In a previous life I lived on the edge of the finance world. Very much on the edge, as I only ever really played with numbers in a naive fashion, ignoring what they meant and focusing on how fun it is to play with numbers. I also rather like Lego. Anyway, after abandoning the world of computers and finance for a world of booze and, well, computers, I started looking back fondly on those numbers and wondered what they meant.
In a recent attempt to find new podcasts to listen to I was pointed at Planet Money, currently towards the top of my lists of favourite listens – short bi-weekly shows explaining what the numbers mean and how finance works. The most recent episode brought up something that got me thinking about booze. It’s title – What’s a Bubble?
Some bubbles. In Irn Bru. The second most important liquid in my life.
The whisky market is constantly being accused of being ‘a bubble’ and I’ve been guilty of occasionally parroting the phrase. However, I’ve never really thought about what we actually mean and how we can work out if there is a ‘whisky bubble’. The latest Planet Money episode specifically looks into that question by talking to recent Nobel laureates Eugene Fama and Robert Schiller – two guys with rather different views on the way that markets work.
What we mean by ‘bubble’ is quite easy to define if you’re not an economist – a situation where prices will rise rapidly before inevitably stopping and rapidly dropping. The bubble rises quickly, pops and we fall back to earth. Defining features are the popping of said bubble and the prediction that it will pop.
Fama’s view is that if a market is working a bubble bursting should not be predictable, as a reliable prediction of a crash in prices will in itself cause the prices to drop, which in turn will stop a crash.
Schiller, however, doesn’t believe that markets are as rational as Fama does. At the 2010 World Economic Forum Conference at Davos he proposed a check list for identifying bubbles, based in part on the checklists used by psychiatrists for diagnosing mental illness. Here it is, copied from the New York Times:
- Sharp increases in the price of an asset like real estate or dot-com shares
- Great public excitement about said increases
- An accompanying media frenzy
- Stories of people earning a lot of money, causing envy among people who aren’t
- Growing interest in the asset class among the general public
- “New era” theories to justify unprecedented price increases
- A decline in lending standards
Let’s go through those for the whisky market:
- Sharp asset price increases – While indices like those from Whisky Highland show that there are losers as well as winners, the general price for whisky as a commodity does seem to be rapidly rising.
- Public excitement – Lots of people have recently become whisky investors, in part because of the next point:
- Media frenzy – This is me doing my bit, but it pops up all over the place quite regularly. A recent example from the Guardian, a week ago – Thirty years ago a distillery died. Now it’s Scotch sells for £1500 a bottle. As is pointed out in the Planet Money episode – before there was a mass media it would have been difficult to have a bubble. Now that almost anyone with access to a computer can become a news source the potential for the media to become frenzied is all the more scary.
- Stories of people earning lots of money and envy of the stories – Look at any forum that has people discussing the buying of whisky for investment and see the boasts, stories and howls of anguish at having drunk something rather than having sold it on. There are also the very satisfied posts from people who don’t believe in whiskhy investment telling everyone how much they enjoyed drinking a whisky that recently grew in price, which seems to me to be a slightly different take on the boasting story, achieving a very similar outcome.
- Growing interest among the general public – Outside of things like the Grauniad article above, there is a general rise in interest amongst the ‘muggles’. My anecdotal evidence is the number of emails I receive each day asking for investment advice from people who are new to whisky. I receive a lot of them.
- Justifications – Every time a bottle goes for lots more than it has previously, the discussion turns quickly to trying to rationalise why. While much of the conversation revolves around ‘crazy people’ you get occasional boring folk (like me) trying to work out why individual bottles have made the jump. e.g A recent conversation in the Malt Maniacs and Friends group on Facebook as to why Speyburn Flora and Fauna has recently hit ridiculous heights in auctions. Also, The Whisky Sponge‘s take on the same topic.
- A decline in lending standards – I think at this point we are saved from being in a bubble, because lenders worldwide have taken on the experience of the recent economic downturn and have raised their requirements for lending. What? They haven’t? Oh. We’re screwed.
