Making Method Out of the Madness: A Different Viewpoint on Today’s Collector Car Market

In late April, RM Auctions sold a mint Ferrari 330 GTS for nearly $2 million. One month later a one-off Aston DB4 GT (the very cool Bertone-designed Jet) found a new home for a shade under $5 million, just a couple weeks before a Ferrari 340/375MM sold for $13+ million at Villa d’Este. Then Bonhams blew those prices out of the water when a 1954 Mercedes-Benz W196 F1 brought $29.6+ million, setting a world record price for a car at auction.

To illustrate how far (and how quickly) the market has moved, not quite two years ago a friend and client was itching to buy a 330 GTS. I found him several examples in comparable condition to RM’s car, and all were priced at $900,000-$1 million. In other words, in less than 24 months that Ferrari model doubled in value.

That and a lot more adds up to a memorable road car, one that delivers a very tasty experience that can only be found in the 330 GTS. Throw in those elegant lines, a production run of only 100 examples, and you have a road car with strong intrinsic value. But is that enough to make 330 GTS prices double in less than two years? We’ll come back to that thought in just a moment.

So what’s up with these seemingly nutty prices, and soaring market movements? McKeel Hagerty is president of the collector car insurance company that bears his name, and is one sharp cookie whose firm may well have the world’s best database on real time market information. They see where cars are going, and what people feel they are worth when they purchase them, and place insurance on them. “All around the world,” he told me recently, “many economies have had pockets where tremendous wealth has been created. A lot of the newly wealthy are discovering ‘rich people toys,’ and collector cars are high on that list. So they are buying them in a big way.”

A conversation I had with noted Mercedes restorer and Pebble Beach judge Scott Grundfor confirmed the trend. He spoke about being contacted by, and then meeting a wealthy Russian who was doing his homework before jumping into the collector car market.

Helping to lure fresh money into the market is “top event organizers have raised their game so that now more people want cars to take part in them,” says classic car specialist Simon Kidston, who probably has more frequent flyer miles than anyone I know. “There are also a number of countries such as Great Britain and Switzerland that have an absence of capital gains taxes on cars.”

Then there’s what Don Williams calls “the 30 year rule.” Williams has been dealing in collector cars since the early 1970s at the very highest levels, and says, “You need to look at what people lusted after in their youth. A guy who is 50 right now will be looking at things from when he was around 20. Older, wealthier collectors are doing the same—going after what they fantasized about when they were young.”

No doubt these factors are goosing the market, but I feel they can’t completely explain a 100% increase in 330 GTS prices in such a short time, let alone the nosebleed, telephone book numbers of the Mercedes and MM. In the past I’ve written about how certain cars have become an asset class, and how a good number of collectors view their cars as a form of currency. Now there seems to be a new foundation underneath all these factors, one that is influencing values in a big way.

Now we’ll go to Commodity B. The one-off Aston DB4 GT “Jet” was done by Carrozzeria Bertone back in 1961, and is seen here at Pebble Beach in 1989 (where it won its class). The Jet sold for nearly $5 million at Bonhams not too long after the 330 GTS sale.

To illustrate this emerging trend, how would you answer the following question: Ten years from now, do you think the purchasing power of the money in your wallet will be more, the same, or less than it is right now? I’m guessing probably 100% of you said “less” (some may have even thought “a lot less”), and therein lies the catalyst behind the market’s parabolic push—around the globe there is a quiet, slow, almost invisible but continual loss of faith in the money we use every day.

To see how this works, let’s view the current car market as commodities, rather than the “collector cars” we are so passionate about. So, we’ll have “Commodity A” be the previously mentioned 330 GTS.

For a bit of background on Commodity A, its coupe brethren (the 330 GTC) is widely considered one of Ferrari’s best all around cars ever. Back in 1966-68 when it was new, you could have used a GTC as your only car, it was that well mannered. It had elegant understated styling but was a real stormer when you put your foot in it, and the few cars that were faster weren’t nearly as comfortable and civilized. So, if we remove the GTC’s roof to make the 330 GTS, and reduce the production numbers by 5/6 to 100, the desirability quotient rises considerably.

