New Orleans Bachelor Party (last weekend)

We cleaned out the entire minibar on American Airlines but not before some old guy insisted on giving me a syllabus:

Some of us went rogue and discovered the sandwich of everlasting life: 

(Yes, that's bacon between the cheese and fried oysters.)

 When twelve dudes redecorate the kitchen...

(Did the owner (aka douchebag) give us an security deposit credit for improvement to leasehold?)

Pullman wine bar, Montreal

Nice ambiance, good food and wines by the glass selection, friendly staff, owner seemed like a bit of a douchebag.

Montreal

The rules governing the protection of the French language are true:

I've also discovered where the world's finest wine hails from:

Leaving the Middle Kingdom

I had previously talked about how the number 8 is lucky for Chinese people because it phonetically sounds like the word for getting rich. Similarly, the number 4 is unlucky because it sounds like “death.” Moreover, “14” is even worse because it sounds like “must die.” In areas where there’s a high concentration of Chinese people – like casinos, and well, China – buildings have a 13^th floor but not a 14^th floor.

When my Business Class upgrade came through, I decided to go with the strategy that selecting a seat in Row 14 would minimize the probability of having an annoying middle-aged Chinese dude as a neighbor – the kind that takes every newspaper at boarding, and proceeds to turn the pages into your airspace, occasionally knocking over your beverage. The strategy failed. That’s exactly who I got.

I washed some NyQuil down with Crozes-Hermitage and tried unsuccessfully to fall asleep. Can’t wait to blow out the rest of my frequent flyer miles and never fly United again. 

Cultural Inefficiencies and Arbitrage

This weekend is the Christie's wine auction in Hong Kong. Like every other auction I've been to, this one is also at the Mandarin Oriental. I consider going. I could hang out at registration and flirt with some of the Ivy League Art History majors behind the desk. But this variety of potential mates seems hard to come by in Hong Kong these days. In pandering to the Mainland clientele, auction house meeters-and-greeters have become mostly attractive Mandarin-and-Cantonese-speaking women. They are courteous and cordial, and do their jobs very well. From afar, we exchange smiles and glances sometimes, especially when the Echezeaux is served in between lots. But it has to remain that way. And our emails to each other will always be signed "Kind Regards." The problem is mine. They speak English very well, but their residual Chinese accents are too much for me to handle. Any question or remark, no matter how witty or charming, can only remind me of every nagging relative I have on this planet.

 Sure, I can improve my own Cantonese or Mandarin. But instead I find myself eating a pie and watching the Christie's auction online. One of the two consignors is the Vintage Wine Fund, which, as its name implies, is a wine hedge fund. They publish a monthly research note that I find to be very intelligent. So, I wonder who's decision it was to blast out 14 sequential lots of 1996 Mouton in the opening minutes of the auction. Hadn't anyone learned anything from how this style of dumpage played out in Andrew Lloyd Webber's Don't Cry for Me, Twenty Cases Lafite and Latour? Somewhere in that undisclosed seller's commission and 20% buyer's premium, wasn't the auction house supposed to have hired someone to read the news about this sort of thing? The answer is, they probably did.

But go to any newspaper or online publication and all you'll ever see is how well the auction went and how strong the wine market is. The key headline numbers include the whopping total sales, the percentage of lots sold, and the percentage of lots that fetched above estimates. Most of these numbers mean nothing, or rather, they mean about as much as the official unemployment rate disseminated by the Chinese government. The quotes are also, always the same. Read one auction article and you've read them all.  "9 out of the top 10 lots were purchased by unidentified Asian buyers." This supports the idea that if you invest in wine now, some maniacal Chinese guy will pay you more for it later. Nobody has an incentive to speak or write in an otherwise manner.

What's more interesting to me is when there are tables of Chinese people at the Mandarin Oriental, who, rather than engaging in peacock bidding wars, are quietly enjoying the free lunch and wine.  But of course, this won't be written about. And to me, that's fine. It's exactly how I extend my phantom life.

