Millionaire’s Portfolio: Collectibles are the Rage

From the CNBC

Collectibles are all the rage. From the $120 million hammer price for the pastel of Edvard Munch's "The Scream" to the run-up in prices for diamonds, wine and antique cars, the collectibles market (or “passion investments” or “treasure assets”) is booming on the back of demand from wealthy investors.

For the rich, Burgundy and sapphire are the new black.

But financial expectations for collectibles may be surpassing reality.

A new report from Barclays Wealth shows that among global investors with more than $1.5 million in investible assets, collectibles and precious metals now account for 9.6 percent of their total wealth. The numbers are even higher in the United Arab Emirates (18 percent) and China (17 percent).

As Barclays points out, wealthy investors like collectibles because they want “tangible, scarce and non-fungible investments" that “could provide a stable store of value in uncertain times.”

Yet Barclays says that “the world of collectibles thrives on fairy tales” like "The Scream" sale, calling collectibles markets “riddled with inefficiencies, "frequently opaque and illiquid," and "extremely volatile and risky.”

Reasons for the growth of collectibles as a share of the portfolio of the millionaires, according to Barclay: Emotions, Hidden Cost, Opaque Markets, Correlation and illiquid.

Yet it would seem misguided to lump arts, wines, precious metals and jewelries as a single asset ‘collectible’ class, as the utility and reservation demand functions of these items are different.

Some of the wealthy people will buy because of aesthetics, enjoyment and or for social status.

But it isn’t a ‘fairy tale’ when wealthy investors say that they had opted for ‘collectibles’ out of “tangible, scarce and non-fungible investments" that “could provide a stable store of value in uncertain times.”

Bluntly put, 'collectibles' represents as insurance against counterparty risks and are ‘real’ assets for the millionaires.

What truly will be exposed as fairy tale are the colossal financial claims at the fractional reserve banking system. The euro debt crisis signifies an ongoing manifestation of such a process.

Thus, the increased exposures by millionaires on 'collectibles' reflect on the present economic and financial realities.

Wine Market as Bubble Meter

I previously pointed out that the Art Markets can signal the phases of a bubble cycle here and here

The wine markets appear to be manifesting some signs too. That’s according to this report from Bloomberg,

Surging demand for Chateau Lafite and other French trophy labels, especially from Asia, has pushed both prices at auction and wine futures to records. Not all wine dealers are happy.

The prices for some of the most expensive bottles are starting to discourage even billionaire collectors, said dealers -- some of whom had warned in January of a bubble that could burst in 2011. Chinese and other buyers balked as some Bordeaux producers raised prices as much as 80 percent last month for the new vintage offered “en primeur,” when it is still in barrels.

“En primeur sales have halved,” Simon Staples, fine wine and marketing director of the London-based merchants Berry Bros & Rudd, said in an interview. “It’s a combination of high prices and the fact that the chateaux released less than last year.”

Sales growth is also slowing at auctions. Takings at the biggest three wine auction houses in the first six months of 2011 were up by 46 percent on the same period in 2010, according to Bloomberg calculations, down from the 88 percent sales increase in 2010…

Chinese consumers continue to spend millions on older vintages in bottles at specialist auctions. Sotheby’s (BID), Christie’s International and Acker, Merrall & Condit took a record $258.3 million in wine sales in 2010, more than double 2009. About two-thirds of the most expensive lots were selling to Asian bidders, according to both Christie’s and Acker.

Wealth from globalization is one thing. Conspicuous consumption from boom bust cycle is another. One would know the difference ex-post or after the bust.

(hat tip: Dr. Antony Mueller)