Modern Art Market Superheats

As I read this article, red lights and sirens started going off in my head. Why? I cannot possibly imagine that this sort of financial frenzy has any positive connotations for the equity markets:

"You want a Mehretu? A Hirst? A Koons? Fat chance. A much-watched lawsuit is exposing the painful truth of this overheated market: It takes more than money to buy a hot piece of art . . ."

"[A] courtroom battle has become an object of fascination in the art world. That may be because it reflects an increasingly common collector’s predicament—at its heart, it’s about someone’s being denied the opportunity to obtain what he can patently afford. The contemporary-art market hasn’t been this overheated since Soho circa 1989. Nowadays, hedge-fund billionaires who stroll into Chelsea galleries seeking work by Damien Hirst, Jeff Koons, or Cecily Brown quickly discover that money alone won’t help them get it. There is, more than ever, a waiting list, and more to the point, a pecking order within the list, which vaults some collectors above others.

When did collecting art become such a maddening exercise for wealthy collectors, akin to having to go before picky co-op boards only to be rejected over and over again? Even Rembrandt and Dürer had waiting lists. But “lists for younger artists are a much more recent phenomenon,” says Chelsea dealer Barbara Gladstone. “It’s a function of this excitable market.” People on Wall Street are seeking contemporary-art trophies—and waiting lists make works even more enticing to obtain. It sounds familiar, and naturally everyone wonders when this bubble will burst. Right now “feels like the last days of the Roman Empire,” says private-art curator Todd Levin. “Compared to the eighties, it’s a much broader group with much more money”—though some of the people are the same ones who bought art the last time around."

Why is this not a good thing? Three reasons:

1) Wanton disrespect for money as an asset class, as depicted by mad bidding wars for unknown artists, typically only occurs when there is too much of a good thing around; I.E., when the Fed has cranked up money supply (think M2); That condition gets easily rectified by the Fed merely turning the spigot off, which I suspect is 6 months to 1 year away; It takes a little less than a quarter (2 months or so) for weak money supply to be fely by the market  (See Mirror Image and Money Supply Peak discussions for more details);

2) Frenzied speculation in any significant market cannot be quarantined, as it is a condition of the mind, not the body. It has the disconcerting tendency to infect other markets;

3) Can a bifurcated economy the size of the United States continue indefinitely? Can Wal-Mart merely amble along, while — at the same time –high end art dealers blow the roof off the dump? I’m not at all sure what the answer to this one is . . .

As to the timing, I would guess — and its only a guess — that we will be approaching an equity climax sometime over the next 1 to 3 quarters.

In the scheme of things, this ranks somewhere below the Time Magazine naming Amazon’s Jeff Bezos its man of the year (late December 1999); The market peaked in March 2000.

What it will require is the speculation in other markets — art, commodities,real estate — to spill over into equities.

Make no mistake about this; It is a foreboding sign . . .   

UPDATE:  March 3, 2005, 10:13PM   

Just glanced at today’s NYT. Page one story:  A New Prince of Wall Street Buys Up Art

Pretty timely, huh?

She Can’t Be Bought
Christopher Mason
New York Magazine, March 7, 2005 issue

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  1. rob commented on Mar 2

    another great indicator is the silly restaraunt indicator. In Seattle there is a huge increase in restaraunt openings. All are chic, over designed, feature goofy cuisine and overpriced wine and drinks. They typically have novice silent partners and make virtually no profit. They are spreading through town like a plague.

  2. dark1p commented on Mar 2

    Amazing, Barry. I was reading the very same article this morning and having exactly the same thoughts. Many people think that the bursting of the Nasdaq bubble in 2000-2002 took all the necessary air out of the markets, but I fear they’re going to be horribly mistaken. Other indices, like the Dow and the Small Caps, are very close to their all-time highs. That relatively short first blast down was only a warning of what’s to come. Societal bubble symptoms like the current art market, a return to giant bonuses on Wall Street, the complacency in the air regarding the deficit and accountability of our leaders–heck, even the warm welcome home for Martha Stewart–indicate that, psychologically, people are sort of partying like it’s 1999 (or early 2000). Precisely the kind of mentality that foreshadows a very nasty reality check.

  3. dark1p commented on Mar 2

    Rob, I also second your emotion. The restaurant thing is an excellent indicator, also.

  4. cerinn commented on Mar 2

    I don’t necessarily agree with this only because this type of Art by definition is only available or able to be afforded by a select few. I’ll buy the thesis on housing but art simply tells me that a select few individuals have too much money to spend.

  5. Eric Anderson commented on Mar 2

    cerinn–I’d agree if not for this statement: “Compared to the eighties, it’s a much broader group…”

  6. chez Nadezhda commented on Mar 2

    “Severe storm warning indicators” now flashing

    I follow the global capital markets broadly but not closely. Like the Brads (Setser and DeLong),

  7. chez Nadezhda commented on Mar 2

    “Severe storm warning indicators” now flashing

    I follow the global capital markets broadly but not closely. Like the Brads (Setser and DeLong),

  8. Golddigger commented on Mar 2

    I remember well the beanie baby craze and kids paying up for those things. It ran concurrent to the late 90’s equity boom.