Now we’ll examine Commodity B. Since I presented several 330 GTS to that client back in 2011, approximately 1.5 trillion new dollars have been created. So if you have a Commodity A of which there can be a maximum 100 examples with a strong intrinsic value (and is hard to replace), and Commodity B of which 1.5 trillion came into existence at the snap of someone’s fingers, the relationship between those two commodities has to change.

I feel this aberration, more than anything else, is what’s behind the market’s amazing move—a quiet but continual loss of faith in our currency, and in the way our monetary system is working. Don’t agree with me? Then please recall your (very likely) answer to the question on the purchasing power of your money. This is how it all begins, with a change in mentality, and it doesn’t matter whether we’re talking greenbacks, euros, yen, British sterling or even Swiss francs. Almost every western central bank is printing money on a massive scale, and history shows in times of crises (and I firmly believe we are in the early stages of a currency crisis, one that will take some time to play out), the wealthy move their money into hard assets that have real value.

Today, those folks are plowing their capital into a new form of hard asset—A-list collector cars. Unlike real estate, this asset can be moved anywhere in the world, and demand for it is soaring at the same time the money supply is rapidly expanding everywhere.

The three charts below will illustrate the relationship. The first shows Hagerty’s Blue Chip Car Index, an aggregate composed of 24 vehicles (including 3 Shelby models, 3 Ferraris, Aston DB5, Lamborghini Miura SV, BMW 507, Jaguar D-type and some interesting, less obvious choices such as a Tucker, Toyota 2000 GT, and Iso Grifo Series II):

We’ll start with this chart, which comes courtesy of classic car insurer Hagarty. As their “Blue Chip Automotive Index” shows, general prices (like most everything everything else) took a hit during the recession, and bottomed in the summer of 2009. The ramp up since then has been pretty steep. No doubt some of that appreciation can be explained by people hitting peak earning years and such, but I feel that’s not enough to goose 330 GTS values into doubling in less than two years, let alone the newfound regularity of auction houses seeing seven (and even eight) figure lot prices.

Now, here’s a chart from the St. Louis Fed on the M1 Money Supply (currency in circulation, plus demand deposits [checking accounts], travelers checks, etc.):

Rather, the underlying foundation driving everything (including more people pouring into the collector car market) is found here. This chart is M1 money supply (currency in circulation, checking accounts, etc.) as reported by the St. Louis Fed. M1 has increased by $1 trillion in the last four years, which was right around the time car prices turned upward. And the Fed is not alone in inflating the amount of currency in circulation, as almost every major western central bank (including the Swiss!) has been printing on an enormous scale. Even more telling is…

Some feel M2 (M1 plus savings accounts, money market funds, money market mutual funds, and CD’s under $100,000) better defines all the money in circulation. The M2 chart from the St. Louis Fed looks much the same as M1:

… how M2 (M1+savings account, money market funds, etc.; we’ll call this “Commodity D”) has increased by $2+ trillion since 2010. So what does monetary policy have to do with car values? Everything, for this simple reason: Commodity A, of which only 100 exist (330 GTS), Commodity B of which only one exists (DB4 Jet), and Commodity C of which 14 were made (Mercedes W196), all have strong intrinsic values and production numbers that cannot be increased. On the other hand, 2.4 trillion units of Commodity D has come into existence in the last 42 months at the push of a button. Therefore, the relationship between Commodity D and Commodities A, B, and C has to change. That’s why, in a nutshell, this price boom is far from over.

The correlation between these is…how shall we put it…interesting, to say the least.

A coincidence in the direction of the movements? I think not, for in the decades prior to Lehman Brothers’ meltdown in September 2008, putting money in the bank typically yielded 4-5%. Back then we weren’t seeing 100% appreciation on cars in two years—and especially on non A-list cars (I’d rank the 330 GTS as B grade).

Today, a savings account or 1-month Treasury yields around 0.03%. That’s less than 1/100^th of the return pre-Lehman. Should you want to tie up your capital for five years in a Treasury note, the yield is less than 1.9%. So, when looking at real interest rates (yield minus inflation), you are actually losing money when trying to save for the short or medium/long term.

I’ve spoken with enough of the big boys to know this definitely affects their mentality—the rules of capital preservation and safe investing that existed for decades no longer apply. It’s simply another facet that is slowly eroding their confidence in currency as a store of value, especially when the Fed’s continual buying of the vast majority of Treasury bonds (and not market forces) is dictating interest rates—and they are far from alone in this type of action.

