Asher Edelman is an art dealer with experience in the financial markets. He recently gave this talk at Art Basel Miami:
ART AS INVESTMENT
By Asher B. Edelman
Yes, this time there is an art market! As an observer of art and markets for the last fifty years, I have noticed a profound change.
In the past when markets (stocks, bonds, commodities, real estate) stumbled, there was simply a halt in the transactions of art. Stock market down twenty percent. Art market? Bond market down ten percent. Art market? Real estate down forty percent. Art market? Definitive downward movements in other markets were simply the lights in the eyes of the deer on the side of the road when it came to art.
Was there fear? Yes! Was there a wish to liquefy? Yes! Was there hubris? Yes! The owner of art believed that he or she was entitled to the last and highest price at which a similar piece of art had transacted.
It took months, perhaps years, and great pain for the owner’s capitulation and a sale at a real price relative to the economics of other markets. More sales took place at the lowest price point than on the way down. In fact, the way down was defined by inactivity. What now?
The art market had become a market because of the extraordinarily broadened international interest in art as an object of taste and investment during the last ten years. Today, it is as or more interesting to display art as it is to have a McMansion or a Bentley. Though progress has been made, the art market has reached a level of sophistication I equate with that of the stock market of the 1960s.
The issues of liquidity and transparency continue to concern those who would otherwise invest in art. These issues are in a state of flux and will improve as the business of art becomes more innovative. Innovation has snuck up on us during the last ten years and will move more rapidly over the next ten. We have seen the creation of the “Supermarket” age of popular art.
We have seen finance companies, art banks, internet trading, and a myriad of other innovative methods all adding to the liquidity and exposure of the fine arts. We have seen the rise and almost fall of the auction houses setting prices, and speculating on their ability to influence art pricing.
Ultimately, WE WILL SEE auction houses becoming utility-like structures- like stock and commodities exchanges, who serve the markets but play less of a role in setting prices. Auction prices will be set by collectors and a group comprised of speculators, investors, hedgers and insurance providers who will act as price guarantors in some form of another for almost all art at auction. Those who invest in art will be able to hedge their positions. Those who want to speculate will be able to do so with liquidity as their partner. Those who are collectors will benefit from the transparency and liquidity of this new world.
Enough for where the structure of art investment will go. Now to the REAL thing: art as an asset class. I speak of art of quality- recognizable and accepted as such for at least twenty to fifty years, and beyond the risk of instant changes in taste.
Lets look at the art market and the stock markets:
Over the last nine years (from the beginning of 2000 through the end of 2008) $1 million USD invested in:
· The Dow Industrial Index would have been at year-end 2008 $780,211, or an annualized loss of 2.7%.
· The S&P 500 Index would have fallen to $614,894 or an annualized loss of 5.7%.
· The NASDAQ Composite Index would leave only $387,420, or an annualized loss of 10.0%.
· Artprice Global Indices (a composite of 19th Century, Modern, Post-War and Contemporary indices averaged) would be worth $1,711,711 or an annualized positive return of 7.9%.
Though indices are imprecise and do not leave room for choice or judgment, the vast difference between art and equity securities is evident. Well chosen blue chip art has been a store of value in times of war, recession, depression, and a leader in appreciation in times of inflation.
As we are currently in a time of war, either recession or depression, and faced with a massive inflation, this seems as good a time as any to include art as an asset class, not to mention the pleasure of owning beautiful paintings and objects.
Recent weakness in the dollar has emphasized the international view that the U.S. recovery plan is corrupted and skewed towards a trickle-down effect, a method clearly proven to be ineffective in economic planning. The methodology in place will deepen the Depression and will accelerate an inflation which may equal that of the Weimar Republic, where the wheelbarrow became the wallet of the decade. The escape routes are limited as ultimately most countries will compete to degrade their own currencies as a matter of survival.
I recall the currency controls put in place by the Nixon administration to defend our economy-will that happen again? Art, however, remained free to travel.
Many countries require residents to report foreign holdings. Private banking is becoming less and less private. Art remains a non-declarable asset, regardless of where it is housed. It is legal to keep your art collection in a Swiss vault, a Luxembourg house, or a Chinese museum without a reporting requirement. Even in France-the notorious taxor of residents, art is exempt from a “wealth tax.”
SOME OFTEN CONSIDERED ALTERNATIVES TO ART
Why art, not gold? Maybe because we will see only see cash settlements, no more physical settlements. While gold has been the traditional safe haven in times of contraction and inflation, the risk here is that of the system. Most gold transactions take place in the form of derivatives. The banks, brokers, and commodities exchanges guarantee the counterparty responsibility of these derivative trades.
This can lead to situations like the Hunt silver debacle, in which the exchanges and the important commodities brokerages were unable to deliver physical silver, and, to a lesser degree gold, against contracts which required delivery.
