If you hosted a barbeque this past Labor Day weekend, you probably noticed that food prices are up. A hamburger costs 10.3% more than last year, and a hotdog 6.9% more.

But that’s nothing compared to the insane price inflation Casey Research Chief Economist Bud Conrad witnessed at the Pebble Beach Concours d’Elegance, a world-famous auto show and auction held in Monterey, California.

Below, Bud shares the details of his trip to Monterey, complete with photos and price tags of the most extravagant cars… including this 1963 Ferrari GTO that smashed the record for the most expensive car ever sold at auction. See if you can guess what it sold for before reading:

Bud closes by analyzing what this extreme inflation in high-end assets means for investors.

Enjoy!

Dan Steinhart
Managing Editor of The Casey Report

California Dreamin’

Bud Conrad, Chief Economist

“The rich live very different from you and me”—F. Scott Fitzgerald to Hemingway

The Pebble Beach Concourse d’Elegance is a classic auto show and auction held at the fabulous Pebble Beach golf course. I spent a full day at this year’s extravaganza.

I drive a Corvette, but my car is nothing compared to the rarefied collection of multimillion-dollar exotics on display at this show. The event has become huge. This year, investors and collectors spent $428 million to buy 791 cars. The average sale was $540,324, up 32.2% from last year.

The show was an eye opener for me. I compiled a short photojournal to demonstrate just how crazy high-end car valuations have become.

1953 Lancia

The 83-year-old owner has owned this car for 43 years. He told me that he spent the last 10 years restoring it, and came all the way from Florida to cash in.

It sold for $1.1 million later that day.

SOLD: $1.1 million

1957 Buick Caballero Estate Wagon

Jay Leno drove this car onto the stage and donated it to the George W. Bush Institute’s Military Service Initiative. The car, which cost $3,167 in 1957, was auctioned off for $300,000. I took this fuzzy picture of Jay with my iPhone:

SOLD: $300,000

But that’s not all…

The buyer then turned around and re-donated the car back to Jay, to be re-auctioned to the second-place bidder for $280,000. I’ve never seen somebody give $300,000 away. These people have money.

SOLD (again): $280,000

A Pierce Arrow (like my dad’s)

I took this picture of a 97-year-old Pierce Arrow before the auction:

After the auction, while looking through my photos, I recognized the man and his wife who bought it. They were sitting next to me. They bought it for only $170,000. I congratulated them for getting what I thought was one of the better bargains of the show.

SOLD: $170,000

1932 Lancia Dilambda Torpedo Sport

The guy in the seat in front of me bid this one up to $640,000. It wasn’t enough. He went home disappointed after another collector outbid him for $715,000.

SOLD: $715,000

1967 Volkswagen Type 2 Camper

I own a VW bus for windsurfing. I’ve never thought of it as an investment. But I’ll take better care of it after watching this one sell for $99,000.

SOLD: $99,000

Is a Ferrari Really That Valuable?

Jaguar XKE cars that retailed for $3,700 in the 1960s sold for low six figures. Porsches went for $200,000-$400,000. Mercedes Gull Wing 300 SLs were in the $1-3 million range, and a Tucker sold for $2 million.

But Ferraris were the really big movers. A whopping 39 Ferraris sold for over $1 million each, for a total of $205.9 million. That’s $12 million more than the total value of all the cars sold in Monterey in 2011.

This particular Ferrari—a 1962-‘63 Ferrari 250 GTO Berlinetta—fetched a fortune. Take a guess at how much it sold for.

SOLD: $38,115,000

That’s right: over 38 million dollars. Ferrari prices have been rising fast in the last few years, but this one hit a new high by a staggering margin. In fact, it was the most expensive car ever sold at auction.

These cars have been fabulous investments for those who can afford them. They’re helping the rich get richer.

Some wonder if this is a bubble. It looks like one to me. If you think these cars are expensive, try to guess how much this painting, The Card Players, sold for in 2011:

$250 million

You can’t do much with a painting besides hang it on the wall. At least you can drive a car. Personally, I like to see past technology honored, so I find cars a much more meaningful and better investment than art. But after compiling the data on recent sales of high-end paintings, it’s clear that the richest of the rich don’t agree with me:

Compared to rare paintings, even a $38 million Ferrari is cheap.

The Difference Between the Extremely Rich and Everyone Else Is Growing

Life is great for the top 0.1%. While California suffers a crippling drought, the Pebble Beach golf course has no trouble obtaining water to keep its grass immaculate:

The Infinity, Cadillac, and Lexus booths at the show offered free wine and cheese. Party on!

Attendees were what you’d expect: mostly male, mostly white, and older than the usual Silicon Valley crowd. I couldn’t see the bidders who were phoning in from around the world, but rumor had it that Europeans were some of the biggest spenders.

These people are in the extreme minority. Most Americans are not doing well. Household income has been declining since 1999. Offshoring, unemployment, and underemployment have decimated the middle class.

The disparity between the rich and the middle class is masked by averages. The richest 1% hold 40% of the wealth:

What’s so bad about the rich getting richer?

It’s a fair question. Of course people who work hard and succeed deserve what they earn. But this extreme disparity is unnatural. The GINI Index, which measures the difference between rich and poor, shows that we’re approaching extremes not seen since just before the Great Depression:

Government paper money is the culprit. The poor and middle class save in dollars, but dollars aren’t a safe store of wealth, because the government is always creating more of them. New dollars have been flowing to the rich as returns on financial and real assets, especially high-end ones.

Car investors don’t talk about the Fed and dollar debasement. But their actions of buying high-end items suggest that they understand what’s going on, if only implicitly.

What Does Wealth Divergence Tell Us About the Future?

I worry that the ultimate outcome of increasing inequality could be ugly. This photo, published under the headline Smash involves 8 Ferraris, 3 Mercedes, a Lamborghini, a Skyline and a Humble Toyota Prius, provides a worthwhile juxtaposition—and a warning that things can go wrong fast, even for the rich:

The Pebble Beach Concourse d’Elegance is just one example of how the US has changed since the egalitarian times after World War II. Thomas Piketty’s new book Capital in the Twentieth Century suggests that the rate of return on capital, such as stocks or real estate, outpaces that of economic growth. Piketty claims that this will cause wealth to become ever more concentrated in the hands of the few.

I only skimmed Piketty’s 695-page tome, so I can’t comment in depth on his intellectual framework or methods; but I’m not enamored with his idea of using the tax code to change society. More importantly, he ignores central banks’ crucial role in creating inequality via inflation. Printing money benefits the rich because: those in finance get the money first, before it causes price to rise; and the rich own the financial and high-end assets that benefit from inflation.

But regardless of its cause, inequality is rising. And history has shown us the effects of high inequality include:

Social unrest—Ferguson was not a single incident, but an indication of a wider discontent.

Dampened economic growth—because the middle class can’t purchase as much output.

Worsening of the boom-bust cycle—The less affluent have to borrow to keep up with the Joneses, as we saw before the housing crisis. Many Americans not only borrowed to buy homes, but they also borrowed against their homes’ equity to make up for slow income growth.

This was my first and certainly not my last foray into the world of exotic cars. I highly recommend the experience. As Yogi Berra said, “You can observe a lot by just watching.” To me, the fun weekend outing was a signpost that suggests imbalances in America are growing more extreme… and could undermine our future.

I write a monthly article for The Casey Report, our flagship publication dedicated to bringing you strategies and specific investments to help prepare, protect, and even profit from these economic imbalances. Take it for a 100% risk-free test drive by clicking here.