What Does the Fed Have to Do With Rolex?

Good morning!

It’s a glorious Monday – let’s pretend those things exist – in Cebu today.  This time of the year is when the Philippines becomes temperate, or at least livable, depending on your heat tolerance.

First, thank you so much for writing this weekend.  The mailbag is even fuller, and now I’m further behind.

I’ll take the time to read through each and every one of your emails this week.

But before I do that, let’s talk watches in general, and Rolex in particular.

My good buddy of over 20 years, Hung-Wah, was at a dinner party in Hong Kong when he first learned of the Rolex and its infamous gray market.

Whether you like fancy watches or not, how the Rolex market works is relevant to our economic situation.

That might seem like a stretch, but all will be revealed.

Stacking Rolexes

“All I want to do this year is stack paper.”

It’s a famous refrain for those who are in money-making mode.

When paper is worth something, it’s worth stacking.  When it’s not, you’ve got to stack something else to maintain your wealth and purchasing power.

What’s happening in the watch market is a perversion of Gresham’s Law, which simply states, “bad money drives out good.”

In plain English, if your economy is flooded with crappy currency, intelligent people will hoard whatever currency or commodities to maintain their wealth.

Cryptocurrencies would be the most outstanding example of this.

Heck, in the genesis block of Bitcoin, Satoshi Nakamoto plainly intimates the reason he/she/they invented Bitcoin was because of bad government policy.

Before the days of Bitcoin, many would trade their dollars for Swiss francs or gold bars.

But watches?  Really?

All Value is Subjective

Subjective value simply means that the buyer or seller of an object determines its value without regard to the material or labor costs put into making that object.

This is what initially destroyed the shaky edifice on which Marx’s “economic” theory rested.

But for us, let’s keep it simple.

My buddy Trav loves IWC watches.  My friend Matt is an Omega guy.  My first luxury watch purchase was a Cartier Santos 100.  That watch, to me, is still the most elegant and masculine dress watch ever to be produced.

I think Rolex Daytonas are unattractive, though collectors lust over them.

I don’t like date windows on my watches unless I’m traveling.  Date windows wreck the symmetry of a watch, although Omega putting the date window in the “6” position on their newer Seamaster 300s fixes that.

Most people prefer date windows because they keep forgetting what day it is.

Everything in the preceding paragraphs is subjective.

So none of my arguments today will be about any Rolex being ugly, or something dirty old men wear.

Right now, Rolexes are the cigarettes in our economic prison.

Let me explain.

Credit: Rubber B

The Rolex Submariner 6538 – the original James Bond watch – currently sells for $122,000.

You’d expect that because the watch is practically a museum piece.

But a not-so-recent phenomenon is that Rolexes – especially their sports watches like the Submariner – are almost impossible to find.  Even in Rolex outlets!

I should know.  I couldn’t find an Explorer II without the help of a friend.

Hong Kong and My Explorer II

When I was leaving a tumultuous 3.5 years in Hong Kong behind, I asked Pam if I could spoil myself a bit.

Since she got her baby – Micah – she was more than happy for me to get my Rolex Explorer II.  For some reason, I wasn’t into the Submariners.

In fact, I’m pretty sure I wanted an Explorer II because it’s black and orange, my high school colors.

Ridiculous, I know.  And subjectivity like that is expensive.

A Submariner on the left and the Explorer II on the right.  Credit: rolexmagazine.com

Hong Kong is renowned as the best place in the world to buy a watch.

I walked into every Rolex dealer and watch shop I could find.  There was not one Explorer II to be found.

I was devastated.

But then I told my friend Karishma, who’d been living in Hong Kong all her life.

She said, “You want one?  My family knows a guy.”

One month later, my Rolex was on my wrist.

I even got it for roughly retail price, which is next to impossible nowadays.

That family friend had connections.  Most people don’t, which is why the gray market thrives.

The Gray Market

Most of the time, showing is better than telling.  So let me show you this:

I just did this analysis this morning.  I took the cheapest base models from rolex.com.  I compared them to the cheapest new, unworn models currently available on chronext.com.

You may say, “Well, Sean, that’s what the market values them at.”

To which I’d reply, “Sure, but is it an unfettered free market?”

The answer to that question is, “Don’t be ridiculous.  Of course not.”

Those watches above are the six most popular Rolex models out there.  Notice they’re all trading at an enormous premium to their retail price.

So why is this happening?

That’s simple.

Once the Fed prints its enormous currency load, the first people to get that money are the bankers.

Bankers eventually run out of stocks, bonds, commodities, real estate, cryptocurrencies, classic cars, wine, and whiskey, once they’ve already driven those prices to the moon.

So they turn to other things.  And those things are watches.

Specifically, Rolex watches.

The funny thing is, in Switzerland, the big three watch brands are Patek Philippe, Audemars Piguet, and Vacheron Constantin.

Each time you wear one of those watches, you’re strapping a down payment for a mansion on your wrist.

That’s one of the reasons Rolex got so much traction.  Back in the day, they were affordable watches that were also useful.

Almost no one can afford a Nautilus, Royal Oak, or an Overseas Dual Time.

I’ll leave it to you to look them up.  You’ll never look at Rolex the same way.

But besides those behemoths, you’ve got Omega, IWC, and Breitling.  All of them make great watches.  They just don’t have Rolex’s cache or reputation.

The great thing about the market is that both buyers, sellers, and window shoppers get to comment.

Sure, the “market” says Rolex is a premium product.  But I get to say, “That’s ridiculous, and I won’t play.”

When enough people share my sentiment, prices will come down.

The Fed’s bad money has driven out Rolexes from their very stores.

If you want one, be patient and wait.  This, too, shall pass.

See you tomorrow!

All the best,

Sean 

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