So, by Schiller’s definition the whisky market is almost certainly in bubble territory and, by extension, it should be possible to predict when the crash will happen. From Fama’s interpretation of functional markets, noone will be able to predict when the crash will happen, as if it was predictable then the market wouldn’t crash. My gut tells me that I agree with Schiller, but my head tells me that I’d probably agree with Fama if I understood more.
All in all this means is that I need to learn more about economics, read Schiller and Fama’s books, and then work out if whisky is a properly functioning market. After that I should a) be able to work out if it’s possible to tell if we are in a bubble and b) predict when the crash will happen if we are. Unfortunately I think the bubble will burst before I finish my research.
You can find out more about Planet Money over on their website. And you should, they’re really good.
Make sure to have a read of the comments section below – there’s some more working out of ideas there. I think I’m slowly shifting to agree with Fama’s opinion that markets are normally rational…
RT @cowfish: New blog post: Are We In A Whisky Bubble? Contains attempts at understanding economics. I blame @planetmoney – http://t.co/uzP…
RT @cowfish: New blog post: Are We In A Whisky Bubble? Contains attempts at understanding economics. I blame @planetmoney – http://t.co/uzP…
@cowfish Interesting post! I wonder though how classic supply and demand still play into this. Even if the bubble …continued next tweet.
@cowfish ..bursts will it really bring down the price of the likes of Port Ellen and Karuizawa where there is a definite lack of supply?
It all comes down to how much of the price increase can be attributed to a bubble-like market and how much is due to traditional supply and demand. I expect Port Ellen to calm down one day, although a drop in price feels unlikely. However, I suspect Karuizawa will carry on as it currently is, unless it hits a bump like Port Ellen did and sky-rockets – at the moment it’s been relatively sensible in it’s inexorable rise…
@bboivin Things only cost what people are willing to pay – the bursting of the bubble will be when people will no longer pay the high prices
Excellent read by @cowfish : http://t.co/zUZBa4PLtF – are we in a whisky bubble?? — good writeup sir Billy.
@galg @cowfish Yes, agreed. Fascinating stuff. Better open that 1960 Karuizawa….
@cowfish I expect it to burst but will affect some more than others. Just like the UK housing mkt where London really didn’t burst too much.
@bboivin If it doesn’t ‘burst too much’ was there actually a bubble or is the market just doing a normal cycle? I need to learn more econ…
@cowfish … me too 🙂
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Have you been putting the single malt in the sodastream again Billy?
I only did that once. It worked better than the rum…
Not sure about public excitement part Billy (or media frenzy at a broad scale, although within the listening audience for whiskey media I could get it). Seems the public in your case may be too small a segment of the public to make this case. Lets say your market is people of wealth primarily that are looking for alternative investments (is that fair?)….in that case, it’s probably more equivalent to art or some such luxury market. In which case, the only thing to bring prices crashing I would think would be wealthy folks taking a beating. The financial crisis conveniently hit this group, but I’d say your bubble burst is more tied to demand reduction when the wealthy have a bad financial downturn and seize up. Of course, given that whiskey, like art, can be viewed as alternative investment…it may actually be a beneficiary (price and demand) when traditional investments appear poor plays.
@cowfish On the #whisky bubble: ” there is a general rise in interest amongst the ‘muggles’.” Comedy + economics: http://t.co/oiQXfz3Y6Z
Interesting piece by @cowfish – Are We In A Whisky Bubble? (economic bubble, not literal bubble): http://t.co/0IYNZVzxF2
Mark: We’re definitely not on a ‘frenzy’ side of things quiet yet, although within the niche media we definitely are, but public interest outside of the whisky sector is getting quite scary. While my experiences with non-whisky folk are very much anecdotal, it seems to be widespread across the industry – we’re not housing bubble levels of interest, but we are starting to move most definitely into the mainstream.
