Articles

Michael Sheehan's Ferraris-online.com Article

Are Ferraris Booming or Bubbling?

The equation is simple: There is no lack of wealth chasing a fixed number of collectible Enzo-era cars

As appeared in:

Sports Car Market—June 2012 issue

Sheehan Speaks

by Michael Sheehan

1972 Ferrari 246 GT, sold for $214.5k — a record Dino price — at Gooding & Company’s Amelia Island auction
1972 Ferrari 246 GT, sold for $214.5k — a record Dino price — at Gooding & Company’s Amelia Island auction

The used Ferrari market has always been both a reflection of — and an overreaction to — the economy. When times are good, Ferrari prices rapidly rise, and when the economy is bad, buyers go into hibernation and prices fall.

Recent sales from Scottsdale and Amelia Island last month indicate that we are in a boom, but is it sustainable? As a speaker at the Hagerty symposium at Amelia Island, I was repeatedly asked whether we are in a bubble. I said that we are in the early stages of a boom.

Why are we in a boom and not a bubble? To understand the current business phase, we begin with a history lesson on the previous cycles.

The forgotten boom and bust

In 1973, the Western world endured the first fuel crisis, as gas went from 33 cents to $1 a gallon in the U.S. and much more in Europe.

The market was flooded with used exotics, with near-new Daytonas priced at $15k and Dinos at half that. All bad things eventually come to an end, and consumers painfully accepted $1-per-gallon gas

From 1975 to 1979, America’s economy and real estate markets boomed and inflation soared. The Ferrari market had its first boom, and in only five years — from 1975 to 1979 — the $15k Daytona became a $75k Daytona. In August 1979, party-crasher Paul Volcker became the chairman of the Federal Reserve. Volcker cranked interest rates to 21%, which killed inflation, the economy, the real estate market and the Ferrari market. By 1984, Daytonas were back to $50k.

Déjà-vu, all over again

As interest rates dropped in the early 1980s, the money markets stabilized, liquidity returned, and the economy again took off in 1985. Baby Boomers began celebrating their big “Four-O” birthday with a buying binge. When the Japanese came to the party in 1986, Ferrari prices spiraled onward and upward. By the end of 1989, a nice Daytona had reached $500,000.

But the 1985–89 boom was built on voodoo economics and massive debt. The Bank of Japan’s interest rates were at a (then) ridiculously low 2% to 3%, and massive liquidity flooded the Japanese market. The Japanese banks were offering an unbelievable 100%-plus financing against the appraised value of real estate. As the yen got stronger, anything outside Japan was half-price.

Back in the United States, on what is now known as Black Monday, October 19, 1987, the Dow started down, and by the end of October had lost almost 23% of its value, following the lead of Hong Kong, which fell 45%; Australia fell 41%, the U.K. fell 26% and Canada fell 22%.

While most people would guess the Ferrari market would be hard hit by the dip in the Dow, the death of Enzo Ferrari in August 1988 — and the end of the last of Enzo-inspired cars — invigorated the market. Investors pulled money from the stock market into collectibles, such as art, real estate and autos, so the Ferrari market kept climbing to the end of 1989.

Japan defies financial gravity

As other stock markets headed south during the late 1980s, the Japanese Nikkei index kept growing, reaching a peak of 38,915.87 on December 29, 1989. While Americans and Europeans had started to pull back from the Ferrari market, the Japanese were aggressive buyers and kept pushing prices upward. The crash of the Nikkei index in December of 1989, coupled with the following implosion of the Japanese real estate market, brought everything to a screeching halt. By 1994, our benchmark $500k Daytona was now $125k. Once again, a five-year boom was followed by a five-year bust.

By 1995, the Ferrari market had begun a slow-but-steady climb. That stopped in 2000, when the dot-com bubble burst and NASDAQ markets imploded. The market got another blow from the September 11, 2001, terrorist attacks. Despite that, the financial markets slowly gained strength through the early 2000s. By late 2007, our benchmark Daytona had crossed well over the $300k barrier.

The latest bust and boom

Then you-know-what again hit the fan in 2007, with the crash of the sub-prime market. The economy hit the proverbial wall in 2008, with the demise of Lehman Brothers and the freezing of the financial markets. The world entered the worst financial downturn since the Great Depression of 1929. If one had to sell, our benchmark Daytona was a low $200k car.

Collector cars tend to be a financial market indicator leader, and they tend to lead the economy’s recovery. In August 2010, the Monterey auctions paid proof to a collector car revival, with a whopping $172m in sales, up by $52m from 2009.

Those impressive results were reinforced at Scottsdale in 2011 with a very impressive $159m in sales. Monterey 2011 continued the turnaround, with total sales reaching the $200m mark, with the top-end cars leading the rally with Gooding’s sale of 250 TR, s/n 666, at $16.4m and RM’s sale of 250 SWB Competizione, s/n 2209, at $5.28m. The strength in the Ferrari market was in the very best cars.

2012 began with a bang as collectors spent $184m at Scottsdale, easily beating 2011’s $159m — and beating the all-time high of $163m set in the boom days of 2007.

The upward trend continued at Amelia Island with $59m in sales, up from $42m in 2011. The top end continued to boom, while the under–$500k Enzo cars took off, with 246 GTS, s/n 5820, selling for a staggering $363k at RM and 246 GT, s/n 3496, selling for $214.5k at Gooding. These are record Dino prices.

Is it different this time?

The rich world’s central banks are now in the “reflation trade,” which means they are printing money to revive and grow their economies — regardless of short-term inflation.

The United States and the United Kingdom have led the pack, but the Swiss joined the printing party late last year, while the Bank of Japan added billions of yen to their banking system to encourage growth through inflation.

The European Central Bank has pumped billions into the European banking system to provide liquidity. Investors have responded with a surge in buying “real assets” linked to growth (such as stocks) or to rising prices (commodities and collectibles).

All of this has helped to lift the overwhelming gloom that permeated the European economy mere months ago, although the Europeans are not yet buying in force. I predict that we are in the very early stages of another economic boom. My crystal ball sees good times and rising prices for the next two or three years, but five years out is simply too far to predict given today’s geo-political climate.

The caveats, of course, are what Donald Rumsfeld called the “known unknowns.” Black Swans such as an Israeli strike on Iran’s nuclear program, which could drive oil toward $200 a barrel — or another terrorist attack rattling the world’s economic markets — loom over all calculations.

Excluding these potential disasters, a lot of buyers just don’t worry about the relationship between the financial markets and the collector-car market. There is no real estate bubble to pop, the sub-prime disaster is being worked through, and many businesses are awash in steady profits.