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.

We felt art before we intellectualized it. Just as the internet has facilitated heretofore unseen levels of political participation and contribution, the increasing amounts of artwork online is raising the public’s comfort with and confidence and trust in their own artistic gut reactions and taste.  Trust in one’s own evaluative ability is rising alongside a very quiet decline in the experts’ ability to dictate worth and value.  Formerly geographically isolated artistic fiefdoms are falling and being replaced as the internet facilitates new levels of artistic exchange and collaboration.

Those with an interest in art do not need Charles Saatchi or any other art dealer telegraphing taste. It’s no coincidence that just as an increasing number of people are turning toward a spirituality which is personally meaningful and away from traditional organized religious structures, blind faith in the opinions handed down by the arbiters of taste in the art world are gradually being replaced by an overarching supreme, personal aesthetic.

Man will begin to recover the moment he takes art as seriously as physics, chemistry or money”   Ernst Levy

 

Art fills many needs. Art and artists confer a ‘coolness’ factor onto neighborhoods,  driving communities’ economic growth. Corporations employ it as a way to motivate employees and lend bite to their brands,  and hospitals utilize its transformative power to encourage healing.   All of which helps to explain why, in concert with the current stratospheric rise in global wealth, art continues to attract a broader audience and deliver record-breaking auction results despite a worldwide economy just beginning to realize the effects of speculative excess and inevitable recession. However, even without a dawning realization of the myriad ways in which it impacts our lives, art would still be climbing because, particularly during times of economic distress, art is the asset that both pleases and prospers.

 

During 2007, America’s financial institutions wrote off a whopping $120 billion in assets stemming from the still unfolding subprime mortgage crisis. S&P is forecasting mortgage-related losses above $265 billion when all is said and done, and well-known U.S. banks have already borrowed $50 billion from the Federal Reserve to shore up their reserves. 

 

Meanwhile, the stock market is clearly unnerved by the prospect of a contracting consumer, with the S&P 500 having already lost 8% of its value year-to-date, with 6.1% of that coming in January, the biggest drop since September, 2002. Not to be outdone, the European Dow Jones equivalent lost 12% in January.  And as a result of reduced U.S. interest rates aimed at dealing with the effects of the mortgage situation, the dollar continues to lose value, having fallen 9.5% versus the Euro in 2007, 37% in the last five years. What’s increasing in value you may ask? The answer: the Euro, Gold, Silver, and ART. 

 

“Nonfinancial assets form the greater part of world wealth and have been more stable in value during periods of financial and social turbulence.” (Global Investing: The Professional’s Guide to the World Capital Markets, Roger G. Ibbotson and Gary Brinson).  On February 14th, 2008, Sotheby’s hosted the Red Auction in New York City to benefit HIV/AIDS. The  75 donated works raised $42.6 million, almost $9 million above estimates, and pieces by 17 artists sold for the highest prices they’d ever received at an auction. Ironically, on the very same day former Federal Reserve Chairman Greenspan announced that the U.S. is on the precipice of a recession. 

 

On February 5th, the Dow fell 370 points, the indexes’ worst loss this year, and the eighth worst day for the stock market since 2000. It was also the day that Sotheby’s held its auction of Impressionist and Modern works in London for a record total 116.7 million pounds, 40 million pounds over the prior record set just last June. The sale saw five records broken, with 88% of lots sold, a healthy outcome in any economy. It was also Sotheby’s highest total ever for an auction of Impressionist and Modern art in London. 

 

Just what explains these levels of spending on art at a time when, it could be argued, inextricably-linked worldwide economies are poised for a painful contraction? In short, because in some quarters, art is seen not as a discretionary luxury, but instead as the store of value that it has always been, especially during economically trying times.  

 

A survey compiled by the U.K. research firm ArtTactic found that in the second half of 2007, 40% of respondents expected a correction in the art market. Given the market’s unprecedented climb over the past eleven years coupled with the steep decline in consumer confidence relative to the woes of the credit market, that result was not particularly surprising. However, what only a few have known for quite some time is that art has often been one of the most stable, not to mention profitable, investments during uncertain economic times. In fact, when the stock market took a swoon in 1987 and again in 2001, outperformance by the art market was notable.

Two NYU economists, Jianping Mei and Michael Moses, developed the Mei Moses All Art Index. The index analyzes the repeat sales of over 12,000 works of art at auction since 1950 to generate precise return data. The pair reported in an article in Forbes that “during the armed conflicts of lengthy duration of last century, art indexes outperformed major stock indexes.”  When stock markets fell during World Wars I and II, art outperformed the S&P during most of those years, and by 1920 had risen to 125% of its 1913 value (versus 94% for the market). Further, while the S&P 500 increased 67% during the Korean War (1949-1954), art was up 108%, and during the Vietnam War (1966 to 1975) when the S&P 500 fell 27%, art rose 256%. 

