Diary of a Patek Philippe Collector – Bubble Trouble II (16th February 2020)

People use the term “bubble” very freely. But what exactly does a bubble look like? What can one expect when a bubble bursts?

I have made my professional career trading financial markets. In particular, I tended to specialise in identifying market “bubbles” and the type of catalysts that would burst those bubbles. The common understanding is that speculative bubbles are rare. They actually occur more often than many think. I am going to describe one of the bigger examples.

On 8th October 1998, one of the largest and most liquid equity markets, the Nasdaq 100, traded at a level of 1063. Just four months later, in February 1999, the index had risen to 2151, a gain of 102%. It doubled in four months. Just over a year later, the Nasdaq traded at 4816. A gain of 353% in just two years or so, with the bulk of the gain coming over the latter part of the time range.

How does this compare, say, with the price development seen in some of the most recognisable “hot” watches?

There is plenty of timeline analysis on the internet detailing the progression of secondary market prices. Auction prices show that Ref. 5711A was changing hands at around USD 24k as recently as April 2017. By March 2019 prices had risen to USD 40-45k. Over the remainder of 2019, prices ratcheted higher. In June, auction results showed price up to USD 70k. And by October up to USD 80k. A price gain of 230% with the bulk of the gain over the last year. The gain would be much higher if one adopted official retail prices back in 2017, but I will stick to secondary pricing so comparisons can be more readily made.

The 5711A still commands a big premium over retail price. But, prices are now 30% below the high.

Lets take another watch that has also been somewhat hyped – the Rolex Daytona Ref. 6263. Between 2010-2016, the price of the Rolex 6263 was basically static (not disimilar to the Ref. 5711A). The 6263 basically sold between USD 30-38k. As recently as mid-2016, one could find a good example for USD 38k. By mid-2018, price had moved up to USD 70k. By 2019q3, prices were up to USD 110k. So, in the space of 2-3 years, there was a price appreciation of around 300% with the bulk of the gain seen during the last year. Sound familiar?

There has been a group of about 10-20 watches that have become “hot” within collector markets and these watches have all seen price increases that have actually been quite similar. Price gains of between 200-400% over the last 2-3 years with the bulk of the gain seen during the last year.

In addition to the general pattern of price increases described above, there are a number of other clues that identify when a bubble has been created. One of the biggest clues that one gets about bubbles is when one sees participants getting involved who have very little idea either of the market, the asset in question or what they are doing. The following is a transcript I am taking from my Instagram account showing a series of messages I received recently.

Sender: You sell your watch?

Me: Sorry, I say on my bio that no watches are for sale.

Sender: Sell me the watch. I am rich. I want the watch. Serious.

Me: Which watch are you talking about?

Sender: With blue dial.

Me: I have several with blue dial. Do you know the Reference of the watch?

Sender: I am serious. I am very rich. You sell?

Me: Sorry. My watches are not for sale.

Sender: Bullshit.

Me: Block user.

This guy couldn’t even name the reference. Probably a scammer. But actually, I think even as a scammer he was getting involved in something he had no idea about. Drawn in by the lure of easy money. I am noticing that there are more and more “collectors” on Instagram who have absolutely no idea about the watches they are buying. They know that the Aquanaut/Nautilus/RO/Daytona/Batman etc are hot and recognisable. They think that prices are rising. And they think it is an easy game. And that’s about all they know.

Another marker for a bubble is when a scandal breaks. When an otherwise impeccable company or individual is shown to have been committing fraud. Enron and Worldcom were two such institutions that helped place many nails into the Nasdaq bubble. Has there been anything similar in horology? I note that in January 2020, a very well-established horological house with a hitherto clean reputation was caught selling replica Rolex as originals. There is never just one cockroach.

Is the Rolex world full of fake watches? Well, I would argue that the correlation between rising secondary prices and numbers of fakes is pretty high. Has a lot of the froth in the watch market been driven by buyers who really are not particularly expert in spotting fakes? Yes. Are such buyers of secondary market watches reliant on the integrity of existing sellers to guanrantee authenticity? Yes. Is that reliance misplaced? Often, yes. Could this be a problem? Lets see.

People get very upset when you describe an asset that they own as a bubble. I remember a meeting in December 1999 when I described the Nasdaq as a bubble. One of the Managing Directors screamed at me …”It is NOT a bubble.” Up until that point, just about everyone who had bought the Nasdaq had made a bundle of money. People who own the bubble asset get angry when their rainmaker is criticised.

