‘SAFE HAVEN ASSETS’
Global art market sizzles with $142 million Bacon sale
by Patricia Reaney / Nov 13, 2013
“The record breaking $142.4 million sale of Francis Bacon’s “Three Studies of Lucian Freud” shows confidence in the art market and that the very wealthy see it as a safe haven for their money, experts said on Wednesday. Bacon’s 1969 three-panel painting, the most valuable ever sold at auction, was one of 10 world record prices set at Christie’s Tuesday evening sale of post-war and contemporary art. The New York event achieved the highest auction total in art market history with $691 million in sales. The Bacon work sold after six minutes of fierce bidding, easily surpassing the previous record of $119.9 million set in May 2012 for Edvard Munch’s “The Scream.” Jeff Koons’ sculpture, “Balloon Dog (Orange)” fetched $58.4 million, the highest auction price for a work by a living artist.
“What we are experiencing now is a kind of melt-up in the market. It is a combination of tremendous surplus capital, and the need of this small band of ultra-high-net-worth individuals to invest all that surplus cash in assets that will appreciate,” said art advisor Todd Levin, the director of Levin Art Group in New York. “Art, for better or worse, is one of these places that they feel is a safe haven to put their money to work,” he added. Art collectors with deep pockets from 42 countries registered for Christie’s sale, with Americans, Europeans and Asians among the strongest bidders. Three lots fetched more than $50 million each, 11 sold for over $20 million and 16 achieved in excess of $10 million. Colin Sheaf, deputy chairman and head of Asian Art at Bonhams in London, said the sale was not only proof of confidence in the art market at the highest level but also a reflection of the quality of art on sale. “But the fact is when exceptional objects come to market in times when people have got a lot of liquid cash, and when interest rates are low, that’s often an incentive to put their money into something which is absolutely magnificent in its own right … and continue to be exceptional,” he said. Bacon’s triptych, showing his friend and fellow painter Lucian Freud on a chair with side and face-on views, had never been offered at auction before, making it very appealing for high-end buyers. “It just reflects that this is one of the greatest Bacons in private hands and now it is in a different pair of private hands,” said Sheaf.
Levin added that the high end of the art market is very strong because the people who have tremendous amounts of capital to spend are speculating in the market. “You can’t invest in art, but you can speculate, and they view art as a commodifiable asset that they are comfortable putting a significant portion of their net worth into,” he said. “If significant fresh-to-the market work of extraordinary quality come up, it will continue to sell for very high prices to this very slim, narrow margin of ultra-high-net-worth buyers,” he added. Brett Gorvy, Christie’s head of postwar and contemporary art, believes it is not a bubble. “Our top collectors bid very, very aggressively for the best of the best,” he said after the sale, adding that many collectors were coming into the market. The state of the art market will be put to another test on Wednesday when Sotheby’s holds its sale of post-war and contemporary art.”
“Some argue that the sale is giving us a message about inflation that investors aren’t getting from the action in gold, the Dollar Index, or the government’s official consumer price index data. “Asset inflation took another leg higher last night,” wrote Peter Boockvar in a Wednesday morning note. “Thank you Federal Reserve, and thank you Bureau of Labor Statistics for not including art in the consumer price index.” The traditional measures of inflation have shown little decrease in the value of a dollar. The Dollar Index, which tracks the dollar against a basket of four other currencies, is barely higher on the year. Gold, which is thought to track inflation, is 24 percent lower. And the consumer price index produced by the Bureau of Labor Statistics shows only a small increase in 2013.
But Francis Bacon inflation is booming. In May of 2008, another Bacon triptych (meaning a three-panel piece of art) was sold for a mere $86 million. And while every work is different, the fact that the more recently sold triptych garnered 66 percent more money is notable. By contrast, the CPI has only increased by 9 percent since then (though it may be worth noting that the price of actual bacon, a CPI component, has risen by 56 percent). “It’s indicative of the time,” Boockvar, the chief market analyst at the Lindsey Group, told CNBC.com. “Stocks and bonds and rare comic books and high-end New York City apartments are all doing the same thing. What we’re seeing is massive asset price inflation generated by what the Fed is doing. And while they continue to want us to look at the lack of consumer price inflation, asset price inflation is just inflation under a different name.”
