WHY ART IS THE BEST INVESTMENT YOU’LL EVER MAKE 

ART: HOW TO PRESERVE WEALTH AND MAKE MONEY IN VOLATILE FINANCIAL TIMES – PART IV

IT’S TIME TO PUT YOUR ASSETS ON YOUR WALLS

“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”

The devolution of confidence in traditional investment alternatives, in concert with the elevation of the importance of design and aesthetic throughout the world, points to a renaissance in the value of art to a degree never before witnessed.

After all, the art auction market is fair and transparent with a degree of stability that many financial institutions, and even some AAA-rated U.S. government debt, can only dream about. 

“The main contributor to both absolute total returns and to the variance of total returns was the asset allocation policy decision.” ( Global Investing: The Professional’s Guide to the World Capital Markets, Roger G. Ibbotson and Gary Brinson

Even absent the conditions present in the market today, making the deliberate decision to remain in the stock market inherently implies acceptance of a degree of risk. In that case then the decision should be made to diversify with the inclusion into the portfolio of assets which have no or little correlation with that of the market, in order to minimize risk and maximize return potential. 

As a real and tangible versus a monetary asset, art’s low correlation with the stock and bond markets makes it an excellent diversification vehicle, enabling reduction in overall portfolio risk. 

A key study examining the returns of 82 large pension portfolios by Gary Brinson, Brian Singer, and Gilbert Beebower uncovered that over 91% of the variance of returns is attributable to the asset allocation policy decision, rather than specific stock or bond selection decisions. (Gary P. Brinson, Brian D. Singer, and Gilbert L. Beebower, “Determinants of Portfolio Performance II: An Update,” Financial Analysis Journal, May/June 1991.)  

Therefore, the research data argue persuasively that allocating a portion of all investment portfolios to art as an investment class is as imperative as the very decision to employ an investment policy. It shows that for an investor with the twin goals of preserving wealth and growing capital, with today’s market conditions, history points to the capital preservation and return superiority of art.

Hence, it doesn’t matter what genre of art is selected, what matters most is the policy decision for its inclusion.  This study therefore highlights the importance of the investment policy with a clear implication for the Art market.  Why not apply the respected and proven paradigm of the investment world as it relates to financial assets, to the real, tangible asset that is Art?

Art’s status as a store of wealth is undeniable by historical standards. 

Under the old paradigm, one would observe that with a buoyant art market in large part due to exuberant participation of buyers from a single industry, that with the sudden ill fortunes of that industry, would necessarily mean at lease the near-term deceleration of the art market. Not so this time.  The growth of the current art market is traceable not simply to a single industry or even a single continent, but to a hitherto unseen confluence of global wealth and acquisitive desire.

It has been an incredible year for contemporary and modern art. Christie’s and Sotheby’s together posted record sales over $12 billion. Despite all the economic travails discussed in these posts, art has been one of the only asset classes that has continued to outperform and bring an important degree of diversification to owners’ portfolios. If you consider the fact that the 10-year inflation-adjusted return of the benchmark S&P 500 has actually been negative,  that real estate can no longer be considered an asset upon which to retire, and, finally, the inflation which will only continue to ravage real returns, the choice for art becomes clear. 

Capucine Price

http://www.CapucinesBoulevard.com

September, 2008

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WHY ART IS THE BEST INVESTMENT YOU’LL EVER MAKE 

ART: HOW TO PRESERVE WEALTH AND MAKE MONEY IN VOLATILE FINANCIAL TIMES – PART III

IT’S TIME TO PUT YOUR ASSETS ON YOUR WALLS

“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”

The Inflation Problem

Economies around the world are experiencing slower growth. However, the imported inflation in those countries where the currency is tied to the U.S. dollar has eliminated central banks’ option of reducing interest rates in order to generate growth. Growth has been further stymied by those countries’ losses from their dollar-denominated assets. Of all the maladies around the globe however, it is dollar-driven food price inflation which poses the gravest danger to the sustainability of the dollar peg. To reduce inflation, Thailand and the Philippine central bank increased intereste rates this week. South Korea has been selling dollars in an effort to revalue the Won. To address inflation, the Indian central government recently decided took steps allowing the rupee to rise in value against the dollar, sparking a rally in the stock market. For example, Pakistan experienced riots at its stock exchanges as a result of continued movements downward, on top of rapidly rising commodity price inflation. A recent survey there highlighted the fact that 71% of respondents see inflation as a problem. This situation has been pointing many decision-makers toward the necessity of de-coupling from the dollar, revaluing their currencies higher, accelerating the movement away from U.S. investment vehicles, including the AAA variety, and hence, the vulnerable position that the dollar now finds itself in. 

