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THE BORDEAUX ROAD AHEAD – A BUBBLE, A SPEED BUMP, OR BLISS?

John Tilson • 5/5/11        Print This Post Print This PostComment Bookmark and Share

Santa Cruz Mountain Vineyard

Santa Cruz Mountain VineyardHear Ye! Hear Ye! Let the word be spread into every nook and cranny of the world and beyond. All rejoice and give praise. The day all oenophiles have been praying for has arrived and their prayers have been answered. By divine proclamation and royal decree of the big numbers gods, the new Bordeaux vintage has been declared “Vintage Of The Century.”

In the 20th Century, there were probably 3 “Vintages Of The Century” in the first half of the century. In the second half of the century there were perhaps 5, bringing the total for 100 years to 8. Now that we are in the 21st Century, we have change you can’t believe in. You see, already we are up to 5 “Vintages Of The Century.” And these “Vintages Of The Century” are also compounding at a rate of about 1 out of every 2 years with the trend accelerating. If this continues, the question in the 22nd Century will not be what was the “Vintage Of The Century,” or even what were the “Vintages Of The Century,” but what were NOT the “Vintages Of The Century?” And, in this instance, it is possible that the scarcity of the NOT “Vintages Of The Century” will render them more valuable. This is especially true as the wonders of modern technology render more and more of the Classified Growth Bordeaux the same or close to the same.

So what is one to do? Can all this wine be absorbed in the Far East? I doubt it. This is especially likely if what I have heard recently is true. It seems that First Growth bottles are selling for up to hundreds of dollars per bottle in the Far East. And, wait a minute. I know that bottles of First Growth wines are selling for thousands of dollars per bottle. But what I am talking about here is the EMPTY bottles. Do you think that the people who are buying the empty bottles are poor folks who can’t afford to buy the bottles containing wine? Well, perhaps. But, if you believe that, then I believe P.T. Barnum was right! You see, we may be in the midst of a new innovation in recycling. That is whereby “old” bottles are recycled and become “new” bottles that magically contain wine and look exactly like the originals. Hmmm. It seems like I have heard this story before (and, yes, I have a story here to be told at a later date). But, the difference now is that this time the “old” bottles are not likely to be too old. Why? It’s simple. The prices of the new “Vintage Of The Century” wines have eclipsed those of the old wines, even those that used to be “Vintages Of The Century.” Strange isn’t it? But, it may very well be that worldwide communication is increasing at a rate even greater than the so called “improvement” in the wines. This annual rite of big numbers being spread all over the world seems to prompt a buying frenzy that is beyond the scope of mere consumption. And, with the higher prices, the scale and scope of the number of recycled new wines is likely to dwarf anything that we have ever seen before. Why? Again, it is simple. There are a lot more of the newer wines available as empty bottles than there are empty bottles of older wines.

However, just as in any other commodity, there is the question of how much is being produced, how much is being consumed, and how much is being hoarded as an “investment?” In this sense, wine such as Classified Growth Bordeaux is no different than gold, silver, corn, or, one of my faves, pork bellies. The financial markets for these commodities have long sense transitioned. Years ago the markets were created to give producers an opportunity to hedge the price of the products they produce by buying or selling the products in the future. Today, these markets have become dominated by financial institutions, traders, and hedge funds who use tremendous amounts of leverage (borrowed money) to speculate on price moves. The basis for this is most often complex, computerized, mathematical formulas created by PhD Rocket Scientists. And, the history of these vehicles is littered with destruction, for these models (to use a Yogi Berra-ism) only work until they don’t. That is, when, something happens that the models did not anticipate (called “Black Swans” for the appearance of black swans long ago when everyone at that time thought swans were only white), the systems fail and cannot be put together fast enough to prevent collapse.

So for all of those out there that think the prices of Classified Bordeaux can go only one way and that way is up, look out below! Somewhere in the future, there is a Black Swan. Maybe it’s the creation of the “new” wine that I have alluded to. Not being able to tell the real wines from the “recycled” ones, creates an almost infinite supply and the scarcity value of wines is diminished. Wines of carefully documented provenance may fare better, but only if demand continues to outstrip supply for an extended period of time. And, in the interim, the proliferation of more and more “Vintages Of The Century” adds more and more supply. But, truthfully, there is likely to be something else. What is it? Well, I don’t know and nobody knows. That is why it is a Black Swan. But nothing has ever gone straight up forever. Nothing! So that is something that I would say is not likely to continue. Nonetheless, that in itself could be a Black Swan. Offsetting that, no one can predict the future for even a second with complete accuracy. So my guess is that I seriously doubt that purchasing wines from all these “Vintages Of The Century” will produce the types of returns that many are expecting. Vamos a Ver!

In Vino Veritas,Santa Cruz Mountain Vineyard

John Tilson

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