The main thing that indicates to me mainstream appeal is that it’s not only the wealthy getting involved. The amounts being invested are often quite modest, with people looking for a bottle or two to hide in the cupboard for a bit. It’s also often a focus in short term investment, with sellers wanting a quick turnaround and a high return, something that the stories being bandied around have made out to be much more common than it is. If there is a bubble and it does burst then it’ll be the short term investors who will be the ones to lose out – the long term holders of whisky will just wait until the bubble rises again…
“As is pointed out in the Planet Money episode – before there was a mass media it would have been difficult to have a bubble.” Um. Isn’t the Tulip bubble the most famous of all? I wasn’t on twitter then so I’m not sure about that mass media effect. Planet Money may be in the business of self promotion by creating sensational commentary. Rick
The Tulip Bubble was cited in the episode as the first bubble. The concept of a ‘mass media’ was emerging in the Netherlands at the time, along with faster communication due to international trade, and that helped spread the information which led to the whole situation. Listen to the episode – they explain things a lot better than I.
Thanks Billy
It was a nice writeup. I just don’t think Planet Money should be the only source of info. They do provide great entertainment though.
Well, the sources were two Nobel Laureates who talked about bubbles, but that is the reason why I need to read more economics books. I’m working through Satyajit Das’s latest, as recommended by Planet Money, at the moment and need to work out whether my brain needs a few more trash fantasy novels between it and grabbing Schiller’s meisterwerk…
Michter’s “Celebration” for $3,000 – Bubble
George T. Stagg for $200 – Get used to it
@cowfish On the #whisky bubble: ” there is a general rise in interest amongst the ‘muggles’.” Comedy + economics: http://t.co/oiQXfz3Y6Z
@cowfish On the #whisky bubble: “..there is a general rise in interest amongst the ‘muggles’.” Comedy + economics: http://t.co/oiQXfz3Y6Z
RT @cooperedtot: @cowfish On the #whisky bubble: “..there is a general rise in interest amongst the ‘muggles’.” Comedy + economics: http:…
Nice article Billy.
My take on the whole investment thing is: A few years ago people never bought whisky to invest. It was mainly to drink or to collect. The majority got drunk. Some got saved. The more bottles that got opened, the less there were, the higher the “value” of the unopened ones became.
Now, it seems, people are buying to either collect or invest. If these bottles aren’t getting drunk it means there are more of them kicking around. Combine this with the fact that the price of single malt has increased dramatically over the last few years, especially if you look at “collectable” bottles (I think in part to deter people from “flipping” bottles to make a quick profit).
So a lot of people will have bottles that when they come to resell them will be worth pretty much what they paid for them.
If we are looking at investing in whisky as an economic bubble, then that’s one thing. If we are looking at whether Scottish Whisky, as an whole industry, is in some way part of another boom and bust cycle (Pattison crash etc.) then that’s something else. And then there is the consideration of whether whisky as a drinks category (and that includes all the New World shenanigans) can be viewed as part of the bubble. I think there is a lot of milage in the last two but whether we’ll tolerate the creep of the first remains to be seen.
Unfortunately there’s not much that the non-investors can do if we are in a whisky investment bubble – either they can join in and fight for the ‘rare’ bottles, or sit back and make it easier for the investors. The latter option strikes me as the Fama argument from above, showing the markets working in a rational manner – prices get too high, people stop buying, the prices will eventually drop so that supply and demand start meeting again. The former option seems to be what’s happening at the moment.
The increase of prices to stop flipping is no doubt part of the situation, but I think the original reason is more that the producers want a slice of the flip-profit for themselves. However, bottles will still get flipped, but the margin for the flipper will hopefully drop as we start testing the limits of the purchasers’ means. That in turn will reduce the incentive for people to flip bottles and hopefully the market will then start working in a more conventional way again.
I think I’m convincing myself that we may not be in a bubble after all 🙂
Hi billy. It’s fair to say the money being ploughed in by distilleries is a good indicator of a few years left. I’ve so much faith In it I’ve actually just published a guide to scotch malt whisky investment & enjoyment on kindle. Michael Ross
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