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Ouch! The Wine Bubble Blows Up

testosteronepit's picture





 

Wolf Richter   www.testosteronepit.com

Disclosure: I’m biased. I love wine—almost as much as I love craft brews—but I’m leaning towards Californian wines; they’re awesome and grow in my extended neighborhood. More precisely, I love drinking wine, not keeping it locked up in a refrigerated vault, and certainly not investing in it. Hence, I have little sympathy for those who got the timing wrong when they bought high-dollar French wines for the sole purpose of investing in them, instead of drinking them, and I certainly don’t feel sorry for them in their plight. But a plight it is.

It all has to do, like so many things, with the China bubble, and central banks.

Wine as an asset class, if you will, didn’t do much until the China bubble got going seriously and rich Chinese began piling into the market: from the summer of 2005 through the Beijing Olympics in 2008, the asset class skyrocketed 152%. But then the world experienced the Lehman Moment, and from September to December that year, the asset class plunged 22.3%.

The fact that wine could fall off a cliff like this scared central bankers around the world, and they dusted off their printers, plugged them into their 440-volt outlets—these are big industrial machines, not desktop devices (see video link at the bottom)—and they started printing money to buy up assets of whatever kind, possibly even wines, which would explain their drunken stupor at the time. As all this freshly printed money out there was searching for a place to go, it created numerous bubbles, and revived others that had been gasping for air. Including the wine bubble.

And so, from December 2008 through June 2011, the wines rallied another 76%. What a ride! That June, as we can see from the graph of the Liv-ex Fine Wine 100 index, was the peak of the wine bubble.

 

 

The Liv-ex Fine Wine 100, calculated monthly, is the “fine wine industry’s leading benchmark” and represents the price movement of 100 of the most sought-after wines, largely Bordeaux, “a reflection of the overall market,” but it also includes wines from Burgundy, the Rhone, Champagne, and Italy (but not from California). Now the index is back where it was just before the Lehman Moment, a 27.3% plunge. Thin mountain air appears to be all that’s underneath it.

The Liv-ex Fine Wines 50 tracks the daily price movement of the most heavily traded commodities in the fine wine market—the last ten vintages of the five Bordeaux First Growths, namely Haut Brion, Lafite, Latour, Margaux and Mouton. And it delineates the dynamics of the wine bubble in even more gruesome terms.

 

 

It powered up 63% from February 2010 (limit of data) to June 28, 2011, the peak of the bubble. By September it had dipped 8% - 10%, when Chinese bottom fishers jumped back in, smelling with their legendary accuracy a huge opportunity—and in such a manner that the LA Times reported:

The real clamor in China is for high-end French reds, which enjoy unparalleled cachet. A Chinese buyer spent an astonishing $540,000 in September on a single lot of 300 bottles of Chateau Lafite Rothschild at a Christie’s auction in Hong Kong.

Alas, he ended up grabbing a falling knife and getting his fingers sliced off. Based on the Liv-ex Fine Wine 50, he lost 27% so far. From its peak through Friday, the index plunged 33.1%; on Friday alone, our hapless Chinese investor lost 1.6%. But unlike stocks, you can always drink your asset and drown your sorrows.

And yet, drinking it is precisely what these investors fear the most because their investment might be ... counterfeit. A “large industry issue,” particularly in China. Making money on fake fine wines is lucrative, and common. Methods range from refilling empty bottles of famous Bordeaux to sticking fake labels on cheap bottles. Less sophisticated Chinese consumers might not be able to tell the difference. And investors who keep their wines locked up rather than drink them? A devastating thought—and investors have lost confidence.

The industry is trying to combat this. Some wine makers implant NFC chips into their labels. When scanned with a smart phone, a website shows information about the wine and confirms its authenticity. Auction house Christie’s breaks its empty bottles with a hammer after wine tastings in Hong Kong and China so that they can’t be sold on the black market and refilled. But these measures might not be able to offset the double whammy of a pricked bubble and of counterfeit assets that are wreaking havoc on investor confidence—and on the value of their assets, fake or not.

