Almost two years ago, I was introduced to the world of sneaker collecting/investing. There’s even a kind of stock market for the buying and selling of ‘deadstock’ sneakers (new, in-the-box, and never-worn). Looking back on what I wrote two years ago, I still think that this type of alternative asset class has something important to tell us about value, investing, and some of our own biases. So, sneakernomics: here’s an update.

The Sneakernomics Background

Two 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?“

On that Slate Money episode, Felix Salmon and company were talking about the contemporary art market; while the story on Planet Money dealt with the crazy market for Nike Sneakers.

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 something like 34 million sneaker auctions:

But that’s only vaguely impressive. If you really want to be impressed, you need to go and visit the Campless/StockX website, where you’ll be able to track volatility and price premium and availability levels.

Here’s an example.

The Air Yeezy 2 Red October: Back in 2014

When I last looked at this sneaker, it had only just been released. Some stats:

And data on volatility (!):

The 2016 Updated Version

Two years on:

That’s not a bad return there, if you managed to get the sneakers at retail price.

The Sneaker Market

The eBay market for Nike Limited Edition sneakers was estimated to be worth around $338 million in 2013. 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 mostly average people on 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 should check out this FiveThirtyEight article: “You see sneakers – these guys see hundreds of millions in resale profits“.

The big question being asked by most writers is: “Why is Nike letting all this uncaptured profit go to waste?” As in: there’s such a massive difference between the retail price and the resale price – surely Nike should want in on that action?

Which, in my mind, is entirely the wrong question.

Because the bigger economic question has to be “What the hell is going on?”

What the hell is going on?

The secondary market pricing for sneakers seems far outside our standard economic framework. If you believe that people buy shoes for walking, then there are a host of substitutes at far more reasonable prices. So clearly, we can’t talk about basic material needs driving the utility of a $21,000 Air Yeezy 2 Red October Nike sneaker.

So we’re forced to look around for another human need. 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 overtly-base living requirements. We prefer this kind of thing:

1. Food stocks, because people need to eat.
2. Construction stocks, because people need to have places to live and work.
3. Manufacturing stocks, because people need things to be manufactured – like furniture for their houses, and cars for them to drive to work in.
4. Mining stocks, because manufacturers need things to make into manufactured things.
5. Financial services stocks, because everything needs to be financed.
6. Health stocks, because people get sick.
7. Bonds, because people need to borrow money.
8. Etc

It just feels more comfortable to invest in businesses that are driven by a biological imperative.

But this is probably a failure on the part of finance to grasp human nature – because it makes any collector market look inherently flawed and imminently at risk of being crushed by a pressing need to eat, or whatever.

But even if you’re a fan of biological imperatives, you can’t deny two things:

1. The rich are getting richer – and they have no issue with meeting their biological urges.
2. And actually, almost everyone is doing better:
   1. our biological needs today are often met in abundance;
   2. gone are the dread diseases of yesteryear,
   3. and the debtors’ prisons,
   4. and the Dickensian sweat shops (at least, in the developed world);
   5. in most countries, the poor have access to some sort of welfare;
   6. and in general, we are all vastly better off than we would have been 150 years ago.

So now that we’ve mostly satisfied the biological urges, what happens next?

We find other needs to satisfy.

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 antique cars, Nike sneakers, baseball cards and antiques would also fall into that category.

And it feels like an exciting time to be investing in them.

Especially as your access can be as simple as the amount of time that you dedicate to standing in queues for sneaker launches…

Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, or like the Rolling Alpha page on Facebook at www.facebook.com/rollingalpha.