Bank Failures:

It doesn’t end at IndyMac, the U.S.’ third largest bank failure ever. Bank regulators,  due to their increased expectations for greater numbers of bank failures, has for months been bringing bank examiners out of retirement in order to handle the anticipated workout workload. Many more banks are expected to fail.Interestingly, IndyMac wasn’t even on the regulators’ watch list when it failed, indicating that other banks are almost certainly as vulnerable. In its call upon depositor insurance to consumers, IndyMac alone will exhaust 10% of the FDIC’s total warchest

Not all things with high prices are in a bubble/Art Market will not implode

The most well-known of the art indexes was developed by economists from NYU’s Stern School of Business Jianping Mei, and Michael Moses.  The Mei/Moses Fine Art index exist for seven different categories of art including Old Masters, 19th century, Impressionist, Modern, postwar and contemporary, and American before 1950.  It is based on repeat sales of paintings, sculpture, ect. and captures almost 95% of all auction data. The index indicates that art had a compound annual growth rate of 12.05% between 1953 and 2003 versus 11.65% for the S&P500 index, with reinvested dividends. 

IT’S TIME TO PUT YOUR ASSETS ON YOUR WALLS

“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”

The devolution of confidence in traditional investment alternatives, in concert with the elevation of the importance of design and aesthetic throughout the world, points to a renaissance in the value of art to a degree never before witnessed.

After all, the art auction market is fair and transparent with a degree of stability that many financial institutions, and even some AAA-rated U.S. government debt, can only dream about. 

Foreign Investors Reducing Their Exposure to the Dollar

Because sovereign wealth funds have begun to more aggressively reduce their exposure to the dollar.  With over $3 trillion in investable assets, Foreign governments already own a whopping $1 trillion of Fannie and Freddie debt. Having watched as their investments in faltering U.S. banks such as Citibank (down 71% past 12-months) have cost them huge losses, Gulf state funds as well as China’s primary investment fund (SAFE) are increasingly diversifying out of dollar assets. China’s State Administration of Foreign Exchange (SAFE), which holds most of China’s $1.8 trillion in foreign currency reserves in dollar-denominated investments, is evaluating investments outside of the U.S. Their move follows moves by Kuwait which cut its ties to the dollar in 2007 and their statements this week that they will not buy any additional Fannie or Freddie debt, and Singapore which has also reduced its exposure after watching its $5 billion stake in Merrill Lynch fall by almost 40% so far. The $200 billion in funds managed by the China Investment Corporation have taken huge negative hits as a result of their $3 billion investment in Blackstone Group in 2007 followed by their $5 billion in Morgan Stanley earlier this year. 

The largest sovereign wealth fund, the Abu Dhabi Investment Authority, is growing increasingly sensitive as its population shoulders the pain of inflation imported as a result of the countries’ tie to the dollar. And while the desire to diversify currency exposure is gaining strength, most sovereign funds, due to their own significant dollar holdings,  are concerned with doing so in a measured way that is unlikely to cause an accelerated dollar plunge. 

What is left then for those banks and investment banks in need of capital infusions, who don’t have the benefit of being Government Sponsored Entities, and can no longer rely on sovereign wealth funds to lend a hand? They, like Merrill Lynch announced this week, are reduced to selling assets. Having raised $15 billion in capital year-to-date from hedge and sovereign funds from Singapore, Thailand, Kuwait, and South Korea, the investment bank announced that it will sell its stake in Bloomberg.