Of course, art might tell us even more than those other asset classes do. “There’s a great line that goes back to the first expansion of the art market in the 1980s, where someone says ‘Gee, art is getting expensive!’ And an artist says ‘No, the dollar is getting cheap.’ And that, to me, kind of summarizes what investing in art is all about,” said Nicholas Colas, the chief market strategist at ConvergEx Group. “If the dollar loses value over time, that’s going to leave collectibles in a pretty good spot. Anything that is rare or scarce and that people want is going to go up in value a lot.” Colas says the art inflation is a repercussion of the Fed’s $85 billion per month bond-buying program, which is known as quantitative easing or QE.
“QE has some major unattended consequences,” he said, “and income inequality and wealth inequality is one of them. It hasn’t filtered down to people who don’t own stocks. But it has made a handful of people not just wealthy, but extremely wealthy. And at a certain point they say, ‘I don’t need any more stocks, I don’t need any more bonds.’ So they buy art.” But while Colas says that the work is probably a good buy, Boockvar believes it will end badly for the unidentified bidder. “Those that are paying $142 million for a painting are not going to be able to sell it for that price when the Fed is out of the game,” Boockvar said. “Of course, we’re not going to cry for the owner of that painting. But the point is that the Fed is only influencing one small portion of the economy. And selling a painting for $142 million doesn’t give the person looking for a job a job.”
‘FLIGHT to SAFETY’
Finance Lessons, From the World of Art Auctions
by Richard Beales / November 13, 2013
“Easy money delivered by central banks pushes up asset prices, ensuring the wealthy feel even better off, while making interest rates on financial holdings unattractive, encouraging investment in things like paintings. There are more and more potential buyers for multimillion-dollar artworks. Seven bidders chased the Bacon, according to The New York Times. The Christie’s sale bears out hedge fund activist Dan Loeb’s contention, in criticizing strategy at Sotheby’s, that contemporary art is where the plutocratic action is. On Wednesday, Sotheby’s is selling a giant Andy Warhol car crash painting, the only one of a series of four still in private hands, estimated at up to $80 million. Sotheby’s will want the Warhol, along with the rest of its lots, to prove it has enough clout in contemporary art to keep Mr. Loeb at bay.”
Why Dan Loeb is targeting Sotheby’s
The activist investor wants auction house Sotheby’s to change its CEO and its strategy. He may have a point.
by Jeroen Ansink / October 7, 2013
“How does a company that outperforms the S&P index by a factor of three become a target for an activist shareholder? At first sight, the battle between auction house Sotheby’s and Third Point, the hedge fund of financier Daniel Loeb, which has a 9.3% stake in Sotheby’s, seems puzzling. In a recent letter, Loeb demanded the immediate ouster of CEO and Chairman William Ruprecht, who in his 13-year reign has grown revenues at Sotheby’s by almost 75%. Sotheby’s shares are up more than 50% for the year. Despite these successes, results could even have been better, says Oliver Chen, luxury analyst at Citigroup.
Compared to its privately held competitor Christie’s, Sotheby’s is lagging behind in Asia and in the contemporary art market. “Those are the places where buyers from emerging markets are gravitating towards, and where the biggest opportunities are.” Sotheby’s recent five-day, 3,571-lot auction in Hong Kong, which scored $23.3 million for an oil painting by Chinese artist Zeng Fanzhi on Saturday night, a record for Asian contemporary art, has done little to strengthen its market position, says Jeff Rabin of Artvest, a New York-based advisory firm. “Christie’s is still absolutely dominant in Asia, both in the high end and the midlevel of the Chinese sector.” On top of that, Sotheby’s made a “critical error” by not focusing on lower end art sales, says Rabin. While the 269-year old auctioneer has achieved some spectacular results in high-end art, including fetching $120 million for Edvard Munch’s “The Scream” last year, margins in this market are under pressure. “A buyer’s premium starts at 25% for sales up to $100,000, but drop to 20% for lots between $100,000 and $2 million, to 12% for anything above that,” says Rabin.
