Rate This Rate Cut
Hi Friends!
This week, Federal Reserve Chairman Jerome Powell announced that the Fed would be reducing interest rates by 50 basis points with an additional 50 point cut expected prior to the end of 2024. Although, a cut was not a surprise to really anyone, to just slightly more than half of the Vegas oddsmakers, a cut of this size was actually a surprise.
For nearly two years now, we’ve been hearing from our clients and partners alike that high interest rates are a really serious issue for this industry. Although definitely problematic for certain components of this space, this business can largely handle inflation. However, high interest rates are a different animal entirely, it’s something that has been very difficult for this hobby to endure and albeit not entirely to blame, have held the lion’s share of responsibility for producing what according to many is the most challenging collector car market we’ve seen in 30 years.
The reasons for this are pretty simple: The low end of the market has been largely unable to operate as everything becomes a race against the clock and profit margins get swallowed due to inability to access cheap cash. On the high end, there’s no incentive to do anything. There’s other places and other things to do that require less effort for similar returns, so why even engage?
This is somewhat unprecedented for this space as generally, when the economy is good overall, the low end of the market is booming and when times are tough for the average consumer, the top end of the market comes out to play (example: The Ferrari market during the great recession) and that side of things booms. For the last couple years however, both sides of the market have been getting essentially neutralized simultaneously and the longer that this issue has continued on, the more the consequences are being felt from the outsides in.
We’ve seen evidence of the effects of this at virtually every level of this hobby. From low level online auctions and classifieds, to dealers, to the pinnacle of Monterey Car Week and basically (aside from a couple of small pockets where there’s glimmers of hope – specifically, retro exotics and unique and limited-edition type Porsches) everywhere in between. Everyone’s hands are tied and nothing is moving as a result.
While I think for nearly everyone in this space, this week’s news was definitely welcome, there’s still some significant concerns:
1. How much of the damage caused is going to be permanent?
The fact is, timing could not have been worse for something like this in this marketplace. We’re in the midst of a generational shift where the incoming group has far less wealth across a larger cross-section of the population than the one that is exiting. The discretionary earning years of the incoming collectors and investors has been significantly handicapped by previous world events and this just adds another layer. Additionally, how has this handicapped collectors that would normally be enjoying their last several years at the top of the marketplace? Have we lost people on both sides for good as a result of this slowdown? We also have to factor in businesses, pillar events and media outlets and other structural components in this hobby that have taken big, big hits over the last several months. There’s a large cross-section of these folks out there that are barely hanging on. Are we going to start losing them and if so, what will the effects be therein?
2. The Feds inability to communicate effectively and control their message to the public.
We have made it no secret that we strongly disapprove of the job that Jerome Powell has done in handling this economy. We believe he was late on inflation, ignored significant components that contributed to it and then has failed to move appropriately in either direction regarding interest rates. This said, perhaps his biggest failure has been his inability to handle the Fed’s public relations and communications strategy. He has utterly failed at every step in this regard. This week, he made yet another misstep as it was “made aware” that he anticipated more cuts before the end of the year. I think this probably affects real estate worse than collector cars specifically, but is this going to keep people on the sidelines and not moving on anything while they wait for that to happen as a result? Remember, these aren’t Crossover SUVs or groceries. People don’t need to own collector cars.
3. Are we now at a point where any movement has become irrelevant due to the impending presidential election?
We continue to hear from our clients and partners that nobody is really happy with either potential outcome here and in their own businesses as well as their dealings with us, they intend to do very little between now and the end of the year. Obviously, for an economy that really needs people to hit the ground running and to get back to actually doing things right now, the proximity on the calendar to the presidential election of this first cut may not end up being particularly helpful. Back in June it might have been a different story, but yet here we are….
Admittedly, there’s a lot of gloom and doom here, but I do want to reiterate that we are happy with the move announced this week overall and we do ultimately think it will be helpful. The question for us is how quickly will we start to see its impact, how significant will it be and is it too little too late?
The beauty of a marketplace like this is that there’s always ups, downs and changes, which continuously provide new opportunities if you stay educated and on top of what’s going on around you. This has unquestionably been a difficult couple of years, but when things go down, something inevitably always goes up someplace else. There’s no reason to think that the viability of this marketplace overall has come to an end and there’s not more opportunities coming around the corner either. Just like anything else, the people that do the most, know the most and can make it over the bumps are the ones who will be most handsomely rewarded when the road gets smooth once again.
That’s it for this week…
Darin Roberge