Should/can we stop calling this a "bubble"?

[Acquisition40]

Why do we assume that this is a "bubble"?

If we look at the more recent timeline, of say, the past 100-200 years, there still has been population, economic growth, inflation, etc., inclusive of momentary economic downturns. Looking at a longer timeline of 1000 years or more, same deal. The world survived the Black Plague.

The .com bust was there, but eventually tech prevailed and still does with much intention and hope for improved communication, logistics, AI, etc. Medicine is arguably still in its early stages, as can be debated for the rest of science and many aspects of humanity.

Watch sales, in both absolute and relative scales, have been climbing compared to 10, 25, 50 years ago. And for "bubble"-pieces, there's definitely more people than can afford these watches than not (supply/demand as case and point). Economically speaking, it's more so "do they want it?" as opposed to "do they need it?"

Don't we define economic bubbles as situations in which people/institutions have artificially overreached and exploited market conditions for some sort of economic gains at an unsustainable rate?

However, if it's sustainable, then we just call it strong economic growth, right? When the supplying power and buying power are both legitimate and strong.

So isn't it also safe to assume that this is a great growth spurt that may slow, but it could never "crash" to a point where it'll actually negatively affect the watch-collecting base. And emphasizing "watch-collecting base" because grey-dealers that stock up on inventory or perhaps companies like AP that re-strategize to condense their distribution network actually may be economically affected.

The term "hype" or "very, very, crazy popular" sounds more fitting, but I don't see who is exploiting the system to create an artificial demand. When people want something because of pop culture or a fad, that's still legitimate demand, though it may not be ever-lasting (but nothing is really ever-lasting, anyways). If (and a big "if") PP or AP is squeezing supply purposely to create this hype, then they're also not making money when they can, since they're not getting any of the benefit from grey-market trading margins. Maybe they get marketing benefits, but no financial gains, which every economic bubble situation exploits.

If prices of these desirable watches come down to MSRP or even to previous points where they were discounted a bit, is that a "bubble burst"? Or does that just apply to speculators? Maybe the rest of the watch community calls it "the fad just moved on" or "strong growth/demand period is over".

Just asking if there's more to this because it seems like the term "bubble" is used when people think things are overvalued and trading as such in the collective marketplace.

But for long-term lovers and collectors, what do we have to lose? Has anyone ever lost money on a time-piece that they held on to for more than 10 years? Do we even care?

S

[beshannon]

Originally Posted by Acquisition40

Why do we assume that this is a "bubble"?

Only the desperate believe it is a bubble, most of us do not use this term here

[Acquisition40]

Originally Posted by beshannon

Only the desperate believe it is a bubble, most of us do not use this term here

Love the confidence!

[MichaelFlash]

Originally Posted by acquisition40

love the confidence!

lol!

[JR16]

More of a pimple than a bubble IMO


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[Russell996]

We are most certainly in a bubble for certain sports pieces and brands - Nautilus/Aquanaut/RM/Daytona etc etc - the question is not is it a bubble but will it burst or simply deflate in a controlled fashion - the jury is still out on how it will end.

[Calatrava r]

Most of the watch market is certainly not in a bubble. Most models are hard to sell without discounts and drop substantially from there. The fact the masses are only chasing a few select SS models and the manufacturers are not meeting the demand has created an extreme supply/demand imbalance. I do not expect to see equilibrium in the SS market any time soon.

[GreenLantern]

Most popular models are in a bubble.

When you see grey market dealers hoarding to manipulate prices and control the market of over-hyped models, you cannot conclude anything else other than: this is a speculative bubble.

[FYI, I own most of these models, so no, I am not one of the "desperate."]

https://www.instagram.com/p/B7yFQGCglAr/

https://www.instagram.com/p/B7pAPE_AOax/

https://www.instagram.com/p/B7MroVRgh8g/

https://www.instagram.com/p/B7ItdCqgcRN/

https://www.instagram.com/p/B6wW64Vg5Md/

https://www.instagram.com/p/B8ODYwtAoIT/

[Acquisition40]

Originally Posted by Calatrava r

Most of the watch market is certainly not in a bubble. Most models are hard to sell without discounts and drop substantially from there. The fact the masses are only chasing a few select SS models and the manufacturers are not meeting the demand has created an extreme supply/demand imbalance. I do not expect to see equilibrium in the SS market any time soon.

