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The Watch Safety Net

I've arrived late to the Peaky Blinders party, but arrived I have and boy is it entertaining. If you're unfamiliar with Peaky Blinders it is a BBC produced TV show centered on a crime family in Birmingham, England post- WWI but pre-WWII.

You would reasonably ask if my opening discussion of a crime drama means I've already jumped the shark in my plan to apply economics to horology on this site. But stick with me, it all connects.

In Season 3 of Peaky Blinders the Russians enter the picture by way of nobility exiled to England in the wake of the communist revolution. The plot has the Russians illicitly acquiring British war materiel in a desperate gambit to fight the communists and restore some version of the aristocracy. The scheme is managed by a character named Leon Petrovich Romanov who is questioned about his source of financing.

His response offers a vital but overlooked insight into one of the great mysteries of the Swiss watch industry: why do people pay so much for watches? The character Romanov reveals a pivotal moment in his flight from the Bolsheviks, "Before we boarded the ship, my niece sewed 16 diamonds into her velvet dress."

Leave the Danger - Take the Watch

If we fast forward about a century there is another Russian navigating the mortal hazards of Moscow politics: Vladimir Vladimirovich Putin. Judging from numerous public photos, Mr. Putin is an avid collector of high end Swiss watches.


In fact, just two years ago during the Monaco Legends Auction the hammer dropped on Mr. Putin's Patek Philippe Grand Complications Reference 5208 in platinum for more than $1.1 million (picture to right).

Sewing $1.1 million in diamonds into a velvet dress would challenge even the most talented seamstress. It is a lot easier to simply strap a Patek to your wrist. If you wanted additional security I suppose you could obtain a clasp extender and wear the Patek on your ankle, tucked under your sock. Just don't trigger the minute repeater at the wrong moment.

Mr. Putin is not alone among those in prominent leadership positions who collect the works of haute horology. The last emperor of Vietnam, Bảo Đại, owned a custom Rolex which is presently one of the most valuable watches in the world. In 2017 the hammer dropped on his Triple Calendar Moonphase Reference 6062 for $5.1 million. This watch witnessed Emperor Đại's removal from power twice in his lifetime and was initially auctioned by his heirs in 2002.

More recently, in 2015, the eighth President of FIFA, Sepp Blatter, was placed in handcuffs during the international soccer association's annual meeting. He faced an indictment on charges of racketeering, wire fraud and money laundering. In May of this year Blatter revealed to the New York Times that he stored a watch collection of hundreds of luxury timepieces in his FIFA office and that he was locked in a legal battle to regain his collection in its entirety, which he valued at more than $400,000.

And, lest we conclude that it is only those engaged in dubious activities who use luxury watches as a lynchpin of their 1% bug-out bag, the philanthropist George Soros has been spotted wearing a Patek Aquanat. Chess grandmaster Gary Kasparov, in recent years a vocal political activist advocating for greater human rights in Russia, is known to wear an eponymous reference of the Audemars Piguet Royal Oak chronograph (an example recently sold pre-owned for just below €20,000, picture below).

Without Liquidity You May Be Liquidated

We seen, then, that there are numerous people filling a variety of risk-filled professions around the world. I've mentioned some in the political realm but there are many more in C-suite corporate positions or in professional sports or entertainment, for example. Risk in these professions means, in part, that you may need to quickly obtain a large volume of cash in order to pay your bills. Risk management necessarily involves placing some of your savings in assets which allow you to do this.

Liquidity is probably one of the more misunderstood concepts in finance. An asset has a lot of liquidity if the value in that asset can be quickly used to make a payment. When I teach this concept I inevitably offer the example of a house. Homes are not liquid. You can not pull a 2x4 out of the wall in your home and use it to buy a venti latte at Starbucks. You have to jump through all kinds of hoops, typically involving a lot of intermediaries, to free the value in your home so that you have cash which you can use to transact. And it usually takes time you may not have.

If your profession involves a great deal of risk then you want to be able to act quickly when the barbarians are at the gate, whether those barbarians are an illness which doesn't allow you to play on a field or whether they are an angry mob who have overthrown your government. And luxury watches check that box almost perfectly.

