Obscure Economic Indicator: Keeneland Thoroughbred Sales

What the price of racehorses signals about the health of the world economy.

Riding the good times

All over the world, rich people have never had it so good. Thanks to high commodity prices, natural-resource magnates are flush. Thanks to low interest rates, investors the world over have access to cash on very good terms. Here in the United States, the Bush tax cuts allow the rich to do better with every passing year.

This wealth laps up all over the place—in Miami condos, at luxury-goods stores in China, and, as reader Gordon Calhoun of the Perfect Peace Farm in Zuni, Va., suggested, in the stables of Keeneland. Located just outside Lexington, Ky., Keeneland is a combination horse-racing track and sales company. The leading thoroughbred horse auctioneer, it holds sales several times a year. Bidders—or their proxies—have to show up in person to bid on some of the world’s finest horseflesh. It’s a global business. “We had buyers from 38 countries” at a recent auction, said spokesman Jim Williams. And it’s a big business. At the September auctions, Keeneland sold 3,545 horses for $384.35 million.

Keeneland’s sales data, published several times a year, is a barometer for the mood of the free-spending global ultrarich. After all, thoroughbreds are expensive, trophy, gambling-oriented products. The average price for a horse sold at Keeneland in 2005 was $95,108. (In the November sale, Sheikh Mohammed al Maktoum of Dubai shelled out $9 million for Ashado.) Like art, antiques, or fine wines, thoroughbreds are luxury goods that are also investments. Mutual funds continually warn that past performance is no guarantee of future performance. Horses are the exact opposite: They are bought in large part based on their pedigree. Good bloodlines should produce a great racehorse. But it’s an inexact science. Thoroughbreds are highly speculative bets on a highly speculative enterprise. Which means you’d expect prices to be highly related to the global rich’s collective appetite for risk. When people are flush and feeling lucky, they’ll invest big in the ponies. When people are feeling fearful about the future, they’re likely to avoid them.

Keeneland’s sales over the last 16 years show that as an asset class, thoroughbreds are high-strung and a bit jumpy. When the world’s economy catches a sniffle, the horseflesh market starts wheezing. And when the world economy kicks into gear, the horse market takes off like Secretariat at Churchill Downs. When the economy slowed in the early 1990s, Keeneland’s sales fell three straight years, slumping 40 percent from $372 million in 1989 to $225 million in 1992.

But like other speculative asset markets—the Nasdaq, for example—thoroughbreds exploded in the 1990s. Between 1993 and 2000, Keeneland’s sales rose eight straight years. In both 1998 and 1999, a few years after Federal Reserve Chairman Alan Greenspan warned of irrational exuberance, sales rose more than 20 percent. The market peaked in 2000 with $754 million in sales, up threefold from 1992.

As the global economy went into a recession in 2001, with stock markets plummeting, the global rich felt the pain. Keeneland’s sales fell sharply in 2001 and 2002. (There was another factor at play, too: “Mare reproductive loss syndrome” led to a smaller crop of foals.) But in the past few years, as low interest rates, lower taxes, and higher commodity prices unleashed a tidal wave of liquidity among the world’s wealthy, the market for thoroughbreds came roaring back. The dollar volume of sales rose about 14 percent in 2003 and 20 percent in 2004. In 2005, says Williams, sales rose another 10 percent to $744 million, just a nose behind the 2000 peak. In other words, the animal spirits of investors are still running free.

Slow early-Christmas sales at high-end retailers like Tiffany and Nordstrom may have raised questions about the continued willingness of the rich to spend on unnecessary baubles. But there are apparently no such worries in bluegrass country. Keeneland has a record number of horses—2,508—cataloged for auction in January.