Right. Just the handful of models out of thousands out there. Kind of like how the best pieces of real estate are always at a premium and in short supply? Hard to call it a bubble when it's such a small portion considering how big the rest of the industry is.

[The Argonaut]

Perhaps I'm mistaken here but I've not seen anyone refer to a "bubble" over the entire watch industry. As others have said above, a handful of PP and AP SS models and most Rolex SS pieces are in a bubble--most definitely. As to the rest, there is no bubble.

[Acquisition40]

Originally Posted by The Argonaut

Perhaps I'm mistaken here but I've not seen anyone refer to a "bubble" over the entire watch industry. As others have said above, a handful of PP and AP SS models and most Rolex SS pieces are in a bubble--most definitely. As to the rest, there is no bubble.

True, not the entire watch industry. It's an interesting distinction to say that only the handful of PP/AP/Rolex SS models are in a "bubble". Isn't it kind of like saying TSLA, AAPL, AMZN, GOOG (for example) are in a bubble, but not the entire tech industry?

It's interesting because situations like those would be generally referred to as "overvalued" based on how we feel/think about it. So how can we say that a few individual models are in a "bubble" when we can't even include them in a definite category?

[GreenLantern]

Originally Posted by The Argonaut

Perhaps I'm mistaken here but I've not seen anyone refer to a "bubble" over the entire watch industry. As others have said above, a handful of PP and AP SS models and most Rolex SS pieces are in a bubble--most definitely. As to the rest, there is no bubble.

[GreenLantern]

Originally Posted by Acquisition40

True, not the entire watch industry. It's an interesting distinction to say that only the handful of PP/AP/Rolex SS models are in a "bubble". Isn't it kind of like saying TSLA, AAPL, AMZN, GOOG (for example) are in a bubble, but not the entire tech industry?

It's interesting because situations like those would be generally referred to as "overvalued" based on how we feel/think about it. So how can we say that a few individual models are in a "bubble" when we can't even include them in a definite category?

https://www.instagram.com/p/B7yFQGCglAr/

https://www.instagram.com/p/B7pAPE_AOax/

https://www.instagram.com/p/B7MroVRgh8g/

https://www.instagram.com/p/B7ItdCqgcRN/

https://www.instagram.com/p/B6wW64Vg5Md/

https://www.instagram.com/p/B8ODYwtAoIT/

[superstarmar]

it's the new norm...

[Acquisition40]

Originally Posted by GreenLantern

Most popular models are in a bubble.

When you see grey market dealers hoarding to manipulate prices and control the market of over-hyped models, you cannot conclude anything else other than: this is a speculative bubble.

[FYI, I own most of these models, so no, I am not one of the "desperate."]

https://www.instagram.com/p/B7yFQGCglAr/

https://www.instagram.com/p/B7pAPE_AOax/

https://www.instagram.com/p/B7MroVRgh8g/

https://www.instagram.com/p/B7ItdCqgcRN/

https://www.instagram.com/p/B6wW64Vg5Md/

https://www.instagram.com/p/B8ODYwtAoIT/

Right. So greys amass a big inventory, so they can make money. Might be a stretch to say they have control over the market of popular models though. Greys are going to have to hold an absolute ton of inventory to be able to control market and manipulate prices. What percentage of these models produced are floating around in greys? I see 1,081 results for BLNRs; 552 results for 5711s; 6,229 for Daytonas (SS and PM) on Chrono24. I'm sure there are other greys out there with undisclosed inventory and those not on Chrono24, but either way, it doesn't seem like a runaway situation to me.

Maybe they're holding onto 70 shares of BLNRs and another 100 shares of HULKs, and sure they're trading high. I guess if people want to call individual TSLA, AMZN, GOOG, APPL stock prices (or as a small tech collective) a bubble, then that's fine, too. Some call it, "trending," "well-performing," "overvalued," even "unicorns." "Bubble" comes with so many more implications than overvalued and/or even manipulated commodities. "Bubble" is more fun to say for sure, though.

[interestedwatcher]

Originally Posted by beshannon

Only the desperate believe it is a bubble, most of us do not use this term here

eh - you're telling me that a BLNR at close to 17000 USD is not in line for a correction?

No one is going to suggest that the bottom will fall out and you can get SS in stores without a wait, (well at least until a recession), but I wouldn't be buying a BLNR et all at full grey prices. I'd grab them at RRP all day long though.