    Cheap money doesn’t just wash into stocks or houses or gold, so this one bears watching.

  9. nostradamus commented on Mar 3

    Clearly there is a lot of money floating around these days. On top of plain cash, there’s E-Z credit. So we’re playing musical chairs with asset inflation. First the stock market, then real estate, now art/collectibles. Maybe when real estate cools, it flows back into stocks. My beat has always been real estate and i’m boggled at what i see here in Calif.

    When i read that 36% of all homes sold in 2004 were bought by speculators or as second homes, I was dumbfounded.

    Here is Calif, there’s not one single-family dwelling—and precious few multi-family units—that throws off positive cash flow at current valuations. Kind of throws a new twist into the concept of “income” property.

    I have a friend whose 23-year-old son (with a net worth of around $2,500) is thinking of buying an $800,000 home in Oakland in partnership with a college buddy. They hope to live in it for a few years and walk away with a few hundred grand. Believe it or don’t, he’ll likely get financing. By the way, he is unemployed.

    We have created a whole generation of citizens who believe that you can’t get anywhere via work and salary (they’re probably right) and the only way to riches is through speculation/gambling.

    The fastest growing city in the US is Las Vegas. The bestperforming US stock index last year was gaming/gambling.

    As that blue-collar comedian likes to say, “There’s your sign.”

    Is this sustainable? Of course not. Will it end in tears? Of course it will. Can it continue?

    Sure, why not.

    We have a complicit goverment who thinks nothing of running up the biggest deficits in US history. We have a Fed chairman who, four years ago, spoke about budget surpluses as far as the eye can see. Now he bloviates about our budget “crisis” while pumping the economy to bursting with credit/cash via negative interest rates.

    I’m not speaking as a disinterested academic or a permabear. We’ve been real estate bulls in Calif for over 50 years. Last year, we sold 150 of our 200 apt units in NorCal for an absurd price. We owned these buildings since the ’60s. There’s a time to buy, there’s a time to sell. We think it’s time to sell. Were we early? Maybe. But we figured we’d beat the rush.

    No one could represent the insanity better than the National Assoc of Realtors chief economist David Lereah. When the news came out that 36% of all 2004 home sales were to “investors” (read: leveraged speculators), Lereah saw no red flags.

    “What we’re seeing is that real estate is no longer just a place to live. It’s a viable alternative to stocks and bonds,” he said. Tell me about it. As far as we’re concerned, real estate WAS a viable alternative to stocks and bonds. No longer. The powers that be have destroyed real estate for years to come, much as they destroyed the stock market in 2000.

    We’re getting out just as the amateurs are getting in. Oh by the way, Lereah just published a book last week entitled, “Are You Missing the Real Estate Boom?: Why Home Values and Other Real Estate Investments Will Climb Through The End of The Decade—And How to Profit From Them.”

    Good on ya, mate. Nothing like leading lambs to the slaughter. Thousands of Ma and Pa Kettles buying into leveraged negative-cash-flow investments at the top of the market.

    I assume his sequel will be titled, “How to Make Zillions From the Pain of Others: The New Foreclosure Opportunity.”

  10. Jon H commented on Mar 3

    “We have created a whole generation of citizens who believe that you can’t get anywhere via work and salary (they’re probably right) and the only way to riches is through speculation/gambling.”

    Well, that’s what Bush’s tax policy is telling people.

  11. lee commented on Mar 3

    There’s nothing wrong with a little healthy speculation—like buying a lotto ticket every week in the offchance you’ll win a million or putting a few bucks in a slot machine and pulling the handle.

    But when large swathes of our citizenry have been infected with a belief in “money for nothing”, there’s a problem.

    We saw this in the late 1990s with tech stocks, now again with real estate.

    In the late 1990s in San Francisco, my 50ish Korean barber was daytrading tech stocks while she was cutting my hair, shouting into a phone—to be heard over the blowdryer—in broken english to “Buy Cisco, sell Healtheon”. The last time I saw her was in 2001. I had just sold my business to a dotcom (for cash, no less) and I asked her how the stock trading was going. “No more,” she said. “I’m getting into real estate.”

    Taking a flyer on a tech stock, OK. Playing the slots on a lost weekend in Vegas, OK. But parlaying $50K to buy a $500K Calif tract home—that could fall 20-30%—is risking the chance of losing over $100K. Not OK. Buying the same home and losing $2-3K a month via negative cash flow. Not OK. Hoping to buy something overpriced and illiquid with the thought of flipping it in a year or three. Not OK.

  12. Fester’s Place commented on Mar 28

    Housing as the New Paradigm Buster :)

    But both are saying the same thing — by the time that people are recycling the language of newness and differentness, the phenomena is already old.

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