However, art’s outperformance of the equity markets is not confined to times of war, but surpasses the more traditional investment vehicles as well when the markets are roiled by a troubled economy, exactly the situation we find ourselves in today.   In an article in InvestmentU,  Mei/Moses analysis of data from the 27 recessions since 1875 reveals that art does quite well in tough economic times. Investors want and need to invest their money but when confronted with volatility-producing uncertainty, the foundation of the bellwethers becomes rocky, and investors turn to art. 

 

For example, in 2000, the U.S. economy was facing many of the same conditions as it does today: declining retail sales, reduced capital spending and tightening bank credit standards. The peak in the Dow Jones Industrial Average that occurred on March 10, 2000 was followed by a loss of almost $3 trillion in market value and an overall loss for the year above 10%. Results for art were much different however with the Mei/Moses Index gaining 16%.  In addition to its outperformance, art has a low correlation with the stock and bond markets which makes it an excellent way to diversify a portfolio, and reduce overall risk. Far from being a luxury, it can be argued that art is an essential component of any portfolio.  

The arts are a workplace and living hub. The presence of art and cultural events is naturally attractive, particularly to a younger demographic, and often deterministic when it comes to choices about where to live and work. The true value of art derives from this innate understanding of art’s key, but often unspoken, role in many of the most important choices that we make, i.e. where to live, work and congregate. Those choices in turn propel economic activity. 

 

In his groundbreaking book, “The Rise of The Creative Class,” Richard Florida employs exhaustive research to determine that “places with a flourishing artistic and cultural environment are the ones that generate creative economic outcomes and overall economic growth.”  That in fact it is easy to extrapolate an area’s degree of innovation and the penetration of high technology industries, as well as its employment and population growth, based upon the resident number of artists (painters, sculptors, photographers, dancers, actors, writers, ect.).

 

Of the 350 public art programs across the U.S., the average size is just under 800K. In total, the programs fund $150M annually in public art with a decidedly upward trend. The genesis of these municipal programs is traceable to the National Endowment for the Arts’ decision to establish its program, Art in Public Places with the belief that art in highly-trafficked locations can serve as a balm to the spirit, while encouraging camaraderie and group gatherings.

 

There’s an understanding that attracting a younger, educated workforce requires that an area possess a certain creative ‘buzz’.  Supporting the arts therefore is crucial, hence the types of programs that exist in Lucas County, OH, or Manchester, England, or Columbia, MO.  These types of programs foster the flourishing of the arts and cultural opportunities, and ultimately result in an enhanced quality of life. 

 

In Lucas County, OH, the new Art Assist program provides 1% loans to residents to purchase art from area galleries with price tags between $500 to $2,500. The program’s ultimate aim is improvement of the county’s quality-of-life by enhancing its art scene and thus attracting highly sought after younger, educated workers. The program was modeled on that put in place in Manchester, England, a once vibrant factory city in need of redirection in the technology age.  There, civic leaders also came to view a thriving arts scene as vital to its rebirth. 

  

In Atlanta, GA, a new condo tower called Gallery is being developed complete with a 1,200 square foot art gallery featuring rotating exhibits anchoring the ground floor. The tower is expected to attract residents interested in creative clustering, not to mention the fact that each unit includes original contemporary art loaned to residents. 

 

In Columbia, MO, a unique arts program encourages businesses to purchase new artwork from area artists every year.  Organizers believe that original art has a strong impact on businesses’ ability to attract and retain employees. The feedback is that these businesses are perceived as offering a more cutting-edge, innovative atmosphere. 

 

When an area requires revitalization, the first tool in the governing body’s arsenal should be art.  In recognition of this reality, the state of Maryland in 2002 established the nation’s first Arts and Entertainment Districts designed to bring together artists and arts-related venues in order to spur development.

 

The data are clear that in terms of job creation, household income and governmental revenue, the arts are an invaluable industry. Therefore, the primary decision for cities and states must center around anchoring the arts.