To get prestigious works under the auction hammer, houses will often rebate a portion of the buyer’s premium back to the seller, a practice known as an “enhanced hammer.” Since Sotheby’s and Christie’s compete so aggressively at the high end of the market, margins are squeezed, says Rabin. “Whereas on the low end, there is no rebating, and auction houses are earning a full commission. That is the kind of business that keeps the lights on in difficult times. It is also a part of market that Sotheby’s has virtually abandoned.” According to Rabin, Sotheby’s has focused mainly on high-end properties. “It is a strategy that doesn’t work.” A focus on lower end auctions will not cheapen Sotheby’s brand, which is one of the oldest and most respected in the art world, says Rabin. “It didn’t for Christie’s, which has a sterling name as well. Focusing on cheaper lots is a good way of attracting new customers. Wealthy people don’t start buying at the highest end, no matter how much money they have. They will have to develop a taste for collecting art first, for instance by starting at the $150,000 level and moving up from there. That’s what makes Christie’s so strong: It caters to every segment of the market place.”
With the recent adoption of a poison pill that prevents an investor from acquiring more than 10% of its shares, the battle lines between Sotheby’s and Third Point seem to have been drawn. “Ruprecht and his board of directors have bought themselves some time to align themselves with the other shareholders,” says Citigroup’s Oliver Chen. “The problem is that there is a variety of interests, both long-term and short-term, as well as starkly different views of the intrinsic value of the company. I don’t know who is right, but Sotheby’s should have probably been thinking about these challenges even without getting forced.” Sotheby’s declined to offer comment. The poison pill has not deterred Third Point, which, in an official statement, called the move “a relic from the 1980s.”
“Loeb is not the kind of guy who would pick a fight unless he is confident he can win,” says Josh Black, an analyst at Activist Insight, a London-based research firm that tracks the performance and campaigns of nearly 200 activist shareholders. Black describes Loeb, who was instrumental in replacing former Yahoo CEO Scott Thompson with Marissa Mayer last year, as “a fine tuner. He intends to get on Sotheby’s board with the intention of staying there for a significant period of time,” Black says. “There is a distinct possibility he will look within Sotheby’s and find an insider to take Ruprecht’s place.” Third Point declined to comment for this article. By bringing Sotheby’s challenges into the open, Loeb has already forced the auction house into the defensive position, says Rabin. “Collectors with a property for sale will still call Sotheby’s and try to negotiate a deal, but they probably will feel not as confident about it as they used to be. The question of what is going on at Sotheby’s, and what its future will be, will definitely linger in the back of their heads. In the battle for control between Sotheby’s and Third Point there is probably one sure winner though: the shareholder. “On the whole, the involvement of a shareholder activist does very well for the company’s stock,” says Josh Black from Activist Insight. “In these kinds of battles, the removal of a CEO leads to an average annualized share price increase of about 7%.”
The new ‘bling’: Rare coins and collectibles
by Ken Smaltz | November 3, 2013
“The savviest realize the power of investment, and are learning that rare coins, fine art and wine, instead of wasting money on traditional “bling,” provide a way to enjoy a luxurious life with beautiful objects and collectibles that accrue in value. Not only do commodities like coins increase in value, but they can pose less risk in terms of investing than stocks. Items like coins, wine and fine art can provide a safe haven from the volatility of the stock market. They may not be totally portable, but they can always be enjoyed in an appointed home, another asset likely to increase in value if purchased wisely.
The stock market is a great investing tool, but not without its challenges. Stock investors saw unusual market volatility in 2008 following the savings and loan crisis. There were record 100-point swings in both directions on the S&P 500 index, with the market finally petering out at a 45.5 percent loss near the year’s end, the greatest year-to-date loss since 1931. The index reached a 13-year low by March 2009. Meanwhile, fine wine investors saw their share of peaks and valleys in the wine market, but the changes were far less volatile in 2008 than in the stock market, according to data from the Liv-ex Fine Wine Investables Index. Since December 2008, the wine index has steadily climbed. With a fluctuating economy and the devaluation of the U.S. dollar, rare coin investing, likewise, is one of the best ways to ensure wealth protection during monetary, economic and social crisis. Although the number of serious coin collectors in America is under debate, since 1999, the U.S. Mint reports that more than 136 million Americans collect coins to some extent.
