“Your currency is likely to become my problem” Former Chinese Vice Premier Zeng Peiyan in a speech, July, 2009

 

The list of shaky, dollar holding creditor nations continues to grow.  Surplus countries like Russia, China, Kuwait, Brazil, Switzerland, and as of July, India, are openly revealing their intention to diversify their nations’ currency reserves out of the U.S. dollar, in light of the U.S.’ rapid accumulation of debt in just the past six months.  “The major part of Indian reserves are in dollars – that is something that’s a problem for us.” (Suresh Tendulkar, Chair of India’s Economic Advisory Council, July, 2009)

 

Meanwhile, the S&P 500 stock Index is now trading at a record P/E ratio in the 120’s, not only because of a run up in stock prices over the past few months, but because of a dramatic diminution of corporate earnings. Emphasize dramatic. What accounts for the fall? Well, when spending by consumers accounts for 2/3 of a nation’s economy and those people suffer not only declines in the value of their homes, their largest asset, but also rising levels of joblessness, that spending can come to a sudden stop, as it has in the U.S. Given the fundamental source of the spending reduction, it would be foolish to expect a resumption in anywhere near the short-term. 

 

As a result, the majority of businesses are unable to reliably forecast a return to former levels of sales and profitability, meaning that these reduced levels of corporate earnings are neither one-time nor short-term, and in most cases, changes in corporate strategy won’t solve the problem. Instead, corporate leaders will address earnings shortfalls with more layoffs, compounding the spending and production conundrum,  further elevating the price/earnings ratio,  and rendering the datapoint even more irrelevant as a way to gauge value. 

 

As unattractive as current bank rates of return are, the stock market by comparison is today loaded with unacknowledged risks.  Tangible assets like art are far more transparent with a degree of stability that many financial institutions, and even some AAA-rated government debt, can only dream about.

 

Advertisements

Damien Hirst’s Sotheby’s Auction Begins the Unwinding of the Hegemonic Gallery/Dealer SystemArt, The Safety and Beauty of Real, Tangible Assets

“Non-financial assets form the greater part of world wealth and have been more stable in value during periods of financial and social turbulence.” – Roger Ibbotson and Gary Brinson, “Global Investing”  

Between September 15th and 17th, Wall Street and world financial markets were turned on their heads as 158 year-old investment bank Lehman Brothers filed for bankruptcy, followed by the Fed’s rescue of the insurance behemoth AIG. Credit markets seized up, stock markets plummeted and gold dramatically reversed its weeks-long downward movement. 

However, it was obvious that no one had though to inform art lovers as concurrent with the carnage on Wall Street, the artist Damien Hirst was busy staging a record auction of work by a single artist, selling $200.7 million of his most recent work at Sotheby’s. The game-changing auction of 223 original pieces of art has effectively changed the rules of the game, permitting an art lover to simply walk in off the street, without having to demonstrate their ‘seriousness’ to a dealer or gallery-owner, bid for a piece of original art and become its owner. Requirement: money. Not required: proper referrals, lineage, documentation of existing portfolio, etc. 

Not only did the sale highlight the juxtaposition between those assets with value (the visual and tangibly creative) and those woefully lacking it (creative financial instruments), but it signals a sea change in the way that artists view their options, as well as the volume of work from which the public can now choose. And in that sense it marks a seismic shift toward a newly democratic artworld. 

The wildly successful auction at which all but five pieces sold marked the first time that original artwork was auctioned without having passed through either a gallery or dealer’s hands. With the increased number of venues for marketing and selling artwork, the argument against consigning art first to high-cost (50% or higher) brick-and-mortar galleries and dealers has acquired a new solidity. 

Poverty is not the cost of respect in any other industry or endeavor, however, it has seemingly been inculcated as such within the realm of art. 

Hirst himself refers to the 50% cut taken by galleries as “an extortionate amount of money.”

When Claude Monet hosted the first exhibition open to the public of Impressionist artwork in the 1800’s, in effect circumventing the prevailing juried system, it’s unlikely there were very many cheers from the establishment. However, the exhibition held on the Boulevard des Capucines undoubtedly altered the way that artists’ sold their work.

Under the dealer/gallery system, a romantic notion was repeated often enough and allowed to codify as a truth, i.e. that artists must suffer to produce good art and that any state other than perpetual poverty for an artist translated to ‘selling out.’ Not in any other creative or sports-related endeavor does this fiction exist, and it has survived only because of the prevailing inefficient sales and management structure under which the levers of power were tilted in favor of distributors instead of producers.

In the end, no industry is spared the power of the market – all are eventually mean-reverting. Hirst’s auction represents quite a few miles logged on the road to reversion.