Rich People Fight Club!
to the tune of ‘Pop Goes the Weasel’; Inflation Part 2.
I enjoy watching auctions. Live ones, usually, but in COVID times, online auctions will have to do. Mr. Main Street calls live auctions “rich people fight club” and he has a point. Early on in the pandemic (early 2020), both the auction and housing market(s) were dead. Many art sales were postponed, or run as online-only auctions, bringing anemic results for both sellers and commission-earning auction houses. It wasn’t long, though, before the major auction houses (Christies, Sotheby’s, Phillips, et. al.) figured out their super high-tech live-auction streaming platforms and once again, rich people were egged on, in real time, by live(remote) auctioneers, and the results were spectacular (“Thank you to the bidder from…Miami! Istanbul, will you respond?”).
What about the live auction creates extreme froth? Is it the idea of competing for something that is a “limited” resource? The instinct to win? I think there’s something to this. A friend of ours told us about how the process for home-buying works in his native country, Australia, where an auctioneer takes names of potential buyers, and at a pre-determined time, cattle-market style, shouts bids so the crowd can hear, while live bidders go at it. There’s even a gavel and everything. Anybody can watch, and, having taken part in it before, he says the emotional aspect of winning an auction overrides all sense in the heat of the moment. You end up just wanting to win after having stood around in the front yard, thirsty and hot, just hoping for it to be all over, because you’ve done the tough work of securing financing, etc. It’s $10k more than your last bid, and way over budget, but hey, we’re all animals here, and if winning means beating the guy across the yard from you with a metaphorical brick of cash, you’ll do it.
But what does this do to the actual prices of things? Do auction benchmarks really give you a good idea of where a market is? I guess many would argue yes, by definition the price at auction is the price, especially for things like Australian real estate, which are difficult to value without referring to prior sales. But I think they’re a lousy indication of a market, and the recent fluffing (froth, enthusiasm, loam, find a term you like) of prices for barely-differentiated goods makes my point.
See here, this glorious sideboard:
It is being sold at auction, and it is really, really nice. It’s handmade, hand-finished, and tattooed(!) leather. No doubt quite unique, and, in this covid-distorted world, actually available for delivery. But look at the discrepancy between the retail value ($26k) and the current high bid: $55k+! I am pretty sure that if you called up the studio and begged them to make you one quite like this, they’d oblige. What’s particularly nice about this listing is that they even tell you how much you’d likely have to pay to order one. Sure, you’d need to wait, and perhaps the difference between waiting vs not is 2x the price. But the market-clearing price for these sideboards is definitely not $55k, despite what this one will all-but-certainly fetch at close of auction. Because if that really and truly were the market clearing price, the retail price would be $55,000. The sideboard maker presumably pegged the retail price as high as they could comfortably go without crushing demand.
So what is at play here? It’s not that the winning bidder is silly, though that’s a tempting, but lazy explanation. It’s not even (necessarily) that they are $26-thousand-extra-dollars impatient. It’s just that they are really, really rich. So rich, that $55k to them might as well be $26k. Or $2. Or $0.50. $55,000 doesn’t mean as much to them as $26,000 does to the rest of the market. In other words, it’s an extremely thin market at that altitude, and you’ve lost the ability to generalize to a broader basket of goods or clients, because you’ve sussed out the lone buyer at a particular price. Any mere mortal who has tried to buy a house in Sydney understands this intuitively. Auctions maximize the price for the seller, but breed an unhealthy market predicated on animal spirits if every price is discovered via live auction. Because in rich people fight club, the most important thing isn’t money, it’s winning.
Generalizing ever-higher auction results and using them to define a market will give you eye-popping inflation figures, but no idea what the real market -made up of real people- can sustainably and credibly bear. Pricing, i.e. inflation analysis should take into account the number of transactions, actual selling prices, and inventory in near equal measure. You should not let the over-bid Sideboard of Great Beauty fool you into believing there are millions of people willing, or even able to pay 2x for millions of sideboards. And if you’re in charge in Australia, you should change your housing market price discovery mechanism, so it’s not, well, fight club.
*I cropped out all identifying information, but didn’t change anything else.