For these reasons and many more, none of today’s eye-popping numbers surprise me; in fact, shortly after Bonhams announced the Mercedes was going up for sale, I told Jakob Greisen (Bonhams Head of Business Development) I thought it would bring $20-30 million. Why so high when the pre-auction estimate was less than half that? By viewing everything from the paradigm of comparing one commodity (collector cars) to another (paper money/beginning currency crisis viewpoint), the parabolic upward move starts to make some real sense.

Or dollars and cents, as the case may be. “As long as the central banks continue to devalue their currencies,” UK-based classic car specialist Andrew Hall so beautifully summed up at Villa d’Este, “I will be selling collector cars.”

At some point there will be a decent pullback (parabolic moves never end prettily), prices will consolidate, and then the climb will resume. But I believe it is still far too early for such a correction, so outside some type of black swan event the auctions next month in Monterey should knock it out of the park.

For background on currencies, money printing and economics, here is some suggested reading I found most helpful:

• Boomerang by Michael Lewis
• The Big Short by Michael Lewis
• Famous Financial Fiascos by John Train
• Endgame by John Maudlin
• This Time Is Different by Carmen Reinhart and Kenneth Rogoff
• Currency Wars by James Rickards
• The New Empire of Debt by Bill Bonner and Addison Wiggin

The 1967-68 330 GTS (which we'll dub "Commodity A" for our discussion) is arguably one of Ferrari's best all around cars. At RM's auction in late April, one in condition better than the car shown here sold for a shade under $2 million. What was behind that surprising, eye-popping price?

One reason is the surroundings when driving. Functional, elegant, understated and quite comfortable, this is a marvelous place to spend several hours getting away from it all, or simply running errands.

Then there's that fabulous V12. Loaded with personality, this charismatic engine effortlessly sings all the way up to 7,000 rpm, belting out a melody that sounds like an orchestra pit filled with precision sewing machines working perfectly in concert. And lets not forget the four exhaust trumpets at the rear...

That and a lot more adds up to a memorable road car, one that delivers a very tasty experience that can only be found in the 330 GTS. Throw in those elegant lines, a production run of only 100 examples, and you have a road car with strong intrinsic value. But is that enough to make 330 GTS prices double in less than two years? We'll come back to that thought in just a moment.

Now we'll go to Commodity B. The one-off Aston DB4 GT "Jet" was done by Carrozzeria Bertone back in 1961, and is seen here at Pebble Beach in 1989 (where it won its class). The Jet sold for nearly $5 million at Bonhams not too long after the 330 GTS sale.

We'll start with this chart, which comes courtesy of classic car insurer Hagarty. As their "Blue Chip Automotive Index" shows, general prices (like most everything everything else) took a hit during the recession, and bottomed in the summer of 2009. The ramp up since then has been pretty steep. No doubt some of that appreciation can be explained by people hitting peak earning years and such, but I feel that's not enough to goose 330 GTS values into doubling in less than two years, let alone the newfound regularity of auction houses seeing seven (and even eight) figure lot prices.

Rather, the underlying foundation driving everything (including more people pouring into the collector car market) is found here. This chart is M1 money supply (currency in circulation, checking accounts, etc.) as reported by the St. Louis Fed. M1 has increased by $1 trillion in the last four years, which was right around the time car prices turned upward. And the Fed is not alone in inflating the amount of currency in circulation, as almost every major western central bank (including the Swiss!) has been printing on an enormous scale. Even more telling is...

... how M2 (M1+savings account, money market funds, etc.; we'll call this "Commodity D") has increased by $2+ trillion since 2010. So what does monetary policy have to do with car values? Everything, for this simple reason: Commodity A, of which only 100 exist (330 GTS), Commodity B of which only one exists (DB4 Jet), and Commodity C of which 14 were made (Mercedes W196), all have strong intrinsic values and production numbers that cannot be increased. On the other hand, 2.4 trillion units of Commodity D has come into existence in the last 42 months at the push of a button. Therefore, the relationship between Commodity D and Commodities A, B, and C has to change. That's why, in a nutshell, this price boom is far from over.