Everyone is aware of the surge in asset prices for real estate and art—two Manhattan condos recently sold for $90m, and a Francis Bacon painting changed hands for a cool $142.4m—but less attention has been paid to the car market. This month, a 1962 Ferrari 250 GTO sold for an eye-watering $38.1m. The price is not a fluke either, as numerous records have been set recently in the collector car market, a sign that cars, like art, are becoming an alternative asset class. For instance, sale prices at Pebble Beach Concours d’Elegance, an annual car auction that is the premier venue of its kind, were up 28% this year to $400m. “Without exception, we’re seeing every segment of the market, and nearly every model, hitting new all-time highs,” said a major collector car insurance executive. The rise in prices has led to concerns that the market may be in a bubble, stoked my low interest rates and central bank manipulation.
FINSUM: One aspect that often gets overlooked when considering whether these alternative asset classes are in a bubble is the question of wealth concentration. According to the Economist, the number of American multi-millionaires has risen 70% since the Financial Crisis, while wages have remained flat on average. That means there are simply more people who can afford such cars—a sign that the market might be here to stay; unless of course you expect wealth stratification to revert.
The recent announcement that Scottish voters were rapidly joining the “yes” campaign, meaning they are in support of independence, has spooked UK markets. Sterling sold off, down 0.5% against the Dollar, and options buying surged for contracts near the September 18th vote. Analysts believe Sterling could trend down from the current 1.65 to the Dollar to near 1.50 should Scotland choose to leave. UK Gilt yields also rose a modest 4 bp on the news. Shares of UK and Scottish bank stocks also tumbled on the announcement, as well as those of the Scottish energy company, SSE. The market movements signify that investors are finally realising the threat that Scottish independence holds to the UK economy, and the country’s EU membership in general.
FINSUM: As it concerns financial markets, the real issue with Scottish independence is its ambiguity. Should Scotland vote “yes”, what would that mean exactly? What implications would it have for the country’s debt, North Sea oil revenues, banking supervision, Sterling etc.? These questions vex investors, and the fact that the UK government says it has “no contingency plans” only makes matters worse.
Unbeknownst to most, the Ukraine crisis has had a surprising effect on the important global palm oil market—it has caused it to tumble. Palm oil is an important ingredient in a wide range of products, from soap to food, but recently, a glut of sunflower oil has lowered wholesale demand for the substance. Ukraine and Russia have both seen bumper sunflower crops this year, and because of the turmoil in the region, have been eager to sell it immediately, creating a wealth of global supply that has hurt palm oil prices. That is bad news for economies like Indonesia and Malaysia, who together produce 80% of the world’s palm oil. The declining prices have huge implications for Indonesia, as much of the country’s banking portfolio is backed by palm oil, meaning the asset quality of the country’s banks is declining rapidly. Palm oil prices have fallen 30% this year.
FINSUM: While this news may be very poor for Southeast Asia, it is great news for European food suppliers like Nestle, who are seeing the lowest prices in years for one of their principal raw materials.
Banks are beginning to protest over the new potential imposition of Basel capital rules which they say would make equity swap and borrowing transactions 4x to 5x more expensive than at present. Such transactions are massively important, as they are the mechanism which allow for investors to freely “short” certain stocks by selling in the market after borrowing them. Essentially, the banks do not want equity borrowings to be considered loans, as that would put them in a much riskier category for Basel III purposes, and mean that costs would skyrocket. The market for equity borrowing is quite large, with $760 bn of equities currently on loan in the market. The segment is a highly profitable one for banks, as it is an area where they can make hedged profits. Banks say the new rules would push equity borrowings into the shadow banking space and increase systemic risk.
FINSUM: This is a seemingly mundane but very significant story. Short-selling is considered a fundamental mechanism for fair market pricing, but if costs were to skyrocket, there would likely be much less of the activity.
Even a casual onlooker has noticed that the art market is surging—valuations are very high, there are plentiful buyers, and the market is developing into a professionalised asset class. However, despite the high sales, major auction house stocks like Sotheby’s and Christie’s are suffering, with the former down from $53 in January to $41 today. Heavy criticism of Sotheby’s by Dan Loeb might explain the stock’s weakness, but other auctioneers, like Poly Culture Group, which is China’s third-largest house, has seen its share price fall 14% since its IPO in May. Evidently, there are two main issues driving the share price declines. Firstly, despite high sales prices, the houses make little on individual high-priced items—it is volume that is needed, and they have not been able to create that. Secondly, investors’ obsession with “scalability” has made the auction house model look less appealing as the companies always need to fight for the next item to sell, and physical spaces of auction mean only so much can ever be sold.
FINSUM: This is quite an interesting story on the stark divergence between the art market, and the businesses that drive it. Despite the former’s success, the latter is ailing.
A new Reuters story has exposed a major link between western firms and the shadowy Chinese fund management industry that could threaten the financial system. In 2012, western firms were allowed to establish joint ventures with Chinese fund management companies in order invest in the country. As such, many firms, including CITIC Prudential, UBS SDIC, State Street Global Advisors (SSGA), Invesco Great Wall and Bank of Communications Schroders, partnered with Chinese firms and began issuing high risk loans to subprime borrowers. The Chinese fund management companies (FMCs) often operated at arms-length, with little oversight from the foreign parent, and apparently made highly risky loans from 2012 onwards. Analysts say the Chinese government opened the door to foreign entry “after all the pretty girls were taken”, meaning that all the solid borrowers had already accessed credit, leaving only those at the very bottom of the barrel to which to lend. Many wealth management defaults in China have been rescued by the government, but there is no precedent for saving a foreign-backed fund management company, which may mean western parents will be on the hook to bailout their partners.
FINSUM: This is a very conclusive link of how the developing Chinese financial storm could engulf western firms. The list of companies above is far from exhaustive, and many large companies may be in the same position. This is one to keep an eye on.