Also read.... Fishy Economic Data and the China Crash.

Wine production in China has been on a stellar trajectory. While much of it might not meet our preferences, or safety standards, some of it made it to a stunning wine competition. Read.... Merde! Chinese Wines Did What to French Wines?

And to round off the weekend with humor, here is a hilarious video from down-under comedians Clarke & Dawe that sums up in 2½ minutes the true nature of Quantitative Easing.

 


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Mon, 07/09/2012 - 12:00 | Link to Comment Gimp
Gimp's picture

Wine, yes wine myfav topic.

I would argue that you are better off buying an expensive California red then over priced Bordeaux.

Why?  Back in the 1850's Bordeaux had a nasty fungi attack that wiped out most of their crops. To save the vineyards they imported Californian vines and grafted them onto their remaining vines. (U.S. vines were resistant to the fungus at the time)

Merd you say...today the expensive Bordeaux are born from California root stock..

FYI -  To this day, to keep fungi at bay, French use a mix of sulphur and lime..known as the Bordeaux blend. Allergies anyone?

 

Mon, 07/09/2012 - 10:57 | Link to Comment TrumpXVI
TrumpXVI's picture

So, wine prices are deflating like prices in all the other collectable categories.....REALLY?  Whodathunkit?

Mon, 07/09/2012 - 09:52 | Link to Comment yabyum
yabyum's picture

You can get great  wines from Argentina ( Malbecs).  Why no one has talked about PBR by the cubit at Costco is beyond me.

Mon, 07/09/2012 - 11:35 | Link to Comment covert
covert's picture

this is similar to when the japanese were buying french paintings.

http://covert.ias3.com/expose/

 

Mon, 07/09/2012 - 09:35 | Link to Comment Shizzmoney
Shizzmoney's picture

Well, at least it's not a complete bubble; at least you CAN drink the fucking stuff.

You can't, however, eat worthless pieces of green paper.

Mon, 07/09/2012 - 07:47 | Link to Comment SmoothCoolSmoke
SmoothCoolSmoke's picture

Wine?  Make your own.  I do.  Quality?  Equal to a $10-12 bottle.  Cost?  Less than $3/bottle.  

Mon, 07/09/2012 - 08:32 | Link to Comment slaughterer
slaughterer's picture

DRC and Lafite to the moon! Uh, wait a minute...

Mon, 07/09/2012 - 06:20 | Link to Comment falak pema
falak pema's picture

if you know anything about wines you only enjoy truly buying and drinking local wines which have character and ARE not in the category of the so called fine wines. The big names are now marketed way above their true value.  Stay simple, stay authentic, stay local; there is such a variety of wines out there! 

From 5 euros to 30 euros and never pay more if you respect your local hide as connaisseur of a region. But then I come from a place where variety is the spice of life in this domain.

Mon, 07/09/2012 - 06:20 | Link to Comment Snakeeyes
Snakeeyes's picture

Not where I live. wine prices keep rising (taxes).

Mon, 07/09/2012 - 05:59 | Link to Comment Henry Hub
Henry Hub's picture

They say there's a thin line between a wine connoisseur and a wino.

Mon, 07/09/2012 - 03:28 | Link to Comment Fred C Dobbs
Fred C Dobbs's picture

A friend of mine said once said when choosing wine, white shirt, white wine; red shirt, red wine.  It made me laugh.  

Mon, 07/09/2012 - 02:51 | Link to Comment AnAnonymous
AnAnonymous's picture

I browsed quickly through the article to see the number of references. The old article is referenced.

The article on Portugal and Spain triggering a new wave of colonization in Angola and Spain, never seen it referenced once.

Never got mentioned once more.

Free press. The focus of the news is determined by US citizens.

Mon, 07/09/2012 - 04:32 | Link to Comment TheFourthStooge-ing
TheFourthStooge-ing's picture

Hey AA, which wine goes best with roasted panda and stir fried Shar Pei?