[yoast]

Here is an interesting article on the subject:
https://thewatchbaron.com/2020/02/16...february-2020/

[locutus49]

The truthful answer is we don't know. It is like quantum mechanics, the people with no training in it make the most authoritative statements but we still don't know why QM works like it does. And we don't know how the SS pricing in Rolex and Patek will end.

[thase13]

Maybe I'm misunderstanding the use of the term "bubble". I understand the term bubble to mean the accelerated acquisition/accumulation of an asset at price points excessively beyond its underlying fundamental support targets.

Loosely applied to the watch industry, I think this is generally defined by grey market behaviors pushing secondary market watch prices to absurd (unsupported) levels. Where I get confused is that fundamental price support in the watch world is MSRP and, in the boutique and AD domain, that currently remains largely unaffected by wild swings in grey market activity. I would be more concerned if the retail market and grey market pricing were more tightly coupled and moved in lockstep with each other.

I've watched this happen in the wine industry where skyrocketing secondary market prices have led winery release prices/MSRPs to astronomical levels based purely on demand and not informed by any other objective qualitative measurement. A drastic correction in the wine industry could create catastrophic outcomes for both the manufacturer, collector, and consumer. Fortunately, this really hasn't happened in the watch industry. While watch pricing has been affected by fluctuations in material cost, exchange rates, inflation, and to a lesser extent, demand, watch pricing within the retail domain has stayed on a more stable trajectory that is well within the norm.

Speculators in the grey market have seen dramatic gains but the downside risks are still limited to a guesstimated stop loss of ~-20% of MSRP. A painful haircut, but certainly not a total deflationary loss. For those who live exclusively in the retail world, price fluctuations in the secondary market are immaterial because, for the most part, they mostly view their watch purchases as a sunk cost.

[Acquisition40]

Originally Posted by locutus49

The truthful answer is we don't know. It is like quantum mechanics, the people with no training in it make the most authoritative statements but we still don't know why QM works like it does. And we don't know how the SS pricing in Rolex and Patek will end.

Totally true!

[JimGlovac]

My $0.02 - it’s less a bubble and more a temporary imbalance of supply and demand. Here goes:

- let’s assume for most of history PP tries to match supply and demand, otherwise a) too little supply leads to gray market transactions and b) too much demand leads to unsold inventory.
- however there was a recent unanticipated surge in demand (including me). Who knows exactly what triggered it, but it probably won’t reoccur, once the surge is met.
- now, In normal industries, supply would increase to meet demand. But for a variety or reasons PP won’t increase demand, at least not right away.
- so, the surge in demand can only be met by the following: 1) PP (or peers like Rolex or AP that are substitutes) increases production, 2) existing watch owners sell their watches in the grey market, 3) slowly over time the normal PP production levels satisfy the surge or 4) PP slowly raises prices to curtail demand.

My guess is some combination of 1-4 happen though it’s probably in all the manufacturers financial interest for #4 to solve the problem. My guess is, prices Settle above current ad levels but below grey market.

[Acquisition40]

Originally Posted by thase13

Maybe I'm misunderstanding the use of the term "bubble". I understand the term bubble to mean the accelerated acquisition/accumulation of an asset at price points excessively beyond its underlying fundamental support targets.

Loosely applied to the watch industry, I think this is generally defined by grey market behaviors pushing secondary market watch prices to absurd (unsupported) levels. Where I get confused is that fundamental price support in the watch world is MSRP and, in the boutique and AD domain, that currently remains largely unaffected by wild swings in grey market activity. I would be more concerned if the retail market and grey market pricing were more tightly coupled and moved in lockstep with each other.

Thanks for the perspective! It's well explained and supported. I do have three questions though:
1. Why do you think grey market price levels and behaviors are unsupported? Isn't the fact that there is demand and buyers at that price point supporting their pricing (and behavior)?
2. Do you think that AP's new boutique strategy and/or PP's Nautilus 20% price increase in 2018 is somewhat tied in that "lockstep" and therefore more susceptible to the swings?
3. Don't you think the fundamental price support at MSRP is just as arbitrary (because 1. ADs and even boutiques are wiling to discount non-popular models and 2. manufacture pricing doesn't always necessarily reflect the "fundamental" aspect of value delivered vs money paid) and the fundamental price support really lies in the basic economic principles of supply vs demand, which happens to fluctuate often?

Thanks!

S

[RHIII]

Originally Posted by yoast

Here is an interesting article on the subject:
https://thewatchbaron.com/2020/02/16...february-2020/

Very interesting article — really made me start thinking about the calculus of the watch world.

