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My Very Own Ferrari

Mike Knepper
From the Print Edition:
Rush Limbaugh, Spring 94

(continued from page 1)

It would have been logical to expect that as soon as the available supply of fantasies had been fulfilled, the urgency would flag and the market would stabilize at a reasonably higher level. And it probably would have if the stock market hadn't tumbled.

Another set of players arrived.

"I think a lot of what got the craziness going had to do with the stock-market crash of 1987," speculates Rick Cole of World Classic Auction and Exposition in Danville, California. "An enormous amount of money came out of the market looking for other places to go. People saw they could buy and sell things like watches and art quickly and profitably. Cars simply became another commodity."

So a second wave of demand for that very finite group of Ferraris arose. Econ 101 taught us what happens to prices when the demand outstrips the supply. When prices began climbing rapidly with no end in sight, the final group of players showed up.

"It was the speculator/investor who drove the cars up," says Gerald Roush, who publishes the Ferrari Market Letter. "At the time, we said you don't have to be smart to make money in the Ferrari market, you just have to have some [seed] money. Anything you bought would be more valuable six months later. You buy a car for $100,000; six months later it's worth $200,000, You go down to the bank and borrow $150,000 on that $200,000 car; put that into another car, it goes up, borrow against it and so on. People were using the cars themselves as collateral to buy more cars."

There is a theory, championed by some, denied by others, that says the Japanese were instrumental in driving up prices. Of the experts I talked to, only Sheehan believes the Japanese were instrumental. The others say the number of cars that actually went to Japan was far fewer than to other countries and Europe. There were some spectacular prices paid by a few Japanese investors, which drew uncommon attention that sales across the other ocean did not.

Then, Roush explains, the speculators began selling to one another, typically taking cash and a car.

"That added to it," Roush explains. "You'd hear these tales about how much a guy got for his car. He'd say, 'I got $700,000 for my car.' What he wouldn't say was he got $100,000 in cash and a car he valued at $600,000. He would have to get that $600,000 before his car was truly worth $700,000. And it worked as long as the greater-fool theory worked. Once the market ran out of greater fools...."

Crash dive.

"Those who saw the proverbial stuff heading for the fan were able to dump their inventories and save their lives," Sheehan says. "Those who continued the madness and bought all the way to the top are wiped out today."

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