Mon, 07/09/2012 - 06:44 | Link to Comment AnAnonymous
AnAnonymous's picture

Maybe Rhodesian wine or Inuit wine...

Mon, 07/09/2012 - 09:46 | Link to Comment False Capital
False Capital's picture

How did African citizenism work out for the Rhodesians?

Mon, 07/09/2012 - 02:34 | Link to Comment silverdragon
silverdragon's picture

There is hope for the Californians yet, the Chinese are buying larger and larger quantities of wine. As the dollar debases US wine becomes cheaper and sales will go up.

The US needs competent trade guys like Australia, wine growers get money from Govt to cover costs of travel to new markets, promotional materials etc. It was a wise govt. investment that paid of massively.

*99% of govt people need to be culled.

Mon, 07/09/2012 - 06:32 | Link to Comment AUD
AUD's picture

I once worked in a fine wine store. The consensus was that Californian wine was shit. But I still say even Californian wine has a greater marginal utility than $.

Mon, 07/09/2012 - 02:25 | Link to Comment ebworthen
ebworthen's picture

Kamchatka Vodka is great stuff, especially mixed 60/40 with Jagermeister.

Mon, 07/09/2012 - 11:45 | Link to Comment chumbawamba
chumbawamba's picture

Note to self: decline invitation to party with ebworthen.

-Chumblez.

Mon, 07/09/2012 - 02:21 | Link to Comment Joe A
Joe A's picture

Wine is there for drinking, not for lying on a shalfe! The problem with a lot of wines in the world nowaydays is that they are designed to always taste the same. That entails that a predesigned taste is acquired by mixing blends. That in the wine tasting world is boring. Wine is a living thing, depends on grape, terrain, soil, weather, etc. Wine that does always taste the same will bore you after a while. Wines should always surprise you.

Mon, 07/09/2012 - 02:22 | Link to Comment mt paul
mt paul's picture

Kashgar in the fall

on the edge of the Talamakan desert

had a delightfuly dry red wine 

made from local grape and vineyard...

would drink well 

with barbecued walrus 

Mon, 07/09/2012 - 01:31 | Link to Comment Temporalist
Temporalist's picture

I'd like to submit that there is more to this story including the growing popularity of wines outside of historically popular wine regions and the national pride for regional wineries.

 

Chinese wine wins top honour at Decanter World Wine Awards

"For the first time in the history of the Decanter World Wine Awards a Chinese wine has won at the highest level."

http://www.decanter.com/news/wine-news/529090/chinese-wine-wins-top-hono...

 

Chinese appetite boosts wine sales

"In the past 18 months China switched from being a buyer largely focused on bulk wine to paying good money for quality Australian bottled brands.

Chinese demand helped drive a 5 per cent rise in the average price of Australian bottled exports to $4.31 a litre in 2011 - the best price in more than two years.

A whopping 23pc lift in the value of Australian wine sales to China last year also propelled the Asian giant to become our third most lucrative destination for overseas sales (worth about $201 million), ahead of Canada and New Zealand."

http://www.chinabevnews.com/2012/03/chinese-appetite-boosts-wine-sales.html

 

Walmart in Beijing was selling a $2000 bottle of Chateau Lafite Rothschild every week back when this was made Sept `09.  I would love to see the numbers now.

http://video.cnbc.com/gallery/?video=1237671881&play=1

Mon, 07/09/2012 - 01:19 | Link to Comment element115
element115's picture

The Front Fell Off - best skit ever!

Mon, 07/09/2012 - 00:41 | Link to Comment SqueekyFromm
SqueekyFromm's picture

Well, Franzia makes a very good White Zinfadel wine, and it comes in a convenient box. Plus, it is very affordable. I drink a lot of it. I wrote a Haiku about it once:

 

Franzia Wine Rocks!

In its little cardboard box.

Replenish your stocks.

 

Squeeky Fromm, Girl Reporter

Mon, 07/09/2012 - 09:47 | Link to Comment yabyum
yabyum's picture

Friends don't let friends drink White Zinfandel.

