Investment research advisers Lee Quaintance and Paul Brodsky of QB Asset Management Company, LLC released a very long report on their views last week. The report tries to tackle the question of achieving real return with one’s investments. Their conclusion helps explain why the wealthy have been funneling cash into A+ art these last two years as the middle of the market dwindles.They even use Leon Black’s purchase of The Scream as an example:
For savers, the ultimate question is (or should be): “where should one place current purchasing power with the objective of maintaining it without risk?” For investors: “where should one allocate current purchasing with the objective of increasing it commensurate with prudent risk?” We believe the greatly overleveraged nature of global public and private sector balance sheets currently suggests the acknowledgement of substantial ongoing currency dilution (base money inflation-induced deleveraging) as the driver of future asset valuation. In such an environment we believe the optimal risk-adjusted play is to allocate capital towards treasure. [Emphasis added]
Treasure comes in many forms including fine art, rare property and, of course, gold. (We understand some enterprising wine marketers promote a return to “SWAG” – silver, wine, art and gold – though we would categorize wine more as a consumable commodity.) Treasure does not need to have any functional utility. The all-important common characteristics of treasure are scarcity and ongoing demand. It is simply, quite simply really, a sanctuary for purchasing power during a period of currency dilution. The more currency in existence, the more currency chases scarce items.
Whether he knows it or not, (and we would bet he most definitely knows it), Leon Black just personally exchanged US dollars for treasure by paying almost $120 million for the original pastel of Edvard Munch’s The Scream. Though Leon may like the piece because it matches his sofa, there should be no doubt that its value is in its scarcity. It is treasure and it is highly likely (to use a phrase Black made famous funding takeovers with junk bonds at Drexel) to maintain its purchasing power upon liquidation – no matter how much the general price level rises. The same would be true for signed first edition Edith Wharton books, original Chippendale chests, Honus Wagner baseball cards, and Wyatt Earp pistols. They are all scarce, easily verifiable and portable (just like gold).
Beachfront homes and midtown Manhattan properties are scarce but not portable. The value of natural and human resources rely on perpetual marginal global demand that may come and go with innovation and political shifts. Taxing powers and control over shipping lanes ensure great wealth for nations but also come with great carrying costs and risks. We believe it is time to hold treasure because it is the very definition of unadulterated, undiluted, unlevered wealth (just like we learned as small children).
Treasure is quite literally priceless because price is derivative of value. [Emphasis added, again.] Price is just a number but there are only four original versions of The Scream. They may be exchanged currently for about $120 million or about 75,000 gold ounces. Were central bank-issued currency to increase in quantity by 10 times, Mr. Black should theoretically be able to exchange his picture for $1.2 billion or, well, 75,000 gold ounces.
Owning the picture for $120 million today allows Mr. Black to maintain his purchasing power tomorrow relative to a society currently over its head in unreserved credit posing as currency and financial assets. Did he pay too much? We don’t think so. Given past and likely future base and credit money creation, we think treasure represents the best store of purchasing power – and the best risk-adjusted investment class – because most investors still do not realize its current intrinsic value in real terms.
Real Return Investing (The Big Picture)