Robert Frank captures James Chanos’s comments on the art market from his appearance on Squawk Box this morning with a fuller description of Chanos’s argument for shorting BID, Sotheby’s stock:
“In the ’80s, the Japanese were buying Impressionists. Then it was modern art in the 1990s. But in the last 10 years, it’s been contemporary. As I like to point out, these people are still alive producing art,” he said.
So how do you hedge the art market? Chanos said that shorting the stock of Sotheby’s is the closest financial proxy to shorting the contemporary art market.
“For people who don’t want to sell their art, the best thing is to short the stock of Sotheby’s,” he said.
It’s odd that Chanos claims the last 10 years have been about Contemporary art when the most expensive lots sold were by Picasso until the recent Bacon sale with two modern works setting nine-figure records in 2010.
There’s also a problem with the chart Chanos showed (below,) it doesn’t match the market it is supposed to predict. Look at BID against the Dow Jones Industrial Average for the same period (above.)
BID is a very poor leading indicator of the blue chips. If you got out of the market in the middle of 2011 when BID plummeted, you would have missed the bulk of a very powerful rally. The same is true of early 1999 and 2007 when Sotheby’s stock reacted to a bad Impressionist and Modern sale in New York during November of 2007 which preceded the art market drop by nearly a year.
Finally, Chanos ignores completely the response to 2010, a very powerful year in art prices, which eventually drove Sotheby’s stock to nearly an all time high before pulling back sharply.
Chanos showed a chart showing how Sotheby’s stock price always peaks during speculative bubbles. It spiked during the leveraged buyout boom in the late 1980s, then during the dot-com bubble in 1999 and then subprime-housing bubble in 2007. He labels the current bubble as the “central banks” bubble, which has lifted Sotheby’s stock to above $44.