Easy money always disappears just as easily.
I know a few Wall Street types. They’ve been making really easy money for the last five years. They’re letting it go easily too. Everything from private jets to $25,000 night club tabs for some of them is pretty standard right now.
I know plenty of small business owners too. They’ve spent years doing what they do. In many cases they make just as much as the Wall Street hot shots. And almost all of them have far more money saved up than the Wall Street operators too. Their big nights out may come up to $500. Usually only more if they’re springing for the entire extended family dinner somewhere.
That’s the difference between easily made money and not.
The thing is, when there’s a lot of easy money being made, it’s probably time to get a little worried.
At least one very successful investor thinks it is.
The Ultimate “Easy Money” Indicator
Jim Chanos is one of the most successful short sellers in the financial world. A short seller is someone who bets on the price of something going down.
After bursting onto the scene after exposing and shorting Enron, he has had a number of major calls over the past few years.
The most recent was the collapse in China around 2010 or so. That’s when everyone believed China would lead the world economy out of recession. It didn’t. And China stocks have been battered ever since.
But his warning is much broader this time. It’s not just one stock or sector. Or one market even. It’s a bubble of everything.
His indicator is one that has long correlated with the tops of past bubbles. And it shows how easy money is flowing right now.
Chanos cited the performance of shares of Sotheby’s (BID), an elite high-dollar auction house, as a sign money is far too easy right now.
The chart below shows Sotheby’s share price along with the past four major bubbles:
It’s easy to draw a correlation with Sotheby’s share price and the tops of bubbles.
The fundamentals make sense too. In bubbles making money is easy. Money made easily tends to go easily.
If you want to spend a lot of money fast, Sotheby’s is one of the easiest places to do that.
The more people that have more easily made money, the more they will spend it on everything from art to other status possessions that Sotheby’s specializes in selling.
Of course, if you look around the world, Sotheby’s isn’t the only bubble-infused business doing exceptionally well.
Another sector of the economy, one usually reserved for the easy money crowd, is doing better than it has in years.
That’s classic cars.
I’m not talking about the classic cars you see most often. Like tail-finned Chevrolets and original Mustangs.
It’s the uber-classic cars that have taken off. The exotic European ones. Think of 60’s Ferraris and $1 million +gull-winged Mercedes.
The chart below shows how well the classic car markets have been doing:
Although it’s not the best representation, it does show two very different trends.
The flat and falling markets at the bottom of the chart are the American classic and muscle cars. They make up the “Affordable Classics” index. Many of these cars, freshly restored, may only cost $30,000 to $50,000 a piece.
The best-performing group is the “Blue Chip” Index. It’s up more than 350% since 2006. It contains the like of the 1958 Bentley Continental, 1971 Lamborghini Miura, and 1963 Ferrari 250 GT. They’re all European and all extremely expensive.
When the $300,000 an up market is doing the best, it’s a sign there’s a lot of easy money being made.
It’s not just ultra-high end classic cars though.
Collectible wine, another purchase category usually reserved for the rich and ultra-high income crowd, has been doing pretty well too.
The Live-ex Wine Investables Index (yes, there is pretty much an index for everything) has been a solid performer too:
Although investable wine is a truly global market, and this market has surely been hampered by economic problems in China and Asia, the index is still up very well over the past few years.
After all, it’s still more than twice what it was at the peak of the global real estate bubble.
And it’s another sign that we’re in another bubble right now or at least extremely close to being in one.
Easy Money and Hard Times
Any way you look at it, there’s a lot of easy money being made out there.
From tech billionaires in their 20s and everyone on down.
Money has been easy to make over the last few years. Probably too easy.
Those markets which are driven almost exclusively by high disposable incomes are the perfect indicator it may finally be too much and the bubble is already here.
That doesn’t mean the party’s over. It’s not. But it does mean it’s time to be a lot more careful.
In other words, it’s more important than ever to keep cash on hand for opportunities that may arise from market sudden corrections. Always buy cheap. And be prepared to be patient as the 30%/yr days may not be around much longer.
If you do those simple things, you’ll have a fortune when this cycle is all over.
Then you can live like the free-spending Wall Street type if you want to. But after you earn it in a tough market, you probably won’t.