A friend just sent me an article written by Elin McCoy and carried on Bloomberg News.  To me,  this article indicates that the insanity in China is rumbling on.  Some time ago I wrote articles on a few trends in China. (To read the article “The Beat Goes On” click here & To read the article “The Beat Goes On And On…Sum Yung Vine X2” click here )  And, as I said,  the saga continues.

Here is the gist of it. It seems that some genius has come up with the idea that if something has gone up a lot you can make even more if you borrow money and buy more. This is called leverage and it looks like the Chinese are going head first into the pool. But, leverage is hardly an original idea. Its origins go back as far as there has been a medium of exchange. And, almost without fail, these schemes inevitably crash. Think tulip bulbs going back several hundred years. And, as we entered this century, think technology stocks. More recently, think real estate and housing. The twist this time is that it is wine and it is centered in China and the Far East. It’s being launched as a “Wine Financing Service” (Drum roll please!). And, yes they are apparently lining up, well, like locusts (or more likely leemings)!

One Hong Kong bank is said to be willing to loan up to nearly $700,000 for up to 50% of the purchase price for you to buy wine. One catch is that you must select from their list of 50 top names. And, you can be pretty sure of is that this list is probably a list of the wines that have already gone up the most. That means the one thing you know for certain, is that you are not buying at the bottom. And, funny thing, the interest rate charged on the loan is less than Italy’s current borrowing cost! Go figure!

So the fact that recently the Chinese have been buying a lot of wine is not new. But many of the buyers are. A lot are neophytes. So who knows how much is being consumed? Or for that matter how much is being counterfeited? One thing seems certain and that is that counterfeiting is part of the culture. So wine is just the newest thing to be knocked off. And, it seems that there has been some illiquidity develop when some of the speculators want to sell. Is storage an issue? How about the question as to whether the wine is real or counterfeit? Here again, it would seem to be that both are an issue and lurking underneath the covers is the possibility that the market is already showing early signs of saturation. And, one another thing is certain. If counterfeiting is allowed to proliferate, the game of musical chairs will be over sooner rather than later.

For now that may not matter. The charge is still on. The “solution” to the illiquidity in the market seems to be to start a wine exchange. In Hong Kong an exchange was launched in October to allow members to buy and sell in a global market consisting of a network of “wine storage partners”. In Shanghai the government has just launched a wine exchange which is designed to bridge the gap between “investors” (aka speculators) and suppliers. That’s comforting. I’m sure these government entities know about as much about wine as any government knows about private sector businesses. And, when was the last time you can remember a government actually helping when a market was becoming over heated?

But never fear, these folks are sure that they are on the right track. In Shanghai, they will work only with “investment grade” wine. And, what is “investment grade” you might ask? Good question. Are they the wines that historically have stood the test of time and increased in value? That seems reasonable, but maybe it is not trendy enough. In fact, the president of the new exchange, when asked what is “investment grade” is reported in the article as having said “Anything with a high Parker score.” There you go. Done deal. How can anything possibly go wrong with such astute judgement?

And the wine investment funds are just starting. Get on board! One manager predicts a 15% annual rate of return. At this rate, wine collector/investor/speculator billionaires are just around the corner. But, hold on just a minute. What is this forecast based on and how much experience does the manager have? I’d say not much to both questions. But, maybe none of this makes a difference. After all, the government is supporting a market based on an arbitrary number value doled out by a person (or persons) trying to set standards for individual taste. What else do you need to know? For me, nothing. Caveat emptor. This is a train wreck!

In Vino Veritas,

John Tilson