Tuesday, October 02, 2007

The State of the Art Market

There has been a considerable amount of speculation over the fate of the current art market. Given the unrest in the financial markets at the current time, I suspect the question actually being asked is whether or not the art market is about to crash.

Certainly there have been signs of excess which one might expect to be followed by a contraction in the marketplace, but this alone is not enough to precipitate a major decline in prices. Desires for a puritan art market purge because art is "not the way it is supposed to be," reflect a lack of knowledge on how markets work and what the consequences of such a purge might imply.

In my opinion, the fate of the US art market is completely tied to the fate of the US economy. Attempts to rationalize art valuations based upon notions of aesthetic quality, taste, or scarcity, are relative within the current economic environment, and therefore less important to a discussion concerning the state of the overall art market.

It’s the economy stupid...

The US economy is currently undergoing a period of severe stress. The recent decline in housing prices has been leading the economy into a potential recession, and problems within the subprime lending markets threatened to spread worldwide with disastrous consequences.

In mid-August the credit problems began to visibly unravel, the US stock markets took a 12% hit which threatened to turn into a full fledged panic. The central bankers (FED and ECB)were forced to intervene in order to maintain stability. On September 18th, the Bernanke FED cut interest rates by 1/2 percent, this was an indication of the FED’s concern over the severity of problem and a signal that the FED was going to aggressively intervene.

If I am correct in my interpretation of Bernanke’s decision to cut interest rates I would expect to see the following:

1. The FED will continue to cut interest rates by another point between now and March 2007, most likely over the next three months.

2. The Dow Jones Average will continue to rally, finishing the year near 15,000, and continue to rise throughout 2008.

3. Although we will see a slowing in the US economy, a deep US recession will be adverted.

In short, I believe the US stock markets made a major low in September and as a result, will continue to outperform all other investments, including art, for the next few years. This would be a change in focus and could shift some speculative capital out of the art market into the equity markets.

I do not think the art market will crash.

Generally, markets do not crash because prices appear to be ‘too high’ and almost never when everyone is anticipating a crash. Excluding extraordinary outside events, markets tend to crash after an existing period of declining prices, at some point the participants panic in fear that the decline will continue unabated, and the markets crash in capitulation.

Given the unfolding of events which have taken place in the financial markets over the past three months, I would expect the fall auction results to be tempered by a bit more caution, this may have a dampening affect on prices.

On the street, in the galleries, it is a bit harder to say what the affects of the recent financial crunch will have. Since I expect a strong stock market for at least the next year, the galleries may continue to benefit, albeit in a less frenetic manner.

Finally, if I am wrong and the FED does not lower interest rates as I suggested above, then all bets are off, the US economy will likely enter a recession and the art market will decline in a manner similar to 1990.

1 comment:

zipthwung said...

I'm a man of means by no means....

Sub-prime. I didn't know or think about what it meant, not being in the market for a loan nor having any money to play the market with.

Sub prime. Below good. Not the best.

But very favorable for loan sharks.

I must say this whole bundling of loans together into bonds seems a bit abstract to me - like set theory. When you pull the strings at either end someone is left holding the bag.

Or not, I don't know what I'm talking about.

Oh yes, art, well that's all good.