The system was saved by a clever commodity trader who convinced the Hunts that he and the exchanges would go broke and not live up to their contracts unless the Hunts provided the physical commodity to the market. Fearing for the disappearance of their gains and capital, they foolishly filled the need of the brokers and exchanges, put up physical silver and eased the pressure on the market at which time the gold and silver markets collapsed! The Hunts lost all!
The system was saved. The proportions of the current physical/derivative relationship are far beyond what any group (government included) could be called upon successfully to “save” the system. There simply is not enough physical gold stock to satisfy the future and option markets, should physical be demanded.
Were the exchange and counterparties to collapse, investors who held derivative gold positions will have lost their “safe” gold positions- no gold! Whether or not this is a long shot remains to be seen, but keep in mind the gold derivative system is funded by the same crowd who brought us the mortgage crisis.
Once burnt, their fault, twice, our own. A solution could be to buy physical gold or coins. The premiums, cost, and simple practicality of this approach, however, make it an unworkable solution for most substantial investors.
THEN WHY NOT.
Shares in companies? Which ones will be here when it’s all over? Once, we would have said GM, Chrysler, Ford, Citibank, J.P. Morgan, AIG, etc. Which ones will be here in the next couple of years?
Bonds? Quality debt instruments such as governments (considered to be quality regardless of poor management) are already substantially overpriced as a result of government manipulation of interest rates. The risks in an inflationary environment are extraordinary as to any debt of mid or long term duration. Bonds will be a trader’s paradise, but only for the fleet of foot. Don’t even consider low quality corporate debt.
Real Estate? Commercial real estate has just begun to show the effect of the debacle. The decline will be steep and long. Remember, commercial real estate values are determined by cash flow and cash flow is a function of rents. In terms of residential real estate, I know of a ten thousand square foot penthouse in one of the best buildings in N.Y. that sold for $1.00 in 1974. Certainly anecdotal, as cost of carry was high, etc.. Townhouses, however, sold at $50,000 and under in the 1970’s, with a few exceptional ones reaching $200,000 – $300,000. The best of coop apartments on Fifth and Park Avenues sold in the low hundred of thousands of dollars. I would not rush a residential purchase until you believe the economy, not just the banks, but the economy has turned.
Art? Art, like gold, has intrinsic value. It is portable and private. Even under previous U.S. currency controls, one could move one’s art freely. It has maintained at least some of its value in all of the wars, contractions and inflations of modern times. There is not yet a derivatives market. There are the risks of lazy research, such as forgery, repaintings, false attributions, etc., all of which can be dealt with by careful research and selection.
It is currently less liquid than the investments reviewed prior, in fact, the narrowest of the markets we have explored. But art markets will become more and more liquid in the next years. It has always been that investing in illiquid markets which take on liquidity offer large returns.
I cannot identify a time in modern history that art has not served as a store of value when no others have been available or sustainable. Today, the knowledge and appreciation of art has proliferated throughout the world. There are transactions taking place. They take place at new market prices. With the coming inflation, important art will, as it always has, outpace the prices of most competing investments.
What I mean by art for investment is proven art by proven artists where the work has clearly made inroads in the growth of artistic expression, and is recognized for that quality among others. A short description of a few areas of art with recent market reactions to the contraction is in order:
Ancient Art: Primarily Egyptian, Greek and Roman. Recent sales have shown almost no price decline, perhaps even small increases, from 2007. A small market.
Old Masters: Recent prices are quite the same as last year’s.
Impressionist and Modern: Market is down 10-20% from the highs of 2007-2008, and more in artistic works that are not extraordinary but were pushed to extraordinary prices.
Post-War, Contemporary: Great and good works are down about 20-30% from the highs. Works which are of secondary quality, but were promoted to prices in the stratosphere have yet to find a market. I would venture a guess that this art will be available at discounts of 40-50% from the highs reached in 2007-2008. Many primary contemporary artists can be purchased at 50% below last year’s prices, even from their galleries.
Masterpieces, great, and good works of important artists will come quietly to the market as more owners seek liquidity in this time. Many of the Maddoff victims are cultured, educated folks who have built quite spectacular collections over the years. A few of the hedge fund managers have bought good to great art, though most just followed what was in style- the style of the day, week, or year.
Real estate developers, financiers and investors will access their collections, some quite spectacular, to raise cash for their businesses and other purposes. Banks will be pushing collectors and dealers to sell art to pay down debt. All of the dislocations of markets, industry, and business will bring quality art to the market at prices which we can begin to consider realistic if art is to be a store of value and an inflation hedge. Of course art must be purchased over time, with a careful view towards quality.
As many of you know, in the past I have been reluctant to present art as an investment. It has served me well over the years, even though most of my purchases were without even a thought of financial gain. It is only in the last twenty five years that I developed an awareness of the financial benefits of collecting art. The numbers have been quite extraordinary. At this juncture in the marketplace, art seems to me to present the clearest course of medium and long-term profit.