John Varley, the boss of Barclay’s Bank, has indicated that the availability of credit has to shrink. In an interview with the BBC, he says: "The amount of credit available is shrinking, it absolutely is, and that is a painful process, it’s a process through which the world absolutely has to go".
Quite right. In bankers terms, it’s called deleveraging and in a world where there’s no trust in financial assets (the basis for all loans), that has to be the way to go. If I apply for an overdraft, the bank will want to know – always has done - if I have enough assets to pay off my overdraft with should things go haywire. And if those assets decrease in value, which they have unless held in cash, the bank will want to decrease their exposure.
Obviously not good for business. Less credit = less demand = less orders = unemployment = less demand again = and so on until the credit cycle stops and with apologies for oversimplifying.
What I’m intrigued about is the effect of this on Fine Wine prices. Yes, we have seen a severe slump in prices in the last 3 to 4 months. But is this due to the credit crunch and the the non-existence of credit availability? I don't think so. I think the main reason why prices have come down in the last few months is because traders found themselves with too much stock. Stock built up on the premise that prices would keep on increasing. When prices start falling and prospects are bleak, the pressure is on to sell as quick as you can.
Once that process of "deleveraging" has ended however, it’s demand that will drive prices again. And demand for Fine Wine is and will be strong, certainly outstripping supply.
A bit of a bold statement? Think about this statistic. Two years ago, Chateau Lafite Rothschild could have sold their supply of en Primeur 50 times over. If demand drops by say 50%, they can still sell 25 times more than demand. Moreover, once these wines get drunk, there’s even less supply.
And that’s the fundamental reason why wine has proven to be a good investment, so much so that in the last 50 years, the average return has been 10% annually, easily outperforming the financial markets. Don't forget, this is not the first slump in Fine Wine prices, For example, the 1997 Asia Crisis saw prices decrease heavily, only to bounce back a couple of years later.
So, what does this mean? Well, with the risk of getting it totally wrong, here’s my prediction. These unprecedented times will lead to a shakeout of wine merchants. Only those with a strong customer base, with healthy access to cash and with a proposition to their customers that is compelling when the going gets tough, only those will do well. Poor delivery i.e you don’t do what you promise to do ? Forget it. Uncompetitive prices? There are loads of other merchants who are very happy to undercut you. You’re just acting as a middleman – not adding real value because you don’t have access to either the source of the wine or the end customer? Bit thin on the ground...
Varley then goes on to say "As soon as asset prices stabilise, then we will see the financial economy recover. And when will that occur? That will occur some time over the course of the next 18 months".
Hmmm. Too late for a few Wine Merchants certainly. For you as a potential wine buyer/investor, great. I reckon you have a window of between 6-12 months, starting now, to pick up trophy wines at a significantly reduced price, before the next upswing will start.
Now, I appreciate the above is all money talk. If you consider buying wine to drink it and can't be bothered with its value, life's much easier. At the moment, you can pick up top Bordeaux Cru Classe's at 70%-60% of the price of last summer. Interestingly, you can buy 2006 and 2007 Bordeaux below its En Primeur price and 1999/2001/2004 First Growths at around GBP 100 a bottle. Happy hunting!