Today's financial world is a tough place for the average person, but paradise
for rich guys. As easy money raises asset prices, the owners of those assets
make effortless profits. Then they buy expensive toys and trophy properties.
Hence the recent boom in fine art, high-end real estate, yachts and private
jets.
But like all financial trends, this one has a limit, and that limit is now
in sight. The 1%, it seems, is rolling over:
(Bloomberg) - Sotheby's is offering employees voluntary buyouts to cut costs
after a drop in third-quarter revenue grabbed more attention from the company's
investors than its largest ever semiannual auction season.
The auction house told employees in an e-mail Friday that if not enough
employees make use of the buyouts, it may have to resort to layoffs. Sotheby's
didn't say how many jobs it plans to cut.
Shares of Sotheby slumped as much as 16 percent this week after the firm
reported a 9 percent decline in third-quarter revenue.
"Sotheby's costs of doing business - increased staff, more expensive catalogue
production, huge marketing and promotional costs, etc. - have to be balanced
against the declining revenue from commissions," said David Nash, co-owner
of Mitchell-Innes & Nash gallery in New York and former head of Impressionist
and modern art at Sotheby's.
(CNBC) - San Francisco homes are still some of the priciest in the nation,
but sales of those houses are showing significant weakness. September sales
were down 19.5 percent in the city from a year ago, according to the California
Association of Realtors.
"We're going through a kind of correction, as we have a lot of new developments
being built right now. The supply is definitely on the rise," said Justin
Fichelson, an agent at Climb Real Estate Group in San Francisco. "The market
is not going to continue going up like we've seen in the past two years,
because prices are already high."
(Bloomberg) - Prices of homes valued at 5 million pounds ($7.6 million) or
more fell 11.5 percent on a per square foot basis in the third quarter from
a year earlier, according to Richard Barber, a director at broker W.A. Ellis
LLP, a unit of Jones Lang LaSalle Inc. Sales volumes across all homes in the
best parts of central London dropped 14 percent in the period, the realtor
said on Thursday.
"The bubble may already have burst" for the most expensive homes, Barber
said. Now, "36 percent of all properties currently on the market across prime
central London are being marketed at a lower price than they were originally
listed at, with the average reduction in price being 8.5 percent."
(Bloomberg) - Global long-term spending on private jets is starting to slow
for the first time since 2009 as slumping commodity prices sap demand in emerging
markets, according to an industry forecast.
Deliveries for the 11 years ending in 2025 will be valued at $270 billion,
Honeywell International Inc. said Sunday in its annual survey of the luxury-aircraft
market. That's down 3.6 percent from last year's comparable projection, and
snapped a streak of gains since the last U.S. recession ended.
The decline reflects weakness in Brazil, Russia, India and China, the group
known as the BRIC countries, and the impact of political conflicts in the
Middle East and Africa, according to Brian Sill, chief of Honeywell's business
and general aviation unit. Delays in some new plane models are also pushing
back demand, he said.
Jet shipments will drop 2.6 percent to 9,200 planes, according to Honeywell,
whose forecast had predicted fluctuations in deliveries but no drop in the
planes' list value in the post-recession years. Large planes that had spearheaded
the recovery are now seeing slower growth.
"We're just slogging along," said Janine Iannarelli, president of Par Avion
Ltd., a Houston based plane brokerage. "There is a shortage of buyers, there's
limited activity and prices keep correcting."
So the rich are becoming less rich? To an extent, yes. Recent declines in
commodity prices and emerging market debt have no doubt taken a bite out of
some big portfolios. Meanwhile hedge funds, the preferred investment management
vehicle of the uber-wealthy, have done badly for the past couple of years,
with some high-profile implosions generating
headlines.
These disappointments have lowered the net worth of some big players and made
others more cautious. Hence the lessened demand for the most pretentious assets.
The impact on the global economy? Almost certainly bad, since the 1% are the
marginal buyers of so many reference assets like blue-chip stocks and government
bonds. To the extent that they grow cautious, the bid for a lot of things will
be lower, cutting corporate profits, equity valuations and high-end asset prices.
Put another way, when the only healthy part of an already-impaired system
turns negative, everyone will feel the resulting pain.
