Predictably Painful Market Opens New Cycle

These, as we all recognize, are unprecedented times. Only the foolhardy would forecast the duration, or future direction, of the tempest we suddenly find ourselves trying to navigate. Even so, one thing seems nearly guaranteed. There are people out there, whose most critical resources are not merely financial but sooner measured in intrepidity and acuity, who will turn out to have sown a great harvest during these times of famine.

Because that's the other side of the same coin that made the current crisis as inevitable as it was impossible to foresee. As a system theoretically predicated on something that is simply impossible–perennial growth–capitalism relies, in practice, on cycles of growth and recession. Even these may not be very sustainable, if repeatedly taking the extreme form of “boom” and “bust.” But if society as a whole cannot easily absorb so bumpy a ride, the great individual fortunes will often be made by riding (along with Shakespeare's Brutus) that “tide in the affairs of men which, taken at the flood, leads on to fortune.”

The trick, as after the financial crisis of 2008, will be catching that tide. For the moment, some degree of trauma seems inevitable for a market that ultimately trades–among end-users, at least–in luxury goods.

Setting aside the March Sale in the same ring, a surreal episode even as the pandemic took hold, the postponed 2-Year-Old Spring Sale at OBS last week was the first real measure of the initial shock. Here was an auction that had registered records in gross, average and median for three years running and now faced an onrushing train (containing no overseas passengers, obviously).

Year-on-year comparison is of limited value because of the accommodation this time of a small but valuable group of refugees from Fasig-Tipton's cancelled sale at Gulfstream. These realized eight of the sale's top 10 prices.

Taking these and other supplementary entries out of the equation, the core catalog naturally suffered rather deeper losses than those registered on the surface. The gross for the whole sale shrank by 19.8% from $73,183,000 to $58,701,000 and the average by 14.4% from $108,903 to $93,176. Without the Gulfstream transfusion, however, the core market would have shed around one-third of its 2019 value; and the average would have been down by around a quarter.

Some, no doubt, would settle for even so severe a bump in the road, compared with the kind of abyss that has been opening up in the industry's collective imagination. Regardless, the fact is that even the core of last week's catalog can't be sensibly compared with the equivalent sale in 2019.

Across all North American juvenile auctions last year, 30.2% of the animals catalogued were scratched; last week, 40.8% failed to make the ring. While vetting was presumably at a higher premium than ever, the principal driver for this jump in defections was surely the number of private sales preceding the sale. Pragmatic consignors had been receiving scouting missions from trusted clientele all spring. And while private deals doubtless accounted for the very numerous no-shows in the supplementary catalog, they may also have contributed to loss of impetus in the core market. (Certain elite stallions were conspicuously reduced in their representation through the sale.)

Remember, also, that the earlier auctions usually leave vendors the option of regrouping at Timonium. This time, of course, there was no such safety net. Though itself postponed, the Fasig-Tipton Midatlantic Sale is only days away.

If anyone is equal to tough decisions on a horse's value, it's the guys who present a 2-year-old for sale. They know that 10 seconds of theater can sometimes be too unforgiving a window to demonstrate the true potential of a horse. Often, if retaining sufficient faith and nerve, they will cling to the wreckage and find partners to prove a higher value on the track. This time round, however, many surely felt obliged to write off a project altogether. Despite the depressed values, the clearance rate held up at 80.1%, virtually identical to last year.

Nor, as such, would a juvenile auction necessarily be the most reliable litmus test for the wider market. These represent the end of a cycle, already comprising serial visits to the ring: as a yearling, weanling, even in utero. Throughout that process, values depend heavily on the confidence of pinhookers. The industry's morale, to that extent, is nearly self-fulfilling.

But the cost of the raw materials has been rising steeply in recent years. So yes, the North American juvenile market last year passed $200 million for the first time ever, with the average transaction up 8.5%. But the typical yearling, the previous fall, had cost pinhookers nearly 30% more than had been the case only two years before.

Now, in contrast, we may have the kind of environment in which fresh cycles of investment can begin. If you're a talented young pinhooker, you probably won't need quite such a head for heights to test the water now.

In the end, last week's sale was a nettle that had to be grasped by a few unlucky vendors and consignors on behalf of the whole industry. If the usual complaints about polarisation were shriller than ever, then that's hardly surprising. If anything, the fact that there was still competition for the better horses is more important than a predictable expansion of no-man's-land.