Mon, 07/09/2012 - 09:46 | Link to Comment Boxed Merlot
Boxed Merlot's picture

Franzia, Vella and Carlo Rossi all have a variety of selections in the 5L boxes including Merlot.  I too have been enjoying the white zin with ample water for an all day summertime beverage.  (On closer inspection, I think you'll find Bronco as the packager of these refreshments.)  Another benefit of being in Stockton is they can be found at 8-10 bucks a box.  Can't even make it myself for that.

Mon, 07/09/2012 - 00:32 | Link to Comment williambanzai7
williambanzai7's picture

Years ago I went through a period of enjoying fine wines for dinner and hunting for hidden bargains. But there wwas nothing below $20 in the shops run by purveyors of fine wine. The prices went up from there.

Then I realized that all the hidden bargains are on the wine shelves at the supermarket. It may be hit and miss, but when you find one you really like you can go back and stock up without giving up an arm and a leg.

Seriously, there is no good reason to pay so much money for a bottle consumed in thirty minutes, unless you are celebrating your 100th birthday.

Mon, 07/09/2012 - 05:51 | Link to Comment Pool Shark
Pool Shark's picture

 

 

Yep.

As much as I like the $20/bottle Santa Margherita Pinot Grigio; the $3.99 Contadino from Trader Joe's is just as good.

Also, "2-Buck Chuck" itself won double-gold a few years back:

http://www.wineindustryinsight.com/yourturn.php?id=381

Just for fun, host a wine-tasting party with your snootiest wine-snob friends. Select three bottles of each varietal: a cheap (<$5), moderate ($10 to $25), and high-end (>$50) selection. Hide the labels, serve, and provide your guests with a score sheet. See how adept these "know-it-all" wine "experts" are at identifying which are the cheap/moderate/expensive bottles.

Mon, 07/09/2012 - 11:44 | Link to Comment chumbawamba
chumbawamba's picture

2-buck Chuck jumped the shark a couple years ago. It now tastes like what you'd expect from a $2 bottle of wine. It's just swimming in it's own wake.

I am Chumbawamba.

Mon, 07/09/2012 - 02:27 | Link to Comment ebworthen
ebworthen's picture

Agreed WB7.

Have enjoyed $5 bottles that were just as good or better than the snobby lables.

No, not MD 20/20; Fess Parker (RIP) makes a fine red, as does Gallo.

Cheers.

Mon, 07/09/2012 - 10:27 | Link to Comment Rainman
Rainman's picture

Me too....in Cali there are hidden gems in the supermarkets and drug stores. Turning Leaf is a very good dry chardonnay with 13.5% alcohol at 5 bucks for 750ml. Hint: always check for alcohol content on an unfamiliar brand written on the label...the type is so small you need to bring along a magnifying glass.

Mon, 07/09/2012 - 12:08 | Link to Comment ParkAveFlasher
ParkAveFlasher's picture

You never go wrong with a $10 traminer on a sunny day.  Germans got that right, too. 

Mon, 07/09/2012 - 00:10 | Link to Comment Antifaschistische
Antifaschistische's picture

are you saying, that those thousands of California property investors, who've bet their retirement on opening up a boutique winery/bed-in-breakfast/wine and cheese tasting business weren't really onto a special secret?

I love California.  All of it.  But, if you can't drive between Santa Barbara and Carmel, or God forbid Napa Valley and scratch your head and ask "how many micro Wineries can the overall market absorb" then you're either over excited about FREE wine tasting or you were napping through that trip.  (and missed some great scenery)

Sun, 07/08/2012 - 23:56 | Link to Comment rufusbird
rufusbird's picture

I started making my own wine about two months ago. It is a kick in the pants. Lots of fun interesting, and if the distrubution system ever fails, I will be able to make my own. For $79 I got a thermostat that I use on on old freezer to keep my five gallon carboys at 55 degrees after the fermentation. I figure I can keep about 20 gallons cooking at any one time. Do a google search on winemaking and your halfway there.

