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We Are Not In a Bubble (And Other Famous Last Words)

Post #1717 • July 16, 2014, 9:32 AM

Jason Farago:

Following last week's lackluster sales of impressionist and modern art, a few doubters wondered whether the booming contemporary market was headed for a similar correction. Not a chance. Christie's evening sale racked up a wacky, near-incomprehensible $745m, the highest total in history for a single sale – smashing past the house's own high estimate of $500m, and beating November's $691.6m sale, whose own Bacon, Three Studies of Lucian Freud, set a record (in nominal terms) for the priciest painting ever. The sale established new record prices for 10 artists, including Newman, Alexander Calder, and Joan Mitchell – who became the most expensive woman at auction for a messy blue abstraction from 1960.

Boggling enough on its own, the $744m sale came just a day after the end of Frieze New York, where untold millions changed hands, and on the heels of Christie's own warm-up auction highlighting the "gritty, underbelly-esque side of contemporary art," a rather ludicrous phrase to describe $134.6m worth of safe, predictable painting and sculpture. And collectors are set to do it all again Wednesday, when Christie's rival Sotheby's mounts its own evening sale.

"We are not in a bubble," Christie's CEO Steven Murphy insisted after the sale on Monday. To which the correct response is the one Mandy Rice-Davies gave during the Profumo scandal: "He would, wouldn't he?" All the same, here are four theories on why the bubble keeps inflating, and why it may be a while before it bursts.

Number Four is notable:

As the economist William Goetzmann has shown, art prices rise not along with general increases in a nation's GDP, but rather with a rise in the country's Gini coefficient – that is, with the measure of a nation's inequality. In other words, art does well when most people are doing badly. No wonder, then, that the market for contemporary art has seemed so impervious to economic gyrations.

Julia Michalska asks Harald Falckenberg, Why do you think that the oft-cited art bubble won’t burst?

Today’s international art world is based on success and high prices. The world’s rich put their money in recognised art as an investment. There is talk of money laundering and a general flight to material assets in times of low interest rates, but art is first and foremost a luxury accessory and a status symbol. Again and again, the media report on new record prices for art. Of similar or maybe even greater importance is the sponsorship of art by multi-national companies. Volkswagen and BMW, just two examples, have long-term contracts with MoMA and Tate Modern to increase the value of their products. Along with showbiz celebrities and star athletes, art has become a third avenue for their promotional activities. It’s a logical choice, as images can be understood everywhere and represent desires, longings and individuality, independent of language. So today’s art is consolidated in the international world of business, glamour, events and supported by the print and online media. The set-up is perfect and would not work without stars and top prices. That’s why the oft-cited art bubble won’t burst, provided, naturally, that the whole system will not collapse.

Cue the inimitable Zero Hedge, What Hardcore Pornography Can Teach Us About Asset Bubbles:

...the contemporary art market has gone parabolic as well, and whispers of a bubble abound. What is unusual about the current art boom is the fact that buyers are tripping over themselves to bid up the works of living and active artists, where theoretically there is endless supply.

Some may argue that contemporary art is the playground of stuffy society types and has nothing to do with the rest of society, and they would mostly be right. So what's the furthest place we can go from the confines of a fancy auction house? How about a mechanic's garage. The classic car market is also on fire, and the gains are not limited to just fancy German sports cars...

Emphasis mine:

Like porn, asset bubbles are also hard to define, but given our economic history, and especially our recent economic history, we know it when we see it, and now we see it everywhere. There is a good reason why this was one of the most emailed stories in the New York Times recently. We all see it. Apparently the only people that don't see the bubbles are the people creating them.

The one common diagnosis by experts in the worlds of stocks, art, cars, real estate and debt is the the role central bank money printing is playing in their industry. Since the start of the financial crisis 6 years ago banks like the Federal Reserve, the European Central Bank and the Bank of Japan have printed trillions of dollars. We know that money has not gone towards much of the real economy because growth remains weak, jobs remain scarce and wages remain low. But the money had to go somewhere, and the asset bubbles listed above show us where. Although we've all seen the destruction that bubbles cause when they burst first hand, the Central Banks go on pumping.

Who knows? Maybe it's all noise and no signal. The generator of historical events is different from the events themselves, much as the minds of the gods cannot be read just by witnessing their deeds, says Nassim Nicholas Taleb. But you'll forgive me for thinking that the air is redolent with the scent of early 2008. We weren't in a bubble then either, you may recall. So we were told.

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