese are crazy about Lafite. A friend in Guangzhou got a few cases of 2005 Lafite through a friend of mine. A few days back he called for more.
'The leaders drank it.' He complained
When Chinese businessmen treat government officials, Lafite is the choice of alcoholic drink. The popular drinking style is 'fill it up and bottom is up'. Quite a few businessmen have gone burst 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 Lafite in oak casks for a dinner.
'Today we drink Lafite like beer.' He announced at the beginning of the dinner.
There are many speculations on why Lafite has gained cult status in China. One is that its Chinese translation sounds like promotion. LV bag has gained such status in China too. It is just a self fulfilling thing. If Lafite is really about Chinese mandarins, it reflects China's political reality. If Lafite is a bubble, then China's political power is a bubble too. The two should burst together, i.e., Lafite investors should all become experts on Chinese politics.
China factor can backfire
---------------------------------
China is the fastest changing country on earth, taste included. Chinese government officials change too. Cognac was the biggest deal for them two decades ago. Sharkfin soup was hot a decade ago. Lafite is today's darling. Who knows what lies down the road.
Competition from fakes is a serious force. Most antiques and artworks in China are fakes, maybe created a long time ago, but fakes nevertheless. The tradition for faking valuables is well established. Some mushrooms served me 1982 Lafite lately. They tasted quite suspicious. I'm quite sure the hosts paid top dollars for them. The forgers are just too skillful for them.
For LV bags Chinese buyers can go to the official LV shops. You can't do the same with Lafite. The real Lafite bottles go for hundreds of dollars each in the market. Never know what goes into the bottle that circulates back in the market.
The fakes not only cap the price eventually. They can destroy the demand for it completely. 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 if it's a fake, the demand may decline.
Lafite price peaks on China fighting inflation
---------------------------------------------------------
China is facing inflation problem. The government blames speculation for now. The real cause is fivefold increase in China's M2 supply in the past decade. China has to raise interest rate. Cracking down on speculation isn't likely to work when 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 rate. It should go up three percentage points now. The government won't do it and will only raise it gradually. Still, when interest rate goes up, Lafite in the cellar shines a bit less. While the overall fine market is tied up with the US treasury market, Lafite is sensitive to the China factor. Its price is affected by China tightening.
If I had a lot of Lafite, I would be selling.
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