Two recent podcast episodes that are well worth your time in traffic:
- Slate Money’s “Arts and Crafts Episode“
- Planet Money’s “Episode 584: What The LeBron?“
And on today’s theme, I’d also like to point you in the direction of this recent news piece:
- Now where did I park my 60 cars? Incredible treasure trove of rusting classics worth £12MILLION is found languishing in a French farm garage after 50 years
Welcome to the rise and rise of the alternative asset class.
On Slate Money, Felix Salmon and company were talking about the contemporary art market. The story on Planet Money dealt with the crazy market for Nike Sneakers. And then there are all those old cars, found in a French barn, which are going to be auctioned off by Artcurial in Paris early next year for millions of dollars.
Starting With The Sneakers
Here’s a fact that blew my mind: there is a whole sophisticated economy for the resale of Nike special edition sneakers, with speculators and data observers and market trends. Here’s a graph from campless.com, a data service that has (at the time of writing) tracked 14.5 million auctions for Nike Sneakers:
But that’s only vaguely impressive. If you really want to be impressed, you need to go and visit the Campless website, where you’ll be able to track volatility and price premium and availability levels.
Some information on price (Deadstock or DS means that the shoe is in mint condition):
Some information on availability:
And data on volatility (!):
The eBay market for Nike Limited Edition sneakers was estimated to be worth around $338 million last year. And the market observers say that eBay probably represents about a quarter of the resale market (most sales take place privately, through Instagram, Twitter, etc).
To be clear – this isn’t a market that is frequented by high finance. This is a market driven by the street, and long queues of speculators waiting for Foot Lockers to open on the day of new releases.
If you’d like to read a bit more about this, you have to read this article: “You see sneakers – these guys see hundreds of millions in resale profits“. And entertainingly, this pre and post release date trading analysis for Nike’s What The LeBron 11 sneaker, which was released in September.
The big question being asked in most of these articles: “Why is Nike letting all this uncaptured profit go to waste?” Which, in my mind, is the wrong question.
Because surely the bigger economic question is “What the hell is going on?”
The pricing here is well outside our standard economic framework. If you believe that people buy shoes for walking, then there exist a host of great substitutes at far more reasonable prices. So clearly, we can’t talk about basic material needs driving the utility of a $2,109 used Air Yeezy 2 Red October Nike sneaker.
I think that we need to talk about another human need here. Maybe the prestige need. Or the status need. Or something else that’s just as psycho-spiritual.
The thing is, as a finance person, I’ve been taught to have an inherent distrust of any demand that’s driven by something other than superficially base living requirements. We prefer this kind of thing:
- Food stocks, because people need to eat.
- Construction stocks, because people need to have places to live and work.
- Manufacturing stocks, because people need things to be manufactured – like furniture for their houses, and cars for them to drive to work in.
- Mining stocks, because manufacturers need things to make into manufactured things.
- Financial services stocks, because everything needs to be financed.
- Health stocks, because people get sick.
- Bonds, because people need to borrow money.
The list goes on.
But what I’m saying is, I think we’re more comfortable about investing in businesses that are driven by a biological imperative: like the need for nutrition and shelter – and the supplementary needs that spring from them (like the demand for anything that enables us to address the need for nutrition and shelter).
This is probably a failure on the part of finance to grasp human nature. And it leaves us looking at any collector market as being inherently flawed and imminently at risk of being superseded and crushed by a pressing need to eat, or whatever.
But even if you’re of the school that believes people to be more animal than spiritual in their priorities, you can’t deny two things:
- The rich are getting richer – and they have no issue with meeting their biological urges.
- But also, almost everyone is doing better: our biological needs today are often met in abundance; gone are the dread diseases of yesteryear, and the debtors’ prisons, and the Dickensian sweat shops (at least, in the developed world); in most countries, the poor have access to some sort of welfare; and even if they complain about their status, they’re vastly better off than they would have been 150 years ago.
And once the physical self is satisfied, there are other sides that need attention. And how do we place a value on that?
The SWAG of the investing world
In the Slate Money podcast that I referenced earlier, Felix Salmon made a throwaway comment about SWAG, being the collective term in the investing world for Silver, Wine, Art and Gold. But I suspect that antique cars (hence the other mention), Nike sneakers, baseball cards and antiques would also fall into that category.
And the point Felix made is that these assets aren’t really assets in the strictest sense, because they don’t have cash flows associated with them. And therefore, to talk about intrinsic value is a bit of a misnomer – because you can’t do a proper Net Present Value analysis.
To me, this sounds like an echo of my earlier prejudice. Because there are at least two cash flows associated with SWAG assets: what you pay for them, and what you expect to get when you sell them. NPV analysis sorted.
Only, it’s not as nice an NPV analysis as the one you’d do for “real” assets, because you don’t get dividends or earnings or interest payments in between.
My question is: does it really matter though? Because any time you mention earnings, you’re doing just as much forecasting as you might do with the future selling price of an art piece. Both of those are ultimately driven by your view of future human needs. I’m just not sure that the difference between them is so clear cut.
The Consequence of Rising Tides
The world has changed.
In general, we have the health and the physical fulfilment to become decadent and, perhaps, more self-indulgent*. By that, I mean that we can be more academic in our tastes and more refined in the way that we satisfy them.
*There’s my inner puritan.
It will appear as though we’ve become less homogenous in our needs. And based on our older prejudices, we’re going to find ourselves looking at things and their valuations that seem bizarre and outlandish.
So firstly, I’m excited to see that.
But secondly, finance needs to catch up with the eclectic. And find a better way to value it.
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.