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🔴 “There is precedent for collectibles as hedges” (FT)
There is currently a mainstream narrative —and that is about inflation and how wine is a great hedge against rising prices which, of course, wine merchants are heavily supportive of. This piece from Reuters. On Liv-Ex. The FT reported on Bordeaux Index and its record sales (discussed in the Tech Edition). “From diamonds to wine, investors rush to luxury collectibles“ — another very interesting article by Madison Darbyshire which highlights how collectibles were “once the playground of affluent collectors” but that “assets such as classic dresses and baseball cards are increasingly open to all,“ also noting that “hedge funds and professional investors are carving out pieces of the pie to put their money into collectibles“.
While commodities (among those: collectibles) have long been considered a good store of value during inflationary periods, the key to lock in profits is the timing during which these investments are made. To understand this point, here’s my thinking.
What Is Inflation?
Inflation is defined by the rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising.
In everyday terms, during inflationary periods, $1 is worth less and less because everyday items become more and more expensive.
During inflationary times, central banks need to act fast in raising interest rates, thus reducing the money circulating in the economy, which in turn will slow down the economy. The speed at which rates are increased needs to be measured against the risk of recession (if done too fast this will bring the economy to a halt).
Weimar Germany: “A few million marks meant nothing really. The packages of money need to buy the smallest item had long since become too heavy for trouser pockets”
What Is an Inflation Hedge?
An inflation hedge is an investment that is selected to protect against the decreased purchasing power of a currency that results from the loss of its value due to rising prices.
Intuitively, keeping your savings “under the mattress“ during inflationary periods means that you might wake up one day feeling a lot less cushy.
So-called safe-haven investments like precious metals and real estate, for example, usually perform well in inflationary climates; theoretically, bitcoin could be a strong inflation hedge. Assets that investors run to in times of rising prices are ones that are scarce or move counter to paper money or financial assets. Bitcoin fits the bill. The problem is, bitcoin hasn't much of an investment history: Created in 2009, it's only been actively traded for a decade or so, and inflation hasn't been much of a factor for most of its short life. Energy and banking stocks also benefit from rising prices and interest rates respectively because of top-line growth.
To understand whether wine is a good store of value during inflationary times, I have superimposed world inflation (%) over the Liv-Ex indices during the course of the last three decades.
Key Insights:
By looking at the chart, it’s clear that fine wine prices move in anticipation of an inflationary period.
The ‘size’ of inflation doesn’t matter a great deal — the expectation that inflation will change is what drives prices of fine wine up or down.
Inflation and fine wine prices are concurrent — meaning, when inflation hits, it’s too late to buy.
If central banks are successfull in their attempt to control inflation, a recession (and consequent drop in inflation) are likely in the next few years. That also means a significant drop in fine wine prices is likely to happen soon.
Inflation is a natural occurrence in an economy, and a disciplined investor can plan for it by cultivating asset classes (read: fine wine) that outperform the market during inflationary climates.
Buying fine wine at the right time is the most important aspect of successfully investing in this asset class, and taking advantage of the benefits.
Smoke Taint
🔴 “Should you consider buying a wine from a region/vintage that has been exposed to smoke?” (TWI) ($)
Image of the wildfires in California in summer 2020. Source: Bloomberg
The Drinks Business reported this week that the CIVB has been contacted by vineyards of Australia and California who shared their expertise and re-iterated that “berries have been analysed and nothing has been detected, the rains of last week and this week have allowed to rinse any possible traces”.
In the notes from Jane Anson (see Harvest Reports below) she comments that the harvest is underway with the Sauvignon Blanc in Bordeaux and the reds will soon start.
As wine critics start writing about the 2020 vintage in California and Napa Valley — it’s interesting to see what’s lying ahead for Bordeaux.
Back in August 2020, Decanter was noting that in California, at the time of the harvest, many wineries were conducting extra checks for signs of smoke taint.
Harvest went ‘full steam ahead’ and, although some reports had raised concerns about smoke taint affecting areas of the vintage (perhaps not presenting a united message as the CIVB in Bordeaux is doing), in truth it was too soon to tell.
What Is Smoke Taint?
Smoke taint occurs when developing grapes are exposed to the smoke from wildfires for any period of time.
A number of factors will determine the level of impact the smoke will have on the berries: the state of berry development during the exposure, the duration, and the concentration of smoke.
“Smoke taint involves more than just the unpleasant classic aromas of campfire, ash and wood smoke. Tasters experience elevated levels of perceived tannins and alcohol; the wine tastes rougher and hotter than it actually is”, writes Arnica Rowan for jancisrobinson.com, adding: “with training, which I do not recommend, you can often smell the base fuel from the fire, such as a pine campfire aroma from a pine forest“
Aside from the obvious smoky character, a more worrying note from Perrotti-Brown is that some wines don’t exhibit the taste of it but “smoke taint is insidious in its ability to remain masked for a period before emerging”.
“Some grapes seem to absorb more of the offending taint compounds than others. Syrah seems to favour this smoke character.”
Most white grapes tend to have little or no skin contact, and late-season smoke mainly affects the skin.
Key Takeaways on Napa
Fast forward two years, Lisa Perrotti-Brown MW cautions against buying California Central Coast and Napa Valley 2020 as “smoke-tainted 2020 wines are being bottled and sold, even by reputable wineries“.
Winemakers have lab-tested their wines and were told the smoke taint compounds numbers were below that lab’s stated detectable thresholds.
“The problem is that” explains Perrotti-Brown, “laboratories cannot test for all the taint’s compounds. Most of the time, I can detect what winemakers have been told is undetectable.”
Regarding the red varieties, Perrotti-Brown has tasted smoke tainted 2020 wines from sites in California north of San Luis Obispo, including the major areas of Paso Robles, Sonoma, and Napa Valley. She will release a largescale report on California Central Coast and Napa Valley later this year which will focus on this issue.
Perrotti-Brown hasn’t yet tasted any 2020 white wines that have smoke taint and she doesn’t expect to, since most white grapes were harvested before the smoke became a real issue in most areas.
What’s clear from this word of caution from Lisa Perrotti-Brown MW is that buying a wine from a region/vintage that has been exposed to smoke is very risky indeed. Leaving aside the vintage considerations — a smoky vintage will be considered, no doubt, a lesser vintage, thus reducing its value on the secondary market; but what’s still not quite clear is if and how smoke taint can affect wine in their later years — will it reduce the ageing potential? will compounds remain hidden until the bottle is opened?
Many questions that perhaps winemakers themselves don’t know the answer to.
In the mood for wine nor this article represent investment advice or any kind of professional counsel, nor does it represent an offer to buy or sell securities or investment services.
