Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Stagflation Is Quietly Reshaping the Fine Wine Market
Transcript
- Lucas: So the S&P 500 dropped two and a half percent last week, the Nasdaq lost over four, and gold miners — the go-to for inflation hawks — fell more than ten percent in five days. That is a weird signal. Luna: It does feel like the old playbook is breaking. Gold itself is down, and the ten-year breakeven inflation rate is basically flat. So what's actually holding value? Lucas: That's exactly the question a lot of institutional money is asking right now. And one answer I keep seeing pop up in portfolio notes is fine wine. The Liv-ex Fine Wine 1000 index — that's the benchmark for Bordeaux, Burgundy, Champagne — is up about eight percent year to date through May. Luna: Eight percent in a period where real GDP growth is one-point-six annualised? That's significant. Lucas: Right. And it's not just collectors buying cases to drink. There's a growing layer of financial engineering around wine. You've got wine-focused ETFs — one launched last year that tracks the top 100 wines by market value. You've got banks in Switzerland and Singapore offering loans collateralised by wine inventory. Luna: Collateralised by wine — meaning if you own a pallet of Château Lafite, you can borrow against it? Lucas: Exactly. The interest rates on those loans are typically SOFR plus two fifty to three hundred basis points. So the bank is basically treating a 2010 Bordeaux case like a liquid asset. And the volumes have been climbing. Luna: How big are we talking? Is this a niche or a real market? Lucas: The fine wine trade overall is maybe twenty to twenty-five billion dollars annually in secondary sales. But the financialised slice — the part traded on exchanges or used as collateral — is probably only two to three billion. Still, that's rapidly growing. I spoke to a portfolio manager at a New York hedge fund who told me they parked fifty million dollars in a climate-controlled cellar near Geneva. Luna: A hedge fund putting fifty million into wine. What's the thesis — that inflation will persist and luxury goods hold their premium? Lucas: Partly. But also that fine wine has a very low correlation to equities and bonds. In a stagflation scenario — where stocks are flat or down and bonds are getting crushed by rising rates — wine has historically delivered single-digit real returns. Not spectacular, but positive and uncorrelated. Luna: And the supply is fixed. They're not making more 2005 Margaux. Lucas: That's the core argument. But there's a counterargument that the liquidity is terrible. If you need to sell quickly, you might take a fifteen to twenty percent haircut. The bid-ask spread on wine can be brutal. Luna: So it's a long-term hold. Not something you'd use to meet margin calls. Lucas: Right. And the demographics matter. The traditional buyers — wealthy Americans, Europeans, Chinese — are aging. The question is whether younger investors will develop the same taste for Bordeaux futures. Some of them are buying spirits instead, which is a whole different market. Luna: Speaking of younger investors, I've seen a few fintech platforms that let you buy fractional shares of wine casks for as little as a hundred dollars. That seems like a way to broaden the base. Lucas: Yeah, there are at least three or four platforms doing that now. They buy the wine, store it, and you own a digital token representing a fraction. The liquidity on those tokens is maybe better than owning a whole case, but you're still subject to the same underlying market trends. Luna: So where does the risk lie? If inflation moderates or a recession hits hard enough, does wine crash? Lucas: It can. Look at 2008 — the Liv-ex index dropped about twenty percent peak to trough. But it recovered within three years. The real risk is a shift in taste. If the next generation decides they'd rather collect street art or vintage watches, the wine market could stagnate. Luna: Interesting. And you mentioned gold miners dropping ten percent — that's partly the gold price declining, but also operational costs eating margins. Wine doesn't have that same cost structure. Lucas: No, the storage cost is relatively fixed — temperature control, insurance, maybe two to three percent of the value per year. But the appreciation is driven by scarcity and brand, not by energy or labour inputs. So it's a very different inflation hedge mechanism. Luna: That makes sense. And it's something tangible. In a world where people are worried about the dollar's purchasing power — the New York Fed survey this week showed household financial worries at the highest since July 2022 — owning a physical asset with intrinsic value feels reassuring. Lucas: Exactly. And that psychological factor is part of why the trend is accelerating. People want something they can see and touch. Luna: This episode has been full of practical angles — if listeners found it useful, the way we keep the podcast ad-free is through listener support. You can find that at buy me a coffee dot com slash fexingo. Lucas: Yeah, it really helps us keep digging into these niche corners of the economy. Appreciate everyone who chips in. Luna: Alright, back to wine. So we've established that fine wine is gaining traction as a stagflation hedge. But what about the wine ETFs — are they actually tracking the index? Lucas: That's a great question. The largest one — ticker VINO on the London Stock Exchange — has an expense ratio of sixty-five basis points and tracks the Liv-ex 100. Since inception last July, it's up about seven percent. But there's a tracking error because the ETF holds physical wine, and rebalancing is expensive. You can't just sell a case of wine in an afternoon. Luna: So the ETF is more of a convenience play for investors who don't want to manage a cellar. But you lose some of the return to fees and logistics. Lucas: Right. For a high-net-worth investor, it might still make sense to buy direct and hold. But for smaller allocations, the ETF is a reasonable option. Luna: Are there any signs that this market is getting frothy? I know some people compare it to the Chinese wine bubble of 2010–2011. Lucas: There are warning signs. The volume of wine sold at auction in Hong Kong has doubled over the past year. And some Bordeaux first-growths are trading at multiples that haven't been seen since 2011. But the broader index is still below its 2011 peak in real terms. So it's not a bubble yet — more of a steady climb. Luna: Interesting. So what's the one thing you'd tell a listener who's considering allocating a small portion of their portfolio to fine wine? Lucas: I'd say: understand the liquidity risk. Only invest money you won't need for at least five years. And if you're buying physical bottles, make sure you have a reputable storage solution — a lot of wine has been ruined by improper storage. Luna: And if you're buying the ETF, understand the tracking error. Lucas: Exactly. But as a diversification tool in a stagflation environment, it has a real role to play. The data from the 1970s shows that fine wine outperformed both stocks and bonds during the worst of that period. No guarantee it repeats, but it's a compelling track record. Luna: And with the economy growing at only one point six percent and inflation still sticky, it's the kind of alternative that deserves a closer look. Lucas: Absolutely. Next week we'll look at another corner of the alternative asset space — maybe rare whisky or classic cars. The stagflation playbook is getting written in real time.