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Art Imitating Life: Why Last Week's Art Auctions Matter to Investors

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Those who ignore today's art world do so at their peril

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Last Friday, in a front-page Wall Street Journal story entitled Global Art Free-For-All Sends Prices Soaring, Kelly Crow discussed the historic Spring art auctions.

Her article included phrases:

"We're talking an incredible orgy of spending, and it feels like a total transformation."

...up 25% from similar sales held last May and up 74% from auctions held during the market's last peak in 2007.


...many buyers have become comfortable trading artists often to reap tidy profits."

"The art world is also churning through younger, untested artists at a faster clip than ever before."

"Last year's art stars could flame out next year, yet contemporary art collectors don't seem to mind if they bet big and lose."

"The result is a market that resembles a workshop more than a treasure chest."


As a socionomist and researcher of confidence-driven decision making, I find Ms. Crow's extraordinarily rich mosaic filled with every behavior consistent with a bubble peak:

1) Every Possible Investor Is In

In the art market's case, everyone who could possibly buy art is buying art today.

2) Frantic Speculation

Not only are "investors" trading art, they are now trading art by untested artists. Even when they are losing, they don't mind because they see endless opportunity elsewhere.

3) Price Increases Are Accelerating

Higher prices are creating higher higher demand. Art prices are rising at a 50% annualized rate. Rather than creating a rounded top, the art market is forming a classic, sharp, inverse "V"-shaped bubble peak.

Now many will say that the art market is irrelevant to other markets. Last week, Barry Ritholtz wrote about this week's record sales and offered:

They are anecdotal observations, one-off transactions in a ludicrously small market dominated by a ludicrously wealthy clientele. Given the choice between quantifiable data or anecdotal tidbits, you should always choose the data. So no, these sales are not proof of anything other than the simple truth that some people have very large bank accounts that they are unable to exhaust through normal profligacy or by paying insane prices for a handful of unique objects of art.

There are many ways to understand why these stunning nine-figure transactions are not investment-sentiment indicators.
Anecdotes can tell you about a small subset of investors or even individuals, but they don't measure the crowd. This is important, because sentiment is a yardstick of the crowd's emotional state. Collectively, what are the masses thinking, saying and most importantly doing with their money? There are many ways to measure sentiment, and the best of these avoid anecdotes.


I disagree. While individually an anecdote or qualitative measure may not matter. As tiles in a bigger mosaic, however, they frequently help to reveal a bigger and often important story.

What I am afraid Mr. Ritholtz and others have missed is that record art sales are significant. Last week Jason Goepfert of SentimentTrader shared this chart:



Record art sales may not have called exact tops, but they certainly called the 10-yard line repeatedly. When art markets are frothy, equity markets are in the peaking process.

But I also think that Mr. Ritholtz's willingness to dismiss today's art world bidders as "a small subset of investors" who are not representative of "the crowd" is woefully naïve.

In a world where a chart like the one below reflects the concentration of wealth today, art world bidders -- whether directly or through the corporations, private equity funds, hedge funds or mutual fund complexes they control -- are today's market.



Other than at the peak of the Gilded Age (or right before the French Revolution), I am not sure there has been a time when the behavior of the extreme financial elite has mattered more to the broader markets -- especially when you take into consideration this chart.




Today's art buyer is not just likely to be a financial buyer, but a central bank-financialized buyer. His/her willingness and ability to pay record prices is largely a function of the extreme liquidity largess on offer from central banks around the world..

But there is another chart from New York Times' Chronicle that is worth considering, and that is how much attention art auctions are getting today in the media:



What was striking to me about the chart above is just how much more media coverage the art world is receiving today than at the past two major art market peaks identified by Ms. Crow in her article -- the mid-1960's and in the late 1970's. The excesses of today's art market are now meaningful news, so much so that Ms. Crow's article was worthy of a front page story.

Talk about a statement on current sentiment!

As I write frequently, the media follows mood and the unprecedented frequency with which the New York Times is talking about "art auctions" suggests that something potentially historic is now afoot.

Finally, I think it is important to consider that this week's art auctions are but one important tile in the mosaic of extreme confidence-driven behaviors that are on display today among the world financial elite.

Throughout the art world we are seeing billionaires stampeding to build their own personal museums as well as a record number of new art museums and museum renovations - with the Aspen Art Museum in a league all of its own with its "if you build it, they will come" new building!
    
Meanwhile the bubble in pencil-thin billionaire-driven condominium buildings is continuing to balloon as well. This week, yet another midtown Manhattan building was unveiled. Per Bloomberg, the new MOMA Tower is "emerging when buyers can't seem to get enough of them."

That may be, but with no fewer than six other billionaire-based buildings under construction, the surplus in ultra-luxury is going to be enormous when confidence turns down.

While pundits debate whether the stock market is a bubble, there is a bubble in billionaire behavior that is about to burst. It is evident in art and in archecture -- two means that the financial elite have displayed their confidence for thousands of years. Even for today's billionaires, the excess is extreme.

Those dismissing the art auctions as irrelevent to the broader markets do so at their own peril.

Given how much the financial elite now control, I cannot emphasize enough just how important these "dizzy" art auctions are as a sign of THE top.

Peter Atwater's groundbreaking book "Moods and Markets" is now available on Amazon and Barnes & Noble.
 
"Peter Atwater brilliantly provides a framework for understanding both the socioeconomic hubris that led to the great credit bubble of the past decade and the dark social-psychological hangover that has resulted from its collapse. In so doing, he offers an invaluable guide to what promises to be a very difficult and turbulent period ahead as we experience what he calls the 'me, here, and now' behavioral tendencies of the post-crash world."  -Sherle R. Schwenninger, Director, Economic Growth Program, New America Foundation


Twitter: @Peter_Atwater
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Position in SH, DBC, USO and TBT; Creditor of JPMorgan
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