Tuesday, February 14, 2006

Looking at the art market at the start of the 21st century

Edward Winkleman commented today on a Guardian article "When Even the Most Monstrous Works of Art Cost Millions, It's Time for a Price Crash" Well is it and what is happening?

In the last decade, the art marketplace has made a quantum leap forward in size. The amount of money, number of galleries and artists worldwide has increased by a significant magnitude in the last 30 years. I am inclined to think this is a permanent state, true it will fluctuate somewhat with the economy but that the general increase will remain.

There are a number of reasons for the increase in size of the art market. The growth is unlike any change in the twentieth century and I believe it is a function of capital formation in the last decade of the twentieth century. For comparison, the last time we saw such a rapid creation of wealth was in the 1890's. A while back I took a look at the Forbes list of fat cats, in the early eighties there were two billionaires, in 2004 there were 860 or about as many as the number of early 80's millionaires. (facts from Forbes but from memory, close enough) Well what about inflation you might say? Not quite enough oomph there, a billion is 1000 times a million and inflation at best would only account for a 10x increase. No, there was an incredible increase in wealth primarily caused by the growth in the areas of technology and of course to a lesser degree an increase in population.

I also believe another reason for the increase in the size of the art market is also a fundamental economic and sociological condition linked to the increasing population. In the modern world, we have applied efficiencies of scale to the production of the basic necessities. While we may complain about how these structural changes are specifically implemented there can be no doubt that one result has been a reduction in the manpower required (jobs) in many sectors of the economy. This displacement of workers has created a situation where new jobs were required in order to maintain "full employment" and maintain social order. In order to do this we created the consumer society. Much has been said about the rampant consumerism of the US culture but the fact is, without consumption of non essential goods, the economy would collapse.

When a society is able to provide the basic necessities to a majority of the population, food, housing, clothing etc, but still needs to create more jobs to keep the expanding population employed (under control) the obvious path is to create a demand for non essential items. This is now occurring on more of a worldwide basis (China, India, Russia) I am aware of the downsides and inequities of this condition but it is what I see occurring at the present moment in history.

A side affect of these changes is that art has become commodified. That is, art has become a necessary part of the economic fabric of sufficiently developed economies. It has created an economic niche which provides employment and creates a commodity which is capable of redistributing wealth. Barring a unforeseen occurrence this condition should persist into the future.

When something becomes commodified it can be traded, bought and sold, based upon a speculation of it's value. If a commodity can be traded in a speculative manner, it can be viewed as an "investment".
All investments, stocks, bonds, real estate etc will fluctuate in price and are subject to market psychology. In particular a severe decline in price like the Millennium Crash in the stock market creates a negative psychology towards the particular asset class. Investors look for other places to invest part of their assets. In the last few years real estate was a favorite but this asset class has become fairly valued, if not overvalued. The return on bonds is relatively small so the investor has looked to other asset classes for investment opportunities.

While art has always been considered an investment I believe it was primarily bought and sold by people with a passion for collecting and an interest in art. In the latter part of the 20th century the art market saw an increase in corporate collecting based upon both a support for the arts and as an investment. At some point the "pure investors" began to take note of the increasing auction prices for art and began to treat art as an investment, as a commodity. In the last five years we have seen the valuation techniques previously only applied to other more traditional investment classes being applied to the art market.

Valuation techniques create the ability to project the possibility of a price change into the future. Forward price projection is a powerful marketing tool but one should realize it is only a speculation which works until it doesn't. Never the less, I suspect the sales pitch that it "will be worth more in the future" is a common tool used to both sell art and raise capital for art based hedge funds.

If I were privy to all the details of the current art auction markets I suspect I would find a few things typical of other investment classes.

I think we would see contemporary certain works bid higher probably excessively higher. Some of these price increases might be outright manipulation but I also think that with certain "blue chip" contemporary works, historical and critical evaluations are fuzzier, popular taste is more pronounced and the works "appear" to be liquid. Investors are willing to pay a premium for artworks which are validated, hence more liquid (easily bought and sold) because even in a price downturn there will still be a market for them. This one fact accounts for part of the pricing issues raised in the Guardian article.

Second I would expect to see a rise in "new issues", the work of young artists. The demand here is created by the desire to invest in lower priced artwork which might eventually achieve "blue chip" status and value. Additionally, the prices on these works are driven by whatever is the latest hot fashion and more subject to price manipulation.

Third, I suspect when the large investors realize when certain historical styles are fairly valued they will look to "the ones that haven't gone up yet" Futurism anyone?

What I have described above is a reasonably describes the current situation but I will also point out that it is not a normal situation. The large influx of capital into the art market is directly a function of the increase in wealth at the end of the 20th century. This is a singular event which will not necessarily occur again anytime soon.

The art market was not prepared to handle this influx of capital. Too much capital casing too few goods, it's a definition of price inflation and accounts for some of the run up in prices. In response, the art market expanded, new galleries opened exhibiting new artists as it tried to supply more goods. This is of paramount importance because it helps explain how the market for young artists work became so overheated in the last few years. As the number of galleries grew, the supply was better able to meet the demand and I would expect that investment decisions would start to be more rational.

Finally, the art market is tied to the economy in two other obvious ways. If there is a recession in the economy (sure thing for 2007), the art market will soften but I doubt it will crash. The second but major factor is inflation, not just US inflation but world wide inflation, which I believe (speculate) is on the rise for the next decade. Inflation will help maintain art prices in absolute dollars/euros but not necessarily in inflation adjusted currencies.