You don't need to call a broker or realtor or use an app to take possession of a significant amount of value. It's right there in your watchbox. Just put it on your wrist and there is nobody between you and the value of that watch. That value travels with you. It isn't in a bank account account database somewhere in cyberspace, a database which can be frozen in a millisecond.

Breaking the Law (of Demand)

Watches have a great deal of what we economists call "moneyness." They are very liquid. They're not as liquid as currency, itself, but almost. Data from watchpricetrend.com shows that, on average, it takes 45 days for a wide range of Swiss watch brands to sell. Watches can also serve as easy collateral for short term loans (pawning, etc).

This insight allows us to also understand one reason why prices play a highly unorthodox role in the luxury watch market. In most circumstances if an object has a higher price then consumers will try to buy less of it. They'll buy a close substitute instead or just go without. This tendency is called the law of demand. But if you use a watch as a source of emergency liquidity then the higher its price the more liquidity it provides to you on short notice. Therefore, the motivation to buy a watch actually strengthens as its price increases.

Free Toaster or Grande Sonnerie When You Open an Account

The era of the storied "numbered Swiss bank account" ended officially in 2018. But the neutrality of Switzerland throughout millennia of international conflict, starting in the 17th century, meant that the Swiss financial system is essentially unmatched in terms of perceived safety and reliability. Given the use of watches as a source of liquidity we can understand why horology and banking are close analogues and prominently co-located in Switzerland.

In economics there are positive agglomeration effects when two industries benefit from close geographic proximity. We can think of agglomeration effects as similar to symbiotic relationships in nature. For example, in my state of Connecticut, nuclear submarines are manufactured in the city of New London by General Dynamics Electric Boat. In the adjoining town of Waterford there is a nuclear energy plant. By locating near one another these related industries strengthen their attractiveness to workers with the unique skill set associated with nuclear engineering. The two businesses can communicate regarding innovation and a variety of related topics thereby improving productivity jointly.

Agglomeration effects can also explain why the luxury watch industry is located so close to a world-renowned center of banking. If a client traveled to Switzerland in order to open an account or consult with her banker then the likelihood that she might also purchase a luxury watch as a complimentary element of her financial portfolio, for the liquidity reasons described above, is quite high. Conversely, if a watch collector traveled to Geneva to see or buy a rare timepiece then the collector might also visit a Swiss bank nearby in order to open an account or secure the timepiece in a safe deposit box (admittedly defeating some of the liquidity provided by watches). The discreteness developed by Swiss bankers is likely equally valued by a decent portion of the watch collecting community. So both industries would benefit from insights regarding the cultivation and maintenance of confidentiality. On and on.

If There's Instability They Will Come

There is no knowing the portion of luxury watch demand which is driven by the need for a portable and liquid asset of high value. But seen through this lens we begin to understand why haute horology is located in Switzerland and why luxury watch buyers are so unconventional in their reaction to price.

Recent reports indicate that the single largest market for Swiss luxury watches is China. There is a tendency to ascribe the importance of this market to the burgeoning ascendance of "tuhao," the Chinese term for nouveau riche (a term which apparently also implies some level of tackiness). But we must not forget, especially in light of recent political conflicts in Hong Kong, that the Chinese government has a mixed record on human rights.

"Re-education" camps continue to operate in China and Twitter has recently served as a platform where family members tell the story of "fallen oligarchs" who may have lost favor with political leadership and were imprisoned consequently. This, then, is yet another case in which stashing away some desirable watches with four-figure prices may be one of the few ways to ensure adequate resources for you and your family through a spot of bad luck.

A developing theme in these articles is the fact that risk is part of the DNA of the watch industry. Here we see that uncertainty is an important driver of luxury watch demand. Your timepiece may not be able to indicate the hour of trouble's arrival but it just might offer the stability you need in its wake.

Sources:

https://www.monacolegendauctions.com/auction/Important-Modern-Vintage-Timepieces-Classic-Cars-4/lot-239

https://qz.com/1663657/families-of-fallen-chinese-oligarchs-are-taking-to-twitter/

https://www.nytimes.com/2019/05/08/sports/sepp-blatter-watches.html

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