Among other advantages, the rare coin market is the most private and thinly traded of all financial markets. One can conceivably become a market player with about a $1 million investment. Rare coins provide numerous financial benefits to investors. Consider the following: There are no forms to fill out when you buy or sell investment rare coins. They can be easily traded and gifted. There is no annual dividend tax to pay because coins do not pay dividends. The capital gains on your rare coins can only be taxed at time of liquidation. Rare coins have entered a new renaissance with thousands of new collectors entering the market and vying for a limited number of rare coins. During a recent Sotheby’s auction, a 1933 St. Gaudens rare gold coin sold for $7.59 million. One of only five 1913 Liberty Head V Nickels sold for $3 million dollars in 2001. Experts predict the Liberty Head V Nickel will sell for more than $10 million before the end of the decade.”
the ‘CANTILLON EFFECT’
by John Aziz / August 7, 2012
“Expansionary monetary policy constitutes a transfer of purchasing power away from those who hold old money to whoever gets new money. This is known as the Cantillon Effect, after 18th Century economist Richard Cantillon who first proposed it. In the immediate term, as more dollars are created, each one translates to a smaller slice of all goods and services produced. How we measure this phenomenon and its size depends how we define money. This is illustrated below. Here’s GDP expressed in terms of the monetary base:
Here’s GDP expressed in terms of M2:
And here’s GDP expressed in terms of total debt:
What is clear is that the dramatic expansion of the monetary base that we saw after 2008 is merely catching up with the more gradual growth of debt that took place in the 90s and 00s. While it is my hunch that overblown credit bubbles are better liquidated than reflated (not least because the reflation of a corrupt and dysfunctional financial sector entails huge moral hazard), it is true the Fed’s efforts to inflate the money supply have so far prevented a default cascade. We should expect that such initiatives will continue, not least because Bernanke has a deep intellectual investment in reflationism. This focus on reflationary money supply expansion was fully expected by those familiar with Ben Bernanke’s academic record. What I find more surprising, though, is the Fed’s focus on banks and financial institutions rather than the wider population. It’s not just the banks that are struggling to deleverage. The overwhelming majority of nongovernment debt is held by households and nonfinancials:
The nonfinancial sectors need debt relief much, much more than the financial sector. Yet the Fed shoots off new money solely into the financial system, to Wall Street and the TBTF banks. It is the financial institutions that have gained the most from these transfers of purchasing power, building up huge hoards of excess reserves:
There is a way to counteract the Cantillon Effect, and expand the money supply without transferring purchasing power to the financial sector (or any other sector). This is to directly distribute the new money uniformly to individuals for the purpose of debt relief; those with debt have to use the new money to pay it down (thus reducing the debt load), those without debt are free to invest it or spend it as they like.
While we delever, investment by American corporations will be timid, and economic growth will be faltering at best. The stimulus imparted by government deficits will attenuate the downturn — and the much larger scale of government spending now than in the 1930s explains why this far greater deleveraging process has not led to as severe a Depression — but deficits alone will not be enough. If America is to avoid two “lost decades”, the level of private debt has to be reduced by deliberate cancellation, as well as by the slow processes of deleveraging and bankruptcy.
In ancient times, this was done by a Jubilee, but the securitization of debt since the 1980s has complicated this enormously. Whereas only the moneylenders lost under an ancient Jubilee, debt cancellation today would bankrupt many pension funds, municipalities and the like who purchased securitized debt instruments from banks. I have therefore proposed that a “Modern Debt Jubilee” should take the form of “Quantitative Easing for the Public”: monetary injections by the Federal Reserve not into the reserve accounts of banks, but into the bank accounts of the public — but on condition that its first function must be to pay debts down. This would reduce debt directly, but not advantage debtors over savers, and would reduce the profitability of the financial sector while not affecting its solvency.
Without a policy of this nature, America is destined to spend up to two decades learning the truth of Michael Hudson’s simple aphorism that “Debts that can’t be repaid, won’t be repaid”.
The Fed’s singular focus on the financial sector is perplexing and frustrating, not least because growth remains stagnant, unemployment remains elevated, industrial production remains weak and America’s financial sector remains a seething cesspit of corruption and moral hazard, where segregated accounts are routinely raided by corrupt CEOs, and where government-backstopped TBTF banks still routinely speculate with the taxpayers’ money. The corrupt and overblown financial sector is the last sector that deserves a boost in purchasing power. It’s time this ended.”