Does Record Picasso Sale Signal a Bubble?

Does Picasso Sale Signal a Top for Stocks?
Art auction records say more about billionaires than markets.
Bloomberg, May 12, 2015

The headlines screamed across the Web yesterday: Picasso’s Women of Algiers smashes auction record. Two Artworks Top $100 Million Each at Christie’s Sale. Picasso Painting Sells for $179.4 Million; Sets Auction Record.

The record for paintings was joined by a record for a sculpture, when Alberto Giacometti’s “Pointing Man” was purchased by an anonymous bidder for $141.3 million.

Some people like to point to these auctions as proof of a financial market unmoored from reality. Like the “unicorns” — those tech startups valued at more than $1billion — many see it is yet another piece of evidence that the top is here, that we’re are in the midst of a huge bubble that is destined to collapse.

Whether we’re in a bubble or even an overvalued market is a worthy debate. But these examples are not proof of overvaluation or really much of anything else. 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.

Some traders rely on sentiment surveys, especially the American Association of Individual Investors’ bull-bear readings. I have yet to find a whole lot of value in this metric aside from those rare times when the readings are at extremes. Survey responses tend to swing wildly in response to what just happened, and they typically lag behind market cycles.

If you are going to use AAII survey data, I prefer the asset allocation survey. During the past 23 years, individual investors on average have held a portfolio made up of 60 percent stocks. As of April, stocks and stock mutual funds made up 67.9 percent of individual portfolios, according to AAII. That is a somewhat higher than the average, but below the extremes seen in the past. In 1999-2000, equity holdings were 17 percent higher than the mean, while in 2005-07 they were 10 percent more.

There are lots of other ways to measure sentiment: the VIX (sometimes known as the fear index), mutual-fund flows, put-call ratios, the Arms Index (a technical measure of advancing and declining shares), the percentage of stocks reaching new highs and lows, the percentage of New York Stock Exchange shares trading below their (choose one) 50- or 200-day moving averages and so forth. For the most part, these kinds of sentiment readings tend to be quite noisy while offering no definitive insight much of the time.

Back to the artwork: There are more than 7 billion people in the world. There are almost 320 million people in the U.S. How many folks can afford to spend almost $200 million on a Picasso or $150 million on a Giacometti? There are about 2,300 billionaires in the world. That pretty much defines the size of the market for these sorts of collectibles.

That means these record-breaking art auctions may say something about the rarefied world occupied by the super-rich, but their informational value is of little importance to market sentiment. So stay calm and don’t panic just yet.

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I originally published this at Bloomberg, May 12, 2015. All of my Bloomberg columns can be found here and here.