 

Capucine Price

http://www.CapucinesBoulevard.com

Email: Support@CapucinesBoulevard.com

January 23, 2008

 

http://www.originalfineartgalleryonline.com/

http://www.cafepress.com/capucinesblvd

http://www.youtube.com/profile?user=allartallthetime

“Our chief want is someone who will inspire us to be what we know we could be.” Ralph Waldo Emerson

 

Assume for a moment that emerging artists are akin to value stocks. LIke any true value stock, the work of emerging artists is often overlooked, and their worth and prospects underestimated. However, just as Warren Buffet will search out quality companies with distinctive attributes, art lovers can unearth emerging artists  whose work is thoughtful, topical and passionately committed to a sense of relevance to modern life. And while the majority of investors fail to perceive value stocks’ improving prospects until after the greatest gains have already been made, the opportunity to discover the value of emerging artists exists now.

 

The art market continues to expand at an unprecedented pace. 2007 marked the first time in history that total worldwide sales for Christie’s and Sotheby’s hit $10 billion. In November, Christie’s posted its second highest total for sales of Post-war and Contemporary art at $325 million, second that is to the $385 million tallied in May. Notably, 93% of the works sold, and a dozen artists set records. Meanwhile, Sotheby’s sold $316 million at its November sale of Contemporary Art, the highest auction total ever posted by the firm. Sotheby’s sold 91% of its lots. 

 

CREATIVITY ENGENDERS CHANGE 

Art is attracting a new breed of buyer. At Sotheby’s June sale of Contemporary Art, over 20% of buyers were participating for the first time. Around the world, young, urban and increasingly affluent professionals are choosing art as an accessible means by which to obtain a hallmark of their culture, while demonstrating their individuality and increasing their wealth.  

The reasons for art’s broadening appeal are varied, but beyond the worldwide expansion of wealth, what’s taking place is a fundamental shift in the understanding that creativity engenders change.  Whether it be municipal or county governments, educators, or art lovers, there is a new respect for the way that art and music inculcate culture, define generations, and influence the lexicon.  When asked to characterize a decade, our responses most often include references to art and music.  Art can and often does provide society with forward momentum. 

 

RELEVANCE RULES

Despite their unquestioned quality and finite inventory, sales results of the Old Masters haven’t kept pace with those of the Contemporary and Modern art markets.  Even Contemporary furniture outsells older fare at sales and auctions. Growth in the value of Modern Art has outstripped every other category of art at auction. According to Art Market Research, prices for Contemporary Art have quadrupled since 1995 while results for Old Masters have significantly underperformed.  For the period between June 2006 and June 2007, Old Masters posted gains of 7.6% vs. 44.3% for Modern Art and 55.3% for Contemporary Art, according to the Hiscox Art Market Research Index.  And Sotheby’s sale of 304 lots during its sale of Old Masters in December, while yielding strong year-over-year results, nontheless pale in comparison to Contemporary Art results.

Two economists at NYU’s Stern School of Business, Jiangping Mei and Michael Moses, have developed one of the most respected art indices. Their work centers around an examination of the auction results of over 11,000 sales transactions.  Interestingly, in research reported in the magazine Registered Rep, they found that in over 4,500 cases it was not the most expensive paintings which provided the most return for investors, but those at the lower end of the pricing scale.

PROFIT POTENTIAL IS GREATEST AMONG EMERGING ARTISTS

As society grows more comfortable with the idea of art as a legitimate investment vehicle, the necessity of appropriately guaging the potential posed by emerging artists versus the few known, hot commodities increases. Emerging artists lack the price premium, and therefore the risk, of the more established, “growth” artists. Notwithstanding his works’ aesthetic appeal, the time to have bought Damien Hirst was when he was relatively unrecognized, or in investment parlance, when there was actually alpha relative to the art market.  

 

Like any other inefficient market, the opportunity exists in the art market to realize outsized gains via active management of a portfolio. When it comes to value investments, the greatest gain is always realized by buying the stock whose price is the furthest below its intrinsic value.  As a group, emerging artists fit squarely in the value camp, with equally strong prospects.  Why assume that a tiny minority of artists, blessed with the impremateur of a small pool of art dealers, would produce the only art worthy of collectors attention and investment?

 

EMERGING ARTISTS CUT OUT THE MIDDLEMEN

A healthy byproduct of the clamor for art has been a movement toward a more direct-to-consumer experience among artists. In the past, an artist would often spend many years selling their work through galleries before gaining entry into the auction world. However, the current market allows many to bypass the high-cost (50% commission) gallery experience altogether as demand for their work pulls them directly to auction.  There’s less of a need for a dealer or gallery owner to telegraph an artists’ worth, as intrinsic value virtually sells itself. As a result, lower commission rates paid by artists, and the ability to view work in an objective context both earlier and less expensively via the auction setting, creates a win-win for the artist and the art lover.