In 2009, the average at this sale shed 15%. But since the tremors on Wall Street were already being felt the previous year, it may be more pertinent to record that the average between the 2007 and 2009 sales slumped by 23.5%. Conceivably this crisis, being more abrupt, may have compressed its impact in corresponding fashion.

Either way, it will doubtless feel like a long way home. Looking back to 2008, the worry is that the bloodstock market–though greatly favored by all those cash steroids injected into the economy–took much longer to filter the benefits than did mainstream indices. The Dow Jones lost 33.8% in 2008, but recovered 18.8% the following year and maintained solid gains annually until 2015. The United States GDP, similarly, haemorrhaged 2.5% in 2009 but rebounded 2.6%in 2010 and maintained a decade of growth. North American bloodstock, in contrast, lost 21.2% in 2008; 32.2% in 2009; and another 6.5%, even on those compound losses, in 2010. It was not until 2011 (up 18.2%) and 2013 (up a crazy 27.9%, and even then only in tandem with the biggest spike in the Dow Jones) that its own recession levelled out.

Whether our business will again ride the slipstream of recovery in this very different crisis remains to be seen. But let's just give a moment's attention, and due credit, to the dollars and cents banked by the big winner in whatever kind of market may be left to us.

It's obviously an unlucky time to be launching a stallion. Having recently reiterated a personal regard for the horse, however, it was gratifying to see Not This Time consolidating his brisk start on the track–and a precocity that had not been widely anticipated, in a son of Giant's Causeway–with a knockout sale. From 23 members of his debut crop catalogued, it was a rare distinction to get as many as 21 into the ring; staggering, to find a new home for all but one (a colt who got as far as $95,000 without reaching his reserve); and spectacular, to top two of the four sessions. As a $12,500 stallion, Not This Time baked a cake of rare consistency for a $205,400 average; and then applied the icing in the $1.35 million filly who led the whole sale.

At the best of times, of course, many a good horse will slip through the cracks. Browsing the returns, it looks as though a reluctant farewell must have been said to several youngsters that showed all due gusto under tack and still failed to gain traction. Equally, someone out there will have taken home a foundation mare, or maybe a game-changing stallion, for little money: a tide taken at the flood.

After all, we're dealing with a guess laid upon a guess. Who can say how the global economy will look, even in a few months' time? For now, it's about laying duckboards across the mudflats and keeping as balanced as possible.

The last big shock to the system was caused by financial institutions squeezing its functionality to breaking point (i.e. precisely because of that pressure towards constant growth). The origins of this crisis, plainly, are more extraneous. But you could argue that the post-2008 recovery, and subsequent surge, in turn saw boundaries being pushed, whether in fiscal, political and regulatory terms.

Certainly the instruments used to stimulate growth were all about liquidity–nugatory interest rates, quantitative easing, etc.–and much medication was still being prescribed long after the patient came out of intensive care. That was always going to leave governments short of options, in the event of a relapse. So it remains to be seen how they get back on an even keel, after suddenly being forced into lavish paternalist interventions to stem the catastrophe of a global economic shutdown.

What we do know, in our business, is that the post-2008 therapies were especially congenial for the affluent and that some of them played up their winnings in our business. Then they landed a bunch of tax breaks. The bull run continued breathlessly. It seemed like it would go on forever. After each record-breaking sale, it felt like a moral duty to remind everyone what happened to the “unsinkable” ship. But you might as well go round the Churchill infield on Derby day with a sandwich board, urging repentance, for the end is nigh.

By the same logic, however, it is an equal imperative now to urge everyone not to panic; to keep the faith; to know that the value now available in the marketplace will someday generate the next boom.

As we've noted, last week's market was really centred on the current appetite for a racehorse. We'll have a better idea of what lies ahead when the pinhookers show what they have left–whether literally, in their coffers, or simply in terms of confidence–at the yearling and weanling sales.

Meanwhile here's something for them all to ponder. Because one of the problems of the bull run was that it inverted the whole premise of commercial breeding. It made the sales ring, not the racetrack, the key to far too many matings. If it takes a market crash to correct that, well, for the long-term sake of the breed, that might even be a price worth paying.