One thing that I think is missing - is some basic qualification of demand — since the correlation is on a global scale (stocks) - what is the global representation of the watch market - to give a sense of market demand - it could make one think that 700 Daytonas and 500 Hulks on the market is a lot - but what’s the luxury watch representative market population, if you will. Just as an illustration.

If we just speculated that the enthusiast community was 1m strong (that’s reasonable) the world population in 2019 was what, nearly 8b? We’ve got what 300k TRF members....let’s say that’s close.

And let’s say half of them wanted hard to get watches - and half of the half already had them - and half of that are tired of waiting....and lets base on the two references above. 1200 watches to 125k people..... (heck say 10000 are available). I think you could also paint the picture that - while the availability perception is there — even at the right price point would the demand even be close to being met? Probably not. Probably not even in the ballpark....

Just some thoughts....




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[benlee]

Originally Posted by Acquisition40

Right. So greys amass a big inventory, so they can make money. Might be a stretch to say they have control over the market of popular models though. Greys are going to have to hold an absolute ton of inventory to be able to control market and manipulate prices. What percentage of these models produced are floating around in greys? I see 1,081 results for BLNRs; 552 results for 5711s; 6,229 for Daytonas (SS and PM) on Chrono24. I'm sure there are other greys out there with undisclosed inventory and those not on Chrono24, but either way, it doesn't seem like a runaway situation to me.

Maybe they're holding onto 70 shares of BLNRs and another 100 shares of HULKs, and sure they're trading high. I guess if people want to call individual TSLA, AMZN, GOOG, APPL stock prices (or as a small tech collective) a bubble, then that's fine, too. Some call it, "trending," "well-performing," "overvalued," even "unicorns." "Bubble" comes with so many more implications than overvalued and/or even manipulated commodities. "Bubble" is more fun to say for sure, though.

You're be surprised at the massive amount of inventories hold by greys. Even in the city like Jakarta where I lived in, a supposedly 3rd world country, I can go to this mall where many of the grey dealers operate, and I can buy any "hot model" I want on the spot, including white dial C-Daytona, 5711, you name it, but of course at inflated premium prices. I have no idea how they get the stocks but it looks likely these stocks are sold by ADs as well as flippers. Same can be said of Singapore, Bangkok and Hong Kong. And that is not including grey dealers that only operate online.

[The Argonaut]

Originally Posted by thase13

Maybe I'm misunderstanding the use of the term "bubble". I understand the term bubble to mean the accelerated acquisition/accumulation of an asset at price points excessively beyond its underlying fundamental support targets.

Loosely applied to the watch industry, I think this is generally defined by grey market behaviors pushing secondary market watch prices to absurd (unsupported) levels. Where I get confused is that fundamental price support in the watch world is MSRP and, in the boutique and AD domain, that currently remains largely unaffected by wild swings in grey market activity. I would be more concerned if the retail market and grey market pricing were more tightly coupled and moved in lockstep with each other.

I've watched this happen in the wine industry where skyrocketing secondary market prices have led winery release prices/MSRPs to astronomical levels based purely on demand and not informed by any other objective qualitative measurement. A drastic correction in the wine industry could create catastrophic outcomes for both the manufacturer, collector, and consumer. Fortunately, this really hasn't happened in the watch industry. While watch pricing has been affected by fluctuations in material cost, exchange rates, inflation, and to a lesser extent, demand, watch pricing within the retail domain has stayed on a more stable trajectory that is well within the norm.

Speculators in the grey market have seen dramatic gains but the downside risks are still limited to a guesstimated stop loss of ~-20% of MSRP. A painful haircut, but certainly not a total deflationary loss. For those who live exclusively in the retail world, price fluctuations in the secondary market are immaterial because, for the most part, they mostly view their watch purchases as a sunk cost.

This is a very solid piece of analysis. However, can you answer me one question: who are the speculators you refer to? Grey dealers? Other financial actors?

[thase13]

Originally Posted by Acquisition40

Thanks for the perspective! It's well explained and supported. I do have three questions though:
1. Why do you think grey market price levels and behaviors are unsupported? Isn't the fact that there is demand and buyers at that price point supporting their pricing (and behavior)?
2. Do you think that AP's new boutique strategy and/or PP's Nautilus 20% price increase in 2018 is somewhat tied in that "lockstep" and therefore more susceptible to the swings?
3. Don't you think the fundamental price support at MSRP is just as arbitrary (because 1. ADs and even boutiques are wiling to discount non-popular models and 2. manufacture pricing doesn't always necessarily reflect the "fundamental" aspect of value delivered vs money paid) and the fundamental price support really lies in the basic economic principles of supply vs demand, which happens to fluctuate often?