So what did then happen to the Nasdaq?

Two months after the peak in March 2000, the Nasdaq had fallen 30-40%. One year after the peak, it had fallen a total of 66% from the peak. 2 1/2 years after the peak, it finally hit a low some 84% lower than its prior peak. For every dollar that was invested in March 2000, only 16 cents was left by October 2002.

So, how does that relate to the current development in watch prices?

Lets start with the Rolex 6263. From its high of around USD 110k around November 2019, it is currently EASY to find one at USD 70k or lower. For the Nautilus 5711A, from its peak in November at USD 80k, it is currently EASY to find one at under USD 55k. How about the Rolex Daytona 116500. This was changing hands at almost $30k at its peak. Now, it is EASY to find one at under $20,000. In each case, prices have dropped 30-40% from the high over the last 3-4 months. Sound familiar?

This last week, I spent a day in London again. I did my normal evaluation of the secondary watch dealers. I spent an hour chatting with one of the most reputable pre-owned dealers and almost two hours with possibly the biggest pre-owned dealer in the UK. In addition, I also spent some time with a European dealer who has been in the vintage market for almost 40 years. The story back was the same.

Rolex Daytona 116500 – “prices seem to be falling at about £1000 per month. We have so many in stock now. I bought one from a client 8 weeks ago at £18k. If you want it, you can have it at £18k.”

Nautilus 5712A – “I don’t know if it is something or nothing, but all of a sudden clients from all over the world are monetising their collections. I paid $50k for a Nautilus thinking it was a good price. I think I made a mistake.”

Nautilus 5711A – “For the first time in years, I am turning down 5711s if they are not in either great condition or if they are pre-2019.”

Rolex Hulk 116610LV – “A few months ago, one of these would not stay in our window for more than an afternoon. No sooner for sale than sold. Now, I have 7 sitting in the safe. And I have even more Kermits than Hulks.”

If you want a Hulk, Batman, Pepsi, 5711A, 5712A, Kermit, Daytona 116500, 5167A or indeed any of these type of “hot” watches, then go into ANY of the London dealers around Bond Street and you will find several. And my guess is that they will be more than happy to negotiate. Take a look on Chrono24. There are over 500 Hulks for sale. There are almost 400 Kermits for sale. That impossible-to-find Daytona 116500? Almost 700 for sale on Chrono24! 700. Wow. Rolex 6263, which is supposedly a rare watch? There are almost 150 for sale on Chrono24. Blue dial Ref 5711A? 180 for sale. There is no question at all, the supply of these “hot” watches has shifted a lot higher.

For me, I got the sense that things had changed when I visited London a few weeks ago. Now, I am convinced that things have changed. Dealers are now sitting with a great deal of inventory. Dealers are now building much bigger price margins between their buying and selling prices. At the peak, a dealer might factor-in 10-20% as a profit margin. Today, I would guess it is closer to 40%.

Now, I am not talking about unusual or hard to sell watches. Those types of watches normally get that type of discount when selling to a dealer. I am talking about watches that have, until recently, been super hot. Nautilus 5711. Nautilus 5712. Royal Oak. Daytona 116500. Daytona 6263. Aquanaut 5167A. These superhot watches are no longer superhot. Dealers have them in stock and prices are dropping. So far, prices are down 30% or so from the high. For those who will undoubtedly deny this, I ask you to try selling your “asset” and see just how it goes. Just as an hypothetical exercise, try to sell.

I don’t think we will see Nautilus 5711A selling below $20k again. It might but I suspect the bursting of this particular horological bubble will be less radical than the Nasdaq paradigm. However, one thing seems clear to me and that is that the speculative froth has most definitely come off the watch market. This first 30-40% price decline is evidence of that. Now, to see just how much of a bubble bust there is one needs to see how prices develop over the next 6 months or so. Another 25% decline is entirely possible.

Am I placing too much weight on opinions from a select group within London? Is the picture different elsewhere? Well, price development is not a London phenomenon. The level of demand seen by the London dealers and the European dealer also seems to resonate with what I hear from more and more US dealers too. One can also wonder what impact the Coronavirus has had on the Asian market.

A strong correction in prices is a healthy process. A market that goes up in a straight line will always attract speculators. Speculators also need to learn that prices can fall as well as rise. It keeps a balance. For me, a lot of the balance in the watch world has been lost in the last two or three years. Maybe a refocus is a very good thing.