When I first initiated my position on the 1996 Mouton, I knew I was getting into "Cultural Arbitrage." In a previous post, I had mentioned that the price of the 2008 Mouton had more than doubled on rumors that a Chinese artist would be commissioned for the label. The 1996 is the only other Mouton with a label drawn by a Chinese artist. In December, I noticed that the supply of the 1996 on the market was small. It was also priced significantly lower than the 2008. So I bought some. Did I actually believe that the newly rich Mainland Chinese were lining up for bottles of fine wine  because of a Chinese label on it? Of course not. Would Louis Vuitton bags be such a hit if they suddenly replaced "LV" with "Made in China" all across the design?

Bubbles often occur when there's a great investment sales pitch that people can jump on without feeling guilty about not doing any homework. Example: "The Internet is going to change the world. Nobody knows what the proper valuation is, but if you don't invest now, you'll miss out." This type of lazy investing is similarly receptive to the opaqueness of China: "the demand of a billion new people coming into the market!" The wine community is one that very much enjoys not doing any homework. Add to it Cultural Arbitrage - the smirk on an American, British, or Hong Konger's face at the thought of some goofy Chinese general's son wearing socks with sandals, paying indiscriminately for a brand name - and a trading opportunity is born. The bet is not on the reality, but on the perception of reality: my perception of other people's perceptions, and my small, evil role in supporting it: "Alistair, I'll buy everything you have at that price, but do me a favor, if anyone asks who the buyer was, just say it was a Chinese guy."

Eighteen hours prior to the start of the Christie's auction, I sell out a big chunk of my 1996 Mouton position. If prices are low when the hammer falls in the roomful of actual Chinese people - as opposed to imagined ones - then I can suspect I was right.

Ironically, this auction itself is an example of how the Internet has indeed changed the world. You can now virtually stream into the Mandarin Oriental and make online bids against the crowd. All of this, when the auction gets underway, informs me in real-time that my cultural cynicism has made me into a very good wine trader. But the composite score of my awesomeness remains tragically limited by my inability to flirt with desirable auction house women who speak with a Chinese accent. So I guess we'll have to call this weekend a draw. Next up on the season's schedule, is Sotheby's in April. Maybe they'll have an online chatroom.

A Tale of Two Kitties

According to Google Maps, the length of my block, from intersection to intersection, is 200 feet. It's on a harsh incline. The kind that Ivan Drago loves.

 I've made two friends on my block. They understand about as much Cantonese as I do. In the wee hours of the morning following Valentine's Day, they listened to my resolutions. "No more carbs!" I proclaimed. They meow in approval as another french fry from my lazily wrapped kebab drops to the floor. I continue to find myself very interesting. Their eyelids go into screensaver mode in unison, in the same way that human married people's collusively do when they just want me to leave. "No, wait, wait, did I ever tell you about Paris?"

I wake up with that "oh-fuck" feeling and go to get a coffee and apologize to the cats. But someone has already torn down their house and they are gone.


No cars will pass through my block for the rest of the day. The road has been taken over by street vendors - some legal, some not - just like any other day. They are all women. And they are all about 90 years old. Some of them are under four feet tall. I'm still trying to figure them out. Each one has this palette of stuff. Sometimes, there is consistency: lettuces, potatoes, garlics. Fine. But other stands have this weird mix of a dollar store selection - Chinese slippers, Dale Carnegie in paperback, combination locks inside an open wooden case labeled "Chateau La Tour Carnet." I left for the gym one time, and this one old lady was playing with a wooden plank as if she were a child dreaming about an imaginary boat from a faraway land. She smiled like one too. When I got back from jockeying the elliptical, she was still holding the plank under her arm, and was playing with a newly found treasure: a shiny watch. "What time is it?" she asks me. "It's one." This seems to make her happy. 

 The Pakistani guys who run an actual carpet store have carpeted the sidewalk in front of and around their property. An old lady sits on one of them and starts to spread out her own makeshift shop 'o' scarves. The same cop comes every day to enforce the law, but he can't do anything about it because she moves so slowly that it takes an hour to pack everything up. Of course each day she's back and lays out her goods in 30 seconds.