Foreign investors currently hold around $2.6 trillion of U.S. Treasury Securities. Unfortunately, foreign investors’ questions about the strength of our assets don’t end with Fannie and Freddie. A clear indication of this latest statement comes in the form of credit insurance costs for AAA-rated U.S. Treasuries which in July rose to 16-20 basis points, higher than other nations for the first time ever. 

If the country is called upon to write the check to Fannie and Freddie, our increased debt burden will only serve to call into further question the health and reliability of the dollar, which exacerbates oil and food price inflation, and further threatens the dollar in an endless, macabre loop. 

 

Capucine Price

http://www.CapucinesBoulevard.com

Email: Support@CapucinesBoulevard.com

August, 2008

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http://blip.tv/search?q=capucinesboulevard&x=0&y=0

http://www.originalfineartgalleryonline.com/

 

IT’S TIME TO PUT YOUR ASSETS ON YOUR WALLS

 

“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”

 

The devolution of confidence in traditional investment alternatives, in concert with the elevation of the importance of design and aesthetic throughout the world, points to a renaissance in the value of art to a degree never before witnessed.

 

After all, the art auction market is fair and transparent with a degree of stability that many financial institutions, and even some AAA-rated U.S. government debt, can only dream about. 

 

The Current State of Things 

The U.S. has experienced many decades of economic growth facilitated by technological innovation and ongoing reductions in the cost of labor. As a result, it has enjoyed one of the highest rates of consumption in the world, bolstered by low interest rates and record rates of liquidity, all courtesy of the rest of the world’s willingness to buy U.S. debt. 

 

The DJIA is down 13.1% year to date and the S&P has fallen 12.4% in that time. The U.S. dollar has lost over 10% against a basket of six currencies over the past year, 40% over the past six years, a time when the price of oil is up seven-fold. The Chinese Yuan is up 7% year-to-date versus the dollar after having gained 7% in all of 2007.

 

The U.S. money supply is growing at the rate of 16% per year, the highest rate of growth since 1971 and, correspondingly, Gold is up 283% against the dollar since June 2001. The real source of many consumers’ wealth, their homes, have already lost 16% of their value since the peak in 2006. 

 

Writeoffs related to the credit crisis have already passed the $550 billion mark. Keep in mind that this still only reflects sub-prime losses, as no commercial or Alt-A losses have been taken as of yet. After assuring in June that economic risks had diminished, Fed Chair Ben Bernanke testified in mid-July that “there’s no doubt there’s further deterioration in the cards for bank earnings and we’ll continue to see financial sector woes play themselves out.”  Despite inflation in the form of rising consumer prices, currently at an annual 5.6% rate, the highest since 1991, the stresses in the financial system negate almost any efforts by the Fed to tackle inflation. That does not bode well for the dollar.

 

Fannie Mae and Freddie Mac:

The liquidity and capital crisis at these two mortgage behemoths is set against their guarantee of a whopping $5.3 trillion in mortgage credit, or half the total of all U.S. mortgages. The main issue however, revolves around their relative under-capitalization; the two have only a combined $81 billion in capital and that inadequacy means that raising capital has become a priority in this era of mortgage crisis.  That roughly 2% of liabilities in the form of capital means that the danger exists that if the value of the mortgages that they guarantee declines by a small percentage……From where that capital will come is the big question, and it is increasingly likely that it will be the U.S. taxpayer who will have to shoulder the burden once again. Why? Absent their ability to raise additional capital in the public market they will almost certainly be rescued by the federal government because they are at least implicitly, if not so stated in their prospecti, guaranteed by the federal government, meaning that their failure would send a pronounced negative signal to the nations’ creditors were they allowed to fail. Hence, their bailout could cost as much as 10% of GDP, the rating agency S&P has said  and “could create a material fiscal burden to the government that would lead to downward pressure on its rating.”

 

A new era of value equality is unfolding among the worlds’ artists. In the case of the price differential between the work of the contemporary ‘art stars’ and emerging artists, consider for a moment an important influencing factor also found in the stock market: uncertainty. For instance, a company operating in an industry where a key competitor suddenly becomes the subject of an investigation will undoubtedly see its stock price at least temporarily negatively impacted regardless of culpability simply because of investor uncertainty. Lack of knowledge in any industry acts as a damper on value, and let’s face it, the famous are such because to date they’ve received the entirety of the spotlight from the art market apparatchik, hence relatively little is known about those without such support.

