Money Wears Prada
by Doug French: The
Fed Obliterates the Savings Ethic
doubts the world's central banks' ability to send excess liquidity
sloshing around the globe only has to look at the recent boom in
the area of art and luxury goods.
the case that cheap money flows to malinvestment.
While the monetary
authorities look to create jobs on Main Street, the money inevitably
flows to the latest speculative fashion, whatever it happens to
be. No two Austrian business cycles are exactly the same. Like lightning,
bubbles rarely strike the same sector twice.
the maker of high-end accessories every girl wants to wear or carry,
floated an initial public offering in Hong Kong priced at about
23 times estimated full-year earnings according
at the lower end of what some analysts believed the company would
go for, the Milan-based maker of Miu Miu handbags still raised $2.1
billion for a mere 16.5 percent of the company to grow its brand.
Sex and the City may be relegated to running sanitized episodes
in syndication, but company president and head designer Miuccia
Prada figures there's a boom somewhere and there are plenty of women
needing expensive bags. "It's where the future is," she
told the Wall Street Journal.
At the start
of the year, Prada had 319 stores open for business, with another
80 on the way this year. The company prospectus points to China
as the promised land for growth. "We are positive that the
Greater China region is going to be one of the most interesting
markets for the future of the luxury industry," Patrizio Bertelli,
Prada's chief executive, said Friday at a ceremony to celebrate
the company's stock-market debut.
an isolated case. Roman jeweler Bulgari was picked up for a 60 percent
premium by LVMH Moët Hennessy Louis Vuitton SA in March, reports
Grant's Interest Rate Observer. Two months later TowerBrook
Capital tripled its money, selling Jimmy Choo to Labelux.
Hennessy Louis Vuitton, the biggest luxury group in the world, is
also following the money to China. The New York Times reports
that last year, the company generated about 6.9 billion euros ($9.7
billion) in revenue in Asia, from its more than 800 stores. That
compares with 4.6 billion euros in revenue, and 570 stores, in the
are not just buying fashion. "The speed of the art market's
recovery is astonishing, but it's a differently revived market,"
Michael Plummer, a principal of Artvest told the WSJ. "The
lesson of the crash was to do your homework. Collectors feel wiser
for the experience."
in his book Boombustology,
provides an interesting sidebar with a chart of auctioneer Sotheby's
common stock going back to mid-1988, just before the final run-up
of the Japanese stock market. The Yale lecturer and global equity
investor tracks the ups and downs of Sotheby's common stock as a
proxy for booms and busts in the art market.
The stock price
for the auction house peaked as the Nikkei was peaking at the end
of 1989. It ran to higher highs as the Internet bubble was cresting.
Sotheby's ran to an all-time high of $61.40 with US house prices
in 2007. The shares have run up again since the '08 crash busted
the stock down to $6.05 with the China boom and the Federal Reserve's
QEs 1 and 2. Earning $2.34 a share in 2010, the stock traded smartly
in the $50 range in April, but it has since slumped to $40. "Even
the most optimistic among us would not have predicted such results
just one year ago," Sotheby's chairman Michael Sovern told
Back in April,
Kelly Crow reported in a piece for the Wall Street Journal,
Art Market Snaps Back," that the market would be tested
as $1 billion of Impressionist, modern, and contemporary works go
to auction next week.
that some buyers are shy this time, having been burned just a couple
of years ago.
more, flush and giddy, are just now joining in and paying little
attention to prices. As a result, the art market's current state,
while off from peak levels, still feels slightly breathless. Record
prices are being paid for individual favorites like Pablo Picasso,
whose "Nude, Green Leaves and Bust" sold at Christie's
last May for $106.5 million, the most ever paid at auction for
a work of art.
Art sales peaked
in 2007, when Sotheby's and its main competitor, Christie's, sold
a combined $11.3 billion worth. Two years later, in the wake of
the financial crash, total sales plunged to $4.8 billion. "Yet,
with a speed surprising both collectors and dealers, the market
regained much of its momentum last year, with the two houses combining
for sales of $9.8 billion," Crow reports.
the spring auction season, the New York Times' Carol Vogel
wrote, "Chinese and Russian could be heard in the Sotheby's
salesroom. ... But in spite of the presence of Prada-clad international
collectors, it was a tepid start."
But at the
end of the day, "while 'bidding was not euphoric,'" Simon
Shaw, head of Sotheby's Impressionist and modern sale in New York,
told the NYT "in most cases there was solid activity."
A week latter,
Vogel reported, "A mix of overly optimistic sellers and price-conscious
buyers made for a bumpy evening at Sotheby's sale of contemporary
art on Tuesday night."
Warhol's "Sixteen Jackies" went for only $20.2 million
with Sotheby's fees, below the $30 million that was hoped for.
But while zero
interest rates have only pushed the art market to ho-hum levels
in the Big Apple, in Hong Kong, buyers can't get enough. So far
in 2011, Sotheby's has moved $548.3 million worth during their Hong
Kong auctions, more than double the $271.3 sold in the first half
of last year.
money prefers Chinese paintings and ceramics to Warhols. "They've
now become among the top categories in the world," Sotheby's
Bruno Vinciguerra tells Grant's, "and they're growing so fast
that it's likely they will become the single-biggest category in
the world." After sales in these categories doubled last year,
they're doubling again this year, says Vinciguerra.
have been working hard to trade their renminbi for anything from
condos to beachfront villas in Vietnam for good reason. The
money supply has been growing at a rate north of 15
percent. In May the price of pork the meat preferred
by most Chinese increased
by over 40 percent from last year. And while the Chinese government
says prices are up 5.5 percent, the price of all food was up 11.7
percent in May from 2010.
While the view
exists that the Chinese economic mousetrap is a better one, Carl
Walter and Fraser Howie don't see it that way. "We do not believe
in Chinese exceptionalism," write Walter and Howie in Red
Capitalism: The Fragile Financial Foundation of China's Extraordinary
Rise. "If there are such things as economic laws, they
work just as well in China and for Chinese businesses as they do
in other markets."
authors cast a skeptical eye toward China's government-controlled
and propped-up banking system. Chinese bankers worry more about
pushing the money out the door than the prospects of getting it
back. As Jim Grant writes, "In China, the big banks don't formally
go broke. Rather, every 10 years or so, the state recapitalizes
them." Bad loans are shifted from bad bank balance sheets to
worse bank balance sheets, Grant explains. The Ministry of Finance
provides its guarantee to the bad loans at par, banking life goes
on, and the economic miracle remains alive, backstopped by the lender
of last resort, the People's Bank of China, levered at 1,233 to
based on cheap and plentiful money are as old as John
Law's system and the Mississippi Bubble. Easy money shortens
people's memories and dulls their (good) sense. This one will end
like all the rest, with the buyers of expensive art and luxury stocks
wondering once again, "what were we thinking?"
French [send him mail]
is president of the Ludwig von Mises
the author of Early
Speculative Bubbles & Increases in the Money Supply.
He received the Murray N. Rothbard Award from the Center for Libertarian
Studies. See his tribute to
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