In the evenings, a couple of versatile old ladies (only in their 70's!) operate a fly-by-night operation on the elevated end of the block. A large white van - the kind that you own if you either deliver plutonium or snatch women off the street - pulls up to the curb - and some low-end middle-aged thugs come out and make deliveries of pirated DVDs, phone cards of questionable provenance, and the most random crap in the world, like a cardboard box of restaurant-takeout-tupperware. Presumably, they also collect money. Perhaps they also say, "Thanks, Mom."

 A lonely old man peers out from a large storefront – the kind of square footage that rents for over a million a month – and goes back to tending to his single shelf of soy sauce bottles.  I like to believe that beneath the layers of dust, there is a trap door or a false wall that leads to a cellar of vintage soy sauces the Japanese soldiers never found; or any other romantic narrative that can sedate the befuddlement of my inner-economist.  

 This is a Hong Kong that has refused to move on. Or cannot move on. As I prepare to enter my peculiarly placed corporate apartment, I turn around, see an empty space, and hope that my feline friends have found a newer world. But of course, I hear a "meow."

Can the Party Continue?

 Everyone on the street has been agreeing on one idea: 2010 will be another great vintage, and the chateaux will be releasing at very high prices, similar to those of 2009. This has led to a rush of people stockpiling their "cellars" (whether moldy passageways beneath castles, state-owned warehouses in China, or Excel spreadsheets at hedge funds) with back vintages that appear to be good relative value. For example, a UK merchant recently sold through many cases of 2006 Palmer @ 1100 GBP/cs (RP 94) as it looked inexpensive in comparison to the 2009 Palmer (RP 94-96), which was released at 2400 GBP/cs.

While I've certainly been a beneficiary of this uncoordinated, collective market movement, I have another view regarding the 2010 en primeur campaign, one that nobody wants to talk about. I believe it will suck so much cash out of the wine investment economy, that no one will want to buy more Bordeaux again for a while, thereby limiting the short-term upside of prices.  In the long-run, there is also a problem: the one where every vintage is a new "vintage of the decade."

Whereas great wine used to be predominately determined by the weather and the idiosyncrasies of each individual French producer, these days, technology plays an increasingly important role. Disastrous years simply don't happen anymore because the technical knowledge is much better across the board. And with the current levels of revenue at stake, everyone in the Old World  is investing in technology.

But maybe the bulls are right about China. And by bulls, I mean everyone. Maybe there will just be enough billions injected into the wine market by mainland Chinese, supplemented by the emerging markets of India and Brazil. Things, however, don't stay cool forever, and the elasticity of demand changes over time. We've seen Japan and Russia walk away, and America finding substitute goods in the Russian River Valley.

I'm also skeptical about this recent boom in the Bordeaux Second Growths. "Demand in the Far East is broadening," says the street.

I will bet my left testicle it's not consumption demand.          

I know many well-off Chinese people who have lived in the US/Canada for decades who couldn't tell you the name for the "Bull's horn bun" that they used to eat in Hong Kong. (It's "croissant," by the way.) And so, I have a hard time believing that after a couple years of interest in wine, that there will be long lines forming at Zhejiang wine shops with people clamoring for, "more Ducru Beaucaillou, please."

But what IF, it's entirely investment demand out there? Assume 100%. And assume that 100% of "investment" is "speculation." Can a Chinese sell-off cause a crash? Not really. Because there is a pervasive problem of fakes in China, there will be no re-exporting. No merchant in the world will buy wine that has set foot inside the mainland. So if Chinese demand should taper off, I think it will first lead to stagnation in the UK market, followed by a gradual readjustment of release prices from the chateaux. A parallel exit by Western investors might take place, especially if interest rates creep back up. A dramatic bubble explosion it seems, would require a global financial crisis of the variety we saw in late 2008. But I would not be surprised to see immediate panic, if a credible rumor surrounding, say, Hong Kong's alcohol import tax, were to surface.

While I believe that these macro factors should make one weary of buying into the generally accepted types of wine portfolios, there are still creative opportunities for wine investment that over a long-term horizon remain less sensitive on the downside to sudden shocks, and in my view, an attractive alternative asset class. I'll talk about these in a future post.

- Pinotchio, CFA level 0.