New York Times (May 31, 2012)
IT’S THE ECONOMY
How the Art Market Thrives on Inequality
Illustration by Peter Oumanski
By ADAM DAVIDSON
Published: May 30, 2012
A few weeks ago, when Edvard Munch’s iconic painting “The Scream” went
for about $120 million and became the most expensive artwork ever sold
at auction, it seemed like we had reached the climax of a fine-art
bubble. After all, from 2003 to 2007, the fine-art market grew even
faster than subprime housing. And then it kept on growing, pausing only
momentarily during the crisis before hurtling even further upward.
Eleven of the 20 highest prices ever paid at auction have occurred
since 2008, when the global economy all but collapsed. Less than a week
after the Munch auction, Mark Rothko’s “Orange, Red, Yellow” sold for
nearly $87 million.
Deep thoughts this week:
1. Art isn’t much of an investment.
2. It’s more like a bet on the .001 percent.
3. So do you believe rampant inequality will continue?
4. Wanna put money on it?
Buy Ming Dynasty, Hold Pollock, Sell Rubens
The N.Y.U. economist Michael Moses tracks the sale and resale prices
for major works of art.
Here’s the average annual return of strong painting performers over the
past decade.
It’s the Economy
Adam Davidson translates often confusing and sometimes terrifying
economic and financial news.
Many economists say that art can’t be in a bubble because, frankly,
it’s not much of an investment in the first place. Unlike stocks, an
artwork’s price reflects numerous nonfinancial intangibles, like the
pleasure of owning a painting or, perhaps more important, its ability
to signal the owner’s vast wealth and erudition. While stocks can
provide an ongoing payment stream (via dividends) and are traded in
public markets, art collectors must pay to protect their investments.
It’s also much harder for collectors to resell expensive art. Not only
is the market opaque, but few artists have real long-term value —
Jasper Johns and Andy Warhol are rarities. Sergey Skaterschikov, who
publishes an influential art-investment report, says that no painting
bought for $30 million or more has ever been resold at a profit.
Artwork itself may be a lousy investment, but selling it (and advising
on it and being an art-world consigliere) can be pretty profitable.
Because each piece of fine art is unique and can’t be owned by anybody
else, it does a more powerful and subtle job of signaling wealth than
virtually any other luxury good. High prices are, quite literally,
central to the signal — you don’t spend $120 million to show that
you’re a savvy investor who’s hoping to flip a Munch for $130 million.
You’re spending $120 million, in part, to show that you can blow $120
million on something that can’t possibly be worth that much in any
marketplace.
Art is often valuable precisely because it isn’t a sensible way to make
money. And perhaps as a result, it has become even more valuable of
late. Benjamin Mandel, an economist at the Federal Reserve Bank of New
York, has been studying the art market because, he says, “it’s a great
way to study asset price valuations.” Mandel read reports suggesting
that the market was growing at an unsustainable clip. For one thing,
prices have gone up far faster than global G.D.P.
But then Mandel realized that we had been looking at the market
incorrectly. Fine art, he said, is not really part of the overall
global economy. Instead, it’s part of the economy of a small subset of
the super-superrich, whom some economists call Ultra High Net Worth
Individuals, or U.H.N.W.I.’s. And their economy, unlike ours, is
booming. In that alternate world, fine art as a percentage of the
economy has stayed stable over the last decade, in part because a flood
of new U.H.N.W.I.’s in China, India and other developing nations has
entered the art-buying market with great enthusiasm. In 2003, the sales
at Christie’s Hong Kong totaled $98 million. Last year, they were $836
million.
The art market, in other words, is a proxy for the fate of the
superrich themselves. Investors who believe that incomes and wealth
will return to a more equitable state should ignore art and put their
money into investments that grow alongside the overall economy, like
telecoms and steel. For those who believe that the very, very rich will
continue to grow at a pace that outstrips the rest of us, it seems like
there’s no better investment than art.
So how can a thirsty outsider get in on this market’s profits, short of
opening a gallery or becoming an expert adviser? That’s the supposed
role of art investment funds, like the Fine Art Fund. Fund managers
remove the pleasures and ego-stroking that distort the investment
principles of art ownership by collecting money — the minimum
investment at the Fine Art Fund is $500,000 — from individuals, much
like a hedge fund or asset management firm does. These assets then
serve to create something of a virtual art gallery. Managers use art
expertise and close industry connections to try to buy art cheaply,
sell it high and return the profit to their investors.
In this sense, the current art market seems a lot like the Gold Rush.
In the late 1840s, there were tons of people who wanted to find gold,
but it was mainly the middlemen, who sold the pickaxes and gold pans,
who made money. And right now, the world is going to need a lot more
pickaxe salesmen — advisers, consultants, gallerists, buyers. One
confident art-fund manager told me that his pitch is simple: there are
only around 3,000 top-quality items sold each year and more than 3,000
people want them. The number of buyers is growing faster than the
amount of art.
The pitch is great, except that many art funds have collapsed. That’s
because art isn’t gold, or any other commodity in which units can be
evaluated objectively. The value of any artist’s work is determined by
an insider world of cultural arbiters who coordinate with one another.
They know long before the rest of us which new artist is going to have
a big show, who is going to be trashed in a review or whose piece was
just sold privately for a small fortune.
Because the art market isn’t regulated like financial securities,
insider dealing is generally not illegal. In fact, being a truly
influential insider is so rewarding that the slots are zealously
guarded. Larry Gagosian, perhaps the world’s most influential gallery
owner, needs a nearly impossible combination of skills — deep art
knowledge, master salesmanship, charm, ruthlessness, financial savvy
and the respect of the artists themselves — to maintain his edge and
root out competition. When you start a consulting service or invest in
an art fund, you are an outsider seeking to make money in a shadowy
market filled with brilliant insiders just like him. No wonder it
rarely works.
As I talked to art advisers and economists, I kept thinking of my
childhood in Westbeth, a subsidized housing complex for artists in
Greenwich Village. Our neighbors, painters and sculptors among them,
were decidedly not rich. To them, the very idea that art should make
someone wealthy was laughable, even offensive. It makes me happy to
think that this world of art-as-investment is a minuscule fraction of
the art world overall. Most people who create, trade and own art do it
for a much simpler reason. They just like it.
Adam Davidson is co-founder of NPR's “Planet Money,” a podcast, blog
and radio series heard on “Morning Edition,” “All Things Considered”
and “This American Life.
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