Mon, 07/09/2012 - 10:04 | Link to Comment Big Corked Boots
Big Corked Boots's picture

I submit that the other half of the way would be to grow your own grapes!

Sun, 07/08/2012 - 22:58 | Link to Comment DelusionalGrandeur
DelusionalGrandeur's picture

I buy direct from a winery for €1.25 a litre for a cab, and roboso. I just get a kick outta watching wine flow from a hose and nozzle similar to a gas pump. I show up with a 25 litre tanica and tell the wonderful woman, "fai pieno x piacere!" Things could be worse I guess. Moving from the deep south to a small town in northern Italy might be jumping from the pan into the fire, but at least the wine is cheaper than the water. I don't think I'll ever understand why people pay inordinate amounts of money for old wine, but whatever. I'm happy with my fresh outta the pump alternative.

Sun, 07/08/2012 - 23:51 | Link to Comment Setarcos
Setarcos's picture

Same in Australia.  My poison is Port at about $10 per 2 litres, or a 5 litre cask of whatever wine for about $12 ... and I challenge anyone to pick a cask wine from a range of bottled ones.

Sun, 07/08/2012 - 22:49 | Link to Comment sangell
sangell's picture

Premium bath salts is where I'm putting my money!

Sun, 07/08/2012 - 22:10 | Link to Comment silverdragon
silverdragon's picture

The rich Chinese are still buying expensive wines for gifts, banquets and celebrations.  However if it is for their own consumption they are more than happy to have an affordable drop.

 

Mon, 07/09/2012 - 11:28 | Link to Comment chumbawamba
chumbawamba's picture

The Nouvea Riche are so embarrassing.

The Chinese and their wine consumption reminds me of all those 90s rap videos with all the ghetto-dwellers flashing they cell phones.

I am Chumbawamba.

Sun, 07/08/2012 - 22:00 | Link to Comment Taint Boil
Taint Boil's picture

 

 

Boones Farm Was my choice in the 80's ........

Mon, 07/09/2012 - 04:12 | Link to Comment TheFourthStooge-ing
TheFourthStooge-ing's picture

...or T.J. Swine.

Sun, 07/08/2012 - 21:45 | Link to Comment Stuck on Zero
Stuck on Zero's picture

There are processing means using ultrasound that render cheap wines into fine wines instantly.  The most discriminating tastes cannot tell the difference.  The expensive labels are trying to figure out ways around this.  The same thing with diamonds.  Synthetic diamonds are now so perfect that they are better than mined diamonds from deBeers so that the pedigree becomes more important than the quality. 

The rich hate it when we poor slobs can have the same quality they have.

 

Mon, 07/09/2012 - 08:02 | Link to Comment i-dog
i-dog's picture

The rich just laugh when poor slobs waste money buying copies of the things that they have.

Most counterfeiting is carried out by the rich (they're immune from prosecution) to profit from the wannabees. I wouldn't be at all surprised to learn that CZs are predominantly made by deBeers!

Sun, 07/08/2012 - 21:41 | Link to Comment boiltherich
boiltherich's picture

Viva la VIN DE CARTON et Mylar.

Sun, 07/08/2012 - 21:38 | Link to Comment AUD
AUD's picture

Raspberry cordial still has greater marginal utility than $.

Sun, 07/08/2012 - 21:26 | Link to Comment Seasmoke
Seasmoke's picture

2 Buck Chuck missed the bubble and tastes just fine

Sun, 07/08/2012 - 21:59 | Link to Comment TomGa
TomGa's picture

Ours is 3 Buck Chuck. Arbitrage!

Sun, 07/08/2012 - 21:18 | Link to Comment q99x2
q99x2's picture

My mother's social security perscription medication money was taken by the FED and given to foreigners to buy wine with. Arrest them.

Sun, 07/08/2012 - 21:18 | Link to Comment grunk
grunk's picture

I prefer an investment in box wine. And not for long.

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