The Madness of Crowds

Back in the May 2004 issue of SCM, I wrote how muscle cars—Hemis in particular—had soared past comparable Ferraris.

In May 2005’s SCM, I noted that prices for muscle cars and post-war American show cars had risen faster than anything since the Ferrari glory days (glory if you got out in time, Titanic-sized disaster if you held on) of 1985–90.

Since May 2005, a very nice Daytona coupe has gone from $150,000 to $225,000 while Hemi ’Cuda coupes have spiraled ever upward to a nose-bleeding $1.5 million. The muscle car crowd continues to say “this time it’s different,” and that “these cars are all being sold to end users, not speculators.” Sorry, but I’ve heard that before.

I’ve survived four recessions; from 1973–75 (the first gas crisis); 1980–85 (21% interest, real estate tanked); 1990–95 (FDIC credit crunch, real estate tanked); and a mild one in ’00–’01 when the NASDAQ imploded and 9/11 changed our world.

Market run-ups are easy to trace. The Ferrari madness of 1985–90 was fueled by Japanese collectors with 2% bank money leveraged from a property bubble. Meanwhile, Baby Boomers (my generation) celebrated their “Big 4-0” by throwing money at Ferraris. Add in the fax machine, which allowed any car to be offered worldwide in hours, and speculation about Enzo Ferrari’s expected demise, and you’ve got the makings of a very frothy market.

Finally, combine it with the growing attraction of user-friendly events such as the Monterey Historic races and the Colorado Grand, where boys could display their new (and very expensive toys) and prices went mad.

After a run-up of 500%, the correction was ugly. Very ugly.

So let me tell you exactly what I think is going on right now. I believe that the marketing abilities of the American auction houses—fueled by America’s bizarre “reality-show” fascination with Speed television’s on-air auctions—have moved muscle-car prices to unsustainable levels.

Indeed, I think we have already entered the next turndown. Consider the Barrett-Jackson Arizona auction sales of approximately $34 million in 2004, $65 million in 2005, and $100 million in 2006. At this rate, to sustain this growth, the Barrett-Jackson number for 2007 must range between $125 million and $150 million. Where are those cars going to come from? How many days will it take to reach that goal? And if it isn’t reached, what message is that going to send to an audience that has been trained to see ever-upward results?

With a Hemi ’Cuda convertible selling for $2,100,000 at last year’s Barrett-Jackson auction, what figure will it have to hit this year to sustain the market’s expectations? $3,000,000? $4,000,000?

And as a secondary thought, how did prices on these cars ever get this high in the first place?

Muscle-cars appeal to the blue-collar crowd, and many upwardly mobile construction-workers-turned-contractors have grown rich in the decade-long housing boom. For the last half-dozen years the wealthy drywall contractor from Phoenix or cement contractor from Dallas could be counted on to support this muscle car market.

Muscle cars are a “one generation” 1964–1971, North America-only phenomenon, and with the exception of a few global eccentrics, an international muscle car market doesn’t exist. The muscle car market is out of whack because, at least to me, most of these cars have no inherent collectible value.

Ferrari has almost 60 years of international racing success in Formula One, GT racing and Sports Prototypes, while also building the ultimate transportation for those both sporting and wealthy.

But who are the famous muscle car coachbuilders? What world-famous race in a romantic location did they win? When will they go up the ramp at Pebble or Villa d’Este? What movie star or world celebrity picked them up at the factory when new? Who ever parked one in front of the Casino on Monte Carlo Weekend?

The auction houses’ ability to define “limited production” models by identifying two with twin aerials and a carpeted trunk is snake-oil salesmanship. Dodge, Plymouth, Chevrolet, and Ford made 100,000 other cars that look just the same.

Consider the current economic picture. Former Fed chairman Alan Greenspan engineered the greatest equity bubble (in absolute value) in history, but at a heavy price. While his supporters laud him for carefully engineering the “Goldilocks” economy (not too hot, not too cold), that long equity party was underpinned by debt—and debt by printing paper.

The US Treasury perpetuates the debt cycle every month, calling them Bonds and Notes, as the U.S. is still the only country capable of getting the rest of the world to accept unlimited pieces of paper. The concept of Federal fiscal responsibility is out the window when a single administration prints trillions of dollars and runs up trillions in debt. Now seven or eight Asian creditor nations “own” 50% of U.S. Treasury debt.

And thanks to Greenspan’s policy, many people are in over their heads, with low-entry adjustable rate mortgages. As the 3.5%, or 4.0%, or 4.5% short term loans roll over and become 5.5% or 6% loans, negative equity and defaults soar.

The American political system rarely looks beyond the next election, and most people don’t look beyond their next mortgage payment. But throw in the cost of a no-pay-as-you-go war, an illegal immigrant powder keg; a lame-duck President with an all-time low rating, (and I’m a Republican), an ever-widening gap between rich and middle income America, and a massive deficit, and a market correction is past due.

This author’s sale of 330 P3/4 S/N 0854 for $10,500,000 to Japan in September 1989, followed by the sale of 250 GTO S/N 3909 to Japan for $13,837,500 in November 1989 became symbols of the madness of the Ferrari market. I believe that such sales as the 1953 General Motors “Parade of Progress” Tour bus for $4,320,00 will represent the mad-money mark of American muscle and show cars from 2000–2006.

SCM Senior Editor and columnist Paul Duchene wrote a two-page profile of the bus and its sale in the April 2006 issue of SCM and opined in the second from last paragraph that this insane $4,000,000-plus is unrepeatable and the next one will sell for closer to $400,000. I believe that time will prove him correct, and if so, that’s a 90% correction or $3,600,000 “write-down,” one hell of a price to pay for 15 seconds of Speed television glory.

Some people argue the transfer of wealth from the saving generation (the Baby Boomer’s recession-raised parents) to the free-spending Boomers, will result in a “soft landing” for the muscle car market. Any landing you walk away from is a good landing, but this plane’s coming in mighty fast.

After 32 years of dealing in Ferraris, I’ve learned that when the market doubles, then doubles again, a correction is due. When a market doubles a third time, as the muscle car and American show car market has done, I’m glad I’m not a participant.

A Ferrari Daytona today at $225,000 is a gift from the gods, compared to a Hemi ’Cuda at $1 million-plus. Such a Daytona costs less than half its 1989 high and most Ferraris are bargains relative to the inflation rate from 1990 to 2006.

Excluding the ultra exotic 250 TdF-SWB-GTO-LM, Ferrari collector cars are up less than 100% in almost a decade, a sustainable rate.

I own three Ferraris, (212 S/N 0147, 365 GTB/4C conversion S/N 12681, and 308 SCCA GT-2 S/N 20537) and I mulled over selling them. Given the modest increase in the last decade, anything I might “make” by selling them would be offset by the cost of buying similar cars later… even at a reduced price. Their values could not drop enough to recoup the “spread,” especially when one considers the real cost of selling cars today, then buying cars later, with California’s 8% sale tax, 2% registration, etc.

What that means is that these Ferraris have settled in to a consistent market value, with very little speculation. In short, a healthy, predictable market.

And their inherent values are based on fundamentals. Decades of championship wins, celebrity ownership, technological sophistication, famous coachbuilders, and international recognition as the automotive icon of the 20th century. That’s a lineage no weekend burgerland-cruise-in muscle car can touch.