I don't necessarily like it but it is how I see it.


Art Soldier said...

Great post, very thorough, but unfortunately too true.

The most troubling effect for me personally, that results from this trend of hoards of money investing in "liquid" artworks, is that fewer gallerists are willing to take chances on young artists who make 'difficult' work.

Difficult art just ain't liquid.

This is why we have seen such a meteoric rise in eye-catching personal paintings that seem to be manufactured within a very narrow criteria of stylisticly pleasing characteristics. While I find much of this work to be pleasurable, rarely does it challenge the viewer, and formal or intellectual leaps are few and far between.

On the other hand, I think it's a great thing that so many artists are being given so much opportunity to have their work seen. It's up to us to find and support those making great work not supported by the market.


George said...

AS. It is important to distinguish between "liquid" and "saleable". My comments about "liquid" art works primarily refers to what is considered "blue chip" art. Artworks which have been, by some measure validated and therefore are only rarely works of emerging artists. Some "difficult" artworks may be become "blue chip" and I would speculate that they would be more liquid in the secondary market.

In a period like the one we are in, emerging artists prices may be bid up and the works will appear to be "liquid" because of the buying excitement and hype, but if the past is any indication, this "liquidity" will disappear in a down turn or major change in fashion

I agree with your other observations about how the influx of money affects not only the price but how or what art gets made. That will be my next post

Anonymous said...

i know it is unrelated to this post but i saw in your profile that you are a painter. do you have examples online?

Edward_ said...

(sure thing for 2007),


George said...

Mark, not yet.

Ed: Regarding a recession.
There is a very persistent four year cycle in the stock market which usually parallels the economy. It even has a name "Kitchin Cycle" or "Presidential Cycle" It has tended to trough around the time of the off presidential year congressional elections which is 2006. This year it is running late but I expect the stock market to peak out around the summer.

The economic contraction is often caused by rising interest rates
which we are seeing at the present. So I think the credit tightening of the last two years will finally have an affect and cause a slowdown in homebuilding which is a big part of the economy. Further, many homeowners have refinanced against the appreciated equity in their homes, when they feel home prices might decline or their jobs are in jeopardy they tend to pull in the reigns on spending which also has a constricting affect.

Regardless of what Bush says, we have a huge deficit which has to be paid for one way or another and the perception is that without new tax revenue the only way to do this is by allowing inflation to increase, which puts upward pressure on interest rates which boxes in the Fed as to what they can do.

It is possible that the war in Iraq could be pumping enough money into the economy to keep it afloat but this war seems different in terms of military hardware and I don't think it is the case.

So I expect a slowdown, how long and how deep is a bigger question. It may just be a mild contraction, or sharp and brief, either option is reasonably acceptable compared to a long drawn out recession.

There are some mitigating factors. For awhile I've suspected that the sharp money is anticipating the possibility of the Republican party being voted out of office (both 2006 and 2008) I think they will consider locking in their capital gains in anticipation of the possibility of the giveaway taxes being rescinded and this will put downward pressure on the financial markets.

While there are no "sure things" I think the odds strongly favor a decline in the stock markets (with a mini panic in Aug-Oct 2007) which both mirrors the economy and is part of the problem

Regarding the art market, it has tended to more or less follow the economy but tends to lag the stock market decline. As I said in the original post, I believe that the expansion in the art market was a real event. It may be temporarily a bit overheated but I seriously doubt it will contract back to 1990 levels. The people who suggest a crash are suffering from the psychological effects of the Millennium Crash in the stock market and see a "crash" around every corner. The art market might be sensitive to the economy but a larger factor might be inflation. The best gage of this is the price of gold which is currently at $550 and in a 20 year bull market headed to over $2000. That means that I believe hard assets like art will be perceived as a store of value and although they may fluctuate in value the trend will continue higher

So I am not suggesting one panics here, just that a bit of caution might be warranted when we see what happens later in the year.

Anonymous said...

George, brilliant analysis. It further solidifies for me one of the forces behind the change in art over the past decade, and the overwhelming effects of non-art issues on art itself, in terms of which art is promoted and contributes to "Art" as a continuum, and which disappears.

Imagine if evolution was suddenly highjacked by corporations. The success of a species would no longer rely on "survival of the fittest," but on how much money is used to promote, for example, the Dry Tortuga shrimp, over its biological competitors. Since corporations need to satisfy living investors, millions of years of subtle evolutionary change would be compressed into two or three, with mutation hastened by the behind-the-scenes application of microsurgery, hot glue or staples, if necessary. The resulting species would no longer be viable or competitive in a biological sense; the Dry Tortuga shrimp with the lobster claws glued on would have a brief lifespan. But, so long as it still appears to breathe, stocks will furiously trade hands, and CEOs will be enormously overcompensated.

"Survival of the Fittest," so far as anyone knows, will have passed from species to corporations, as the more fit corporations outperform and consume the less fit.

Eventually someone's going to get caught holding the bag. A crash is inevitable, because, for some motivated individual or corporation, the payoff of revealing the worldwide scam is going to eventually be greater than any payoff from maintaining that scam.

Decades later, when biology is no longer being manipulated, people will look back and wonder what the hell everyone was thinking, stapling lobster claws to shrimp. The species created will be considered monstrous oddities created by delusional people. That entire period of time might be characterized as The Delusionment.

Meanwhile, in a steaming mud pile in a part of the world corporations ignore, a weevil will have hatched with salivary glands mutated to secrete a cure for cancer.