Thanks!

S

Great questions!

1. I suggest that grey market pricing is unsupported because it's irrational and not based on the statistical norms. Grey market lives on the extreme outlying tail of what the most irrational moneyed buyer is willing to pay and not closer to the middle of any pricing bell curve for any given specified demographic. The grey marketer will continue to test the extremes of price tolerance and will only pull back when they determine they've pushed too far.

2. I only say that pricing isn't lockstep because in the watch industry, most manufacturers aren't willing to pursue grey market pricing out into the territory of the unsustainable extremes because that level of pricing volatility has a different effect for manufacturer and grey marketer. In the grey marketer's case aggressive pushes and pull backs are an expected part of doing business, in the manufacturer's case, that level of price volatility will have an undesirable ripple effect across the entire company's balance sheet.

3. I'm not sure I agree that it's as arbitrary for the manufacturer as it is for the grey marketer. The manufacturer probably spends a considerable sum annually researching pricing models as it pertains to the overall health and sustainability of the company. The grey marketer is simply interested in eliciting the highest price at any given particular point in the time domain. Now I'm not saying that just because it's researched, it's correct; I'm just saying the the consequences for getting it wrong are much more serious for the watch manufacturer than they are for the grey marketer.

[thase13]

Originally Posted by The Argonaut

This is a very solid piece of analysis. However, can you answer me one question: who are the speculators you refer to? Grey dealers? Other financial actors?

Good point. I honestly don't mean to be flippant but to better answer your question, who are the "other financial actors" you refer to?

I'll qualify by saying that I don't mean the bloke who simply wants to take advantage of a rising market to make a fair amount of coin by selling a high-demand watch to support another purchase unless it's done intentionally acting as a volume distribution middleman. I seriously don't think the one-offs (or even the aggregate of all of the one-offs) have a significant impact on the market.

[The Argonaut]

Originally Posted by yoast

Here is an interesting article on the subject:
https://thewatchbaron.com/2020/02/16...february-2020/

Very interesting article. Thanks for the link. Definitely made me think, and that my 2020 Post was not that far off. Also, I have to say, the discourse on the PP pages really is excellent. It's like comparing the FT comments section to those on the Washington Post.

[The Argonaut]

Originally Posted by thase13

Great questions!

1. I suggest that grey market pricing is unsupported because it's irrational and not based on the statistical norms. Grey market lives on the extreme outlying tail of what the most irrational moneyed buyer is willing to pay and not closer to the middle of any pricing bell curve for any given specified demographic. The grey marketer will continue to test the extremes of price tolerance and will only pull back when they determine they've pushed too far.

2. I only say that pricing isn't lockstep because in the watch industry, most manufacturers aren't willing to pursue grey market pricing out into the territory of the unsustainable extremes because that level of pricing volatility has a different effect for manufacturer and grey marketer. In the grey marketer's case aggressive pushes and pull backs are an expected part of doing business, in the manufacturer's case, that level of price volatility will have an undesirable ripple effect across the entire company's balance sheet.

3. I'm not sure I agree that it's as arbitrary for the manufacturer as it is for the grey marketer. The manufacturer probably spends a considerable sum annually researching pricing models as it pertains to the overall health and sustainability of the company. The grey marketer is simply interested in eliciting the highest price at any given particular point in the time domain. Now I'm not saying that just because it's researched, it's correct; I'm just saying the the consequences for getting it wrong are much more serious for the watch manufacturer than they are for the grey marketer.

Originally Posted by thase13

Good point. I honestly don't mean to be flippant but to better answer your question, who are the "other financial actors" you refer to?

I'll qualify by saying that I don't mean the bloke who simply wants to take advantage of a rising market to make a fair amount of coin by selling a high-demand watch to support another purchase unless it's done intentionally acting as a volume distribution middleman. I seriously don't think the one-offs (or even the aggregate of all of the one-offs) have a significant impact on the market.

Damn fine thinking Sir. Much appreciated. I thought you were referring to greys, but wondered if there were other actors--meaning speculators--who were also trying to drive prices. The Watch Baron answered that in his article (referenced above).

[incontrol]

Great article! I am interested to see where the market goes from here. Thanks for posting it.


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