 

However, the internet is THE equalizing factor. In an era where the internet functions as the facilitator of the distribution and promotion of the work of emerging artists from all over the world, the era of the ‘art star’ deemed such by the critics, curators and self-appointed art experts has come to a necessary end. 

 

In order to assess value and predict the direction of prices with respect to any asset, including stocks, it’s instructive to look at comparables. The work of the Old Masters and other dead artists has stood the test of time thus guaranteeing its worth in the form of the stratospheric prices garnered today. What is less clear is the rationale for the difference between the prices paid for the work of many contemporary artists and the much larger group of emerging artists. In any other industry, over time such a relative value disparity would disappear. 

 

Given the increasing recognition of the value of art today, equalization of the prices between discovered and undiscovered artists is inevitable if only because the relative value of the latter is highlighted. In the case of two stocks with equal earnings generating power where the sole exogenous, differentiating factor is the amount of ‘coverage’ by Wall Street that each receives, the difference in price to the long-term investor highlights the less expensive as a powerful value, and the common sense choice. Yes, the value stock may lack the imprematur of the big Wall Street analysts, but how many times have they overlooked a diamond covered in coal dust? Emerging artists are the greatest investment opportunity that no one has ever heard of.

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.  

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

 

What’s the best capital gains tax rate for the sale of artwork? There are currently  several arguments being made against reducing the capital gains tax rate on the sale of artwork from the current level of 28% to the 15% rate enjoyed by sellers of real estate, securities and other assets.  Arguments against the reduction center around the view that art is not an asset which plays any real role in economic activity, particularly job creation, and revenue generation.  Nothing could be further from the truth.   

 

When the forces against tax reduction argue that to do so might shift money into art at the expense of more productive activities they fail to appreciate the significant and documented economic impact that art has made and continues to make on everything from job creation, to neighborhood redevelopment to tourism. 

 

Uneven tax policy has also played a role in reducing museum offerings, and hence the public’s access to art as a result of the tax treatment of artists.  Since they are only allowed to write off the cost of materials for donated works instead of the fair market value of the artwork, artists are less inclined to make donations. The negative impact on museums is compounded by the strength of the art market of late, particularly for Contemporary art, all of which reduces museums’ ability to acquire work.

 

Nevertheless, the value of innovation to our society is becoming more and more clear. Businesses that own and display art are perceived as being more innovative, interesting and desirable places to work.  Real estate developers are incorporating art galleries into new condominium towers to entice buyers seeking differentiable living experiences.  In connection with its recent renovation, the Aventura Mall in South Florida now includes a twelve-piece, museum-quality art collection designed to be a destination in a clear indication that creativity is valued and valuable.

 

In the third study conducted by the group Americans for the Arts titled Arts and Economic Prosperity III, data was collected from 116 cities and counties, 35 multi-county regions, and five states. The areas stretched from Walnut Creek, California to Anchorage, Alaska. They found that nationally, the arts generate $166.2 billion in annual economic activity, up 24% over the past five years. That’s greater than the 2006 GDP of either Malaysia, Chile, the Czech Republic, Columbia, Singapore, and the list goes on!  Furthermore, the arts provide 5.7 million jobs and contribute $104.2 billion to household income,and, they produce $30 billion in annual local, state, and federal revenue. 

 

Two specific examples:  In Baltimore City, Maryland, the arts are responsible for $270 million annually, provide 6,500 jobs, and generate $12.6 million in local government revenue.  In a study released in June, 2007, Rochester, New York (Monroe County) calculated that the attendance and sales revenues generated by its arts and cultural organizations were responsible for a total $199 million annual infusion into its economy. 

 

Far from playing a neutral role in this country’s economy, art continues to demonstrate its uniquely productive role as a strong generator of jobs and tax revenue, just as any other important industry. Therefore there really isn’t any defensible rationale for penalizing art investors with an incremental 40% tax bill.

 

 

Capucine Price

http://www.CapucinesBoulevard.com

Email: Support@CapucinesBoulevard.com

January 15, 2008