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  1. Wealth
October 16, 2012updated 09 May 2016 1:53pm

The Art Market Boom Frightens Me

By Spear's

Like the stock market, in a (rapidly) rising art market, the good, bad and ugly also rise in unison

Let’s look for some red flags amid the froth of the art market. Assets always seem most attractive at the top. I am less afraid of a $50m Richter than a $10m Urs Fischer, a 39 year old Swiss artist being served up as today’s soup du jour. Don’t get me wrong, I like it, and with a view to full disclosure, even own a piece (at nowhere near those levels, thank you very much).
But at the uppermost reaches of his price range, please pass the Picasso or Richter instead. It appears a matter of high prices breeding higher prices until there must come a point the ever-escalating numbers can no longer be digested or sustained. 

Only just recently, I have been offered for resale the following: a painting that sold publicly in 2004 at $300k for $5.5m; another that sold in 2001 at $2.5m for $20m; and, a small sculpture that went for $3.5m also in 2001 (same sale!) for $55m. Ok, some of these works that have undergone nuclear price acceleration are actually good, but like the stock market, in a (rapidly) rising art market, the good, bad and ugly also rise in unison. Next up, the Masters in Art Business, get in line.

Bloomberg, the contemporary art journal of choice, reported that legendary collector Peter Brandt, who married supermodel Stephanie Seymour, borrowed from Sotheby’s Financial Services Inc. against 56 pieces of art as collateral, putting up older artists like Warhol and Lichtenstein and much younger, less proven artists (what was the auction house thinking?).

Read more by Kenny Schachter

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The loan was not just to collect more art, though that was part of it, but rather primarily to rescue his newsprint company from bankruptcy, as he couldn’t get traditional commercial financing to do so. And he’s not alone: Michael Steinhardt, hedge fund pioneer, found cheaper money for a property development in Manhattan based on a loan against his art rather than the development. Too much activity like this could be a warning sign about the upward trajectory of art, but is there anything wrong with mining new sources of loanable assets within reason?

Less appealing for the nose-in-the-air, status conscious art maven is the fact that Costco, a discount warehouse club (aka grocery store), has begun selling fine art on the internet again after a false start six years ago when some Picasso drawings offered online turned out to be forged. Costco said they were driven by the idea of art for the masses, and dismissed any incongruity in the notion of selling rare, coveted fine art, including Roualt and Bonnard prints.
Costco’s reasoning was that most art professionals are deal-driven at the expense of satisfying their customers. Tell that to Gagosian, who is engaged in so many client lawsuits I could foresee the onset of the in-house gallery law firm. Whether supermarket Suprematism is healthy or not for the art market and if it can be sustained by increased demand remains to be seen.

The last London auctions in the run-up to the more significant New York fall sales saw the raging bull stumble to its knees only to quickly right itself and go on to trample a few bears in the process. But euphoria is always tempered by a little reality.
Such a scenario was evidenced by a Chris Ofili painting (auction record $2.8m), an artist whose medium of choice is elephant dung, that sold for $1.5m in October 2012 after fetching over $2.3m in 2011. A loss of over $800k in less than a year and a half, amounting to a 35% decline, is some serious shit. (Pictured above: a watercolour by Chris Ofili.)

Are the buyers of today equivalent to the Japanese collectors of the 1980s and 90s? I don’t think so, as that phenomenon represented more banking and tax shenanigans than anything else. As art is the last unregulated multi-billion dollar business, rife with fraud and misrepresentation, are we headed for a period of government reaction? Could there be art taxes akin to the UK’s recently announced mansion tax? Call it a Picasso penalty.
At these levels, maybe governments should jump in and start trading Brancusis instead of bonds. Maybe they should stop printing money and engage in some art infused monetary strategy, QE policy — quantitative easels.

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In defense of art, in the American recession of 1990-95, approximately 300 art galleries went out of business in the SoHo district of New York alone (the market didn’t constrict, it evaporated) vs the 2008-10 downturn, which witnessed barely any high profile gallery closures at all.
Part if not all of the rationale differentiating the two recessions was that in the early 1990s there was zero emerging market participation in contemporary art. Today, Qatar has launched a leveraged buyout of all the remaining art in the world (that they don’t already own). At the rate Western museums are currently deaccessioning their treasures, it shouldn’t take too long; it’s as if they don’t want to be left behind the frenetic activity of the marketplace — museum me-too-ism.

At the end of the day, although intellectually interesting, predicting the end of bubbles (or beginnings) is never good business since most of the time people go broke trying. But thinking in terms of (excessive) pricing is a good framework to have when deciding your next moves. What I mean is that over the next 3-5 years the prices of art may well seem too high, but in shorter term there is still plenty of money to be made, and I mean plenty.

On a basic level, there’s the art market participation of up and coming countries, coupled with crap banks, stock markets and sovereigns, and then there are interest rates still hovering around nil, which all in all paints a pretty picture for pictures. Remember when Michael Milken and Raj Rajaratnam were seen as a cross between gods and rock stars? And a more unlikely duo for the roles you couldn’t conjure.
Sure we could be heading for an art market not unlike that of junk bonds and hedge funds in times past. I only pray the art market doesn’t break the sound barrier in a freefall like skydiver fearless Felix Baumgartner. But let me tell you, in the meantime, there is no better way to make — or lose — so much in as short a period of time, with such fun.

Read more by Kenny Schachter

Read more on art and collecting

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