The WSJ’s take on tangible assets; Apollo Magazine wants the art market to “come to its senses;” South Florida’s Aventura mall drives interest with art; Kenny Schachter’s Art Arbitrageurs.

This commentary by Marion Maneker is available to AMMpro subscribers. (The first month of AMMpro is free and subscribers are welcome to sign up for the first month and cancel before they are billed.)

Tangible Assets Outperformed Financial Markets in 2018

You might have missed this Wall Street Journal article on tangible asset gains in 2018. The story cites a range of sources to contrast returns in tangible assets like art (10.6%), wine (10.2%), and large and colored diamonds (0.4%) with now-cursed public market investments in the S&P 500 (down 5.1% based on total return), cash (1.9%) and gold (down 2.2%.) The story offers a graph of the HAGI index for classic cars that reached a post-crisis high at the end of 2016 and has since pretty much bounced repeatedly off a top. Going the opposite direction, the wine index cited comes off a plateau in 2016 and goes up and to the right aggressively most likely reflecting Chinese money in the wine market.

• “Cars have been the best-performing luxury investment over the past 10 years, gaining 289%, according to a report published by Knight Frank earlier this year. Coins gained around 182%, wine 147% and jewelry 125% over the same period, while antique furniture and Chinese ceramics lost value.”

How seriously should you take this story? The art numbers come from AMR’s Art 100 index. You can’t invest in that index for a number of reasons. There’s a fair bit of statistical manipulation going on to make the index act like an index.

There are very few ways for investors to access the work of the artists who comprise the index in a way that will track the index. In other words, just because Monet prices go up across the index doesn’t mean your Monet got more valuable, as we saw in the November sales. The same can be said of the wine and classic car markets. You have to buy the right bottles, the right cars to benefit from the rise. To date, there is no good mechanism like an ETF or Index fund to buy the asset class for allocation.

Remember too that the art market in 2018 was rebounding from lower sales volume two years running. Accessing those gains would require some phenomenal market timing.

Apollo Wants the Art Market to “Come to Its Senses”

This commentary in Apollo Magazine raises a question about whether the art press is interested in the fundamentals of the market if covers. Note that the author attempts to make a point about third-party guarantees using the sale of a work that rather noisily refused to accept a guarantee of any kind.

• “The result of third-party guarantees is that works of art come to auction with estimates that bear no relation to an artist’s established market value – there were countless examples in November of works offered at four or five times previous auction highs. The most extreme case of hyperinflation was David Hockney’s Portrait of an Artist (Pool with Two Figures). The previous auction record for Hockney stood at $28.5m but a figure of $80m was plucked out of the air for this particular canvas. The consignment was intended to tempt Paul Allen, the co-founder of Microsoft, who had never hidden the fact that he had always wanted the painting, but he died shortly before the auction took place. What kind of financial deal lay behind this particular sale is anyone’s guess, but these bars are arbitrarily set and auction-house employees have to scrabble around to find people prepared to jump over them. The increasing number of works that sell on a single bid, or even a second bid, suggests how strained and unhealthy – and ultimately dreary – this situation is becoming.”

Going further: on what basis does the author claim that the consignor chose $80m to entice Paul Allen? Most in the industry had acknowledged that the consignor had sought $100m for the picture privately and believed it to be worth that. The author also makes it sound like Allen died in the days leading up to the sale. Allen died a month before and it is doubtful the consignor would have made his plans entirely contingent upon a single buyer who surely wasn’t showing interest in the weeks leading up to the sale when guarantees were refused.

Also, the consignor got his price. So the estimate wasn’t contingent upon a single bidder.

The author also doesn’t seem to understand the basic issue with a third-party guarantee. It is a pre-arranged sale. So complaining that the third-party guarantee is creating an unrealistic estimate has the process backwards. The work is sold at predetermined price. If anyone else wants to buy it, they must be informed that they cannot and will not unless they pay more than the already-secured price. Creating an unrealistically low estimate when you have a bid above the estimate range might be a good way to engage more bidders but it would be an even better way to frustrate potential buyers. That hardly seems like a realistic strategy for an auction house that cultivates repeat buyers.

As for estimates exceeding previous auction records by four- and five-fold “countless” times in the November sales, that seems hardly seems like a statement based in fact. The Hockney auction record was close to $30m and the estimate $80m. Other works with estimates above the record price like the Soulages or the de Stäel are based upon auction records for lesser works. Usually when we see estimate levels that exceed previous public prices it is because there have been private sales at much higher levels. Apollo Magazine is either pretending the auction houses are unaware of private sales activity.

More South Florida Adventures in Art & Real Estate

Jackie Soffer has strong South Florida real estate cred as well as art world bona fides. She’s the CEO of Turnberry Associates which her father built into a powerhouse that owns the Fontainbleu in Miami as well as the Aventura mall. She’s also married to Craig Robins who has combined art and real estate in Miami to make an out-sized impact. Architectural Digest points out that Soffer has been stock-piling art over the last dozen years to refresh the huge Aventura mall in North Miami. She’s still buying:

• On the way to that property north of Miami now is Robert Indiana’s iconic sculpture Love, snapped up at a Christie’s auction last month for $1.87 million.
• Artists include Louise Bourgeois, Wendell Castle, Lawrence Weiner, Julian Opie, and Daniel Arsham.
• “[T]he art is an audience attraction—and great selfie bait. For example, Soffer concedes that there’s also a popular and much-photographed “Love” sculpture on New York’s Sixth Avenue, near the Museum of Modern Art. But she brags happily, “That’s red and blue. Ours is a red, blue, and green artist’s proof!”

Kenny Schachter’s Art Arbs

Kenny Schachter’s diary from his holidays in Switzerland contains a gnostic observation on the relationship between the worlds of finance and art that’s got us scratching our heads. Although it is certainly true that what “sets today’s dealers apart from those in periods past is their sheer wealth, whether inherited or generated through industrious art-trading—or a combination of both.” It isn’t clear what Schachter is referring to when he says, “we’re seeing the private-bankization of dealerships where gallerists are growing to resemble a hybrid of financiers and derivative investors—art arbs (aka arbitragers)—who sniff out opportunities like truffle pigs, often at the expense of their traditional client base.”

One would have thought the problem facing art dealers in the current market is the lack of arbitrage opportunities where art dealers traditionally made their money. Dealers found sellers who did not know the true value of their work and bought for a price high enough to please the seller but low enough to make a profit on a subsequent transaction either a year or two or three down the line or immediately to another collector perhaps only the dealer knew was in the market for such a work. A dealer, by definition, was the buyer of first resort, the person a collector, or even an artist, went to for ready cash while the dealer figured out how to sell the work and to whom.

The global information system surrounding the art market, of which Schachter is a highly visible feature, has made that harder for dealers.

Schachter goes on to say that, “Dealers as equity players is a world away from the tradition of nurturing relationships and connoisseurship.” And though he admits that a century ago there was Lord Duveen who stitched up the secondary market, “what I am referring to is of an altogether different degree.”

The only problem is that Schachter doesn’t give us any examples of what constitutes a “different degree.” He abruptly shifts his focus to the clients. “[T]here’s also a role-reversal going on: investors are buying and selling as never before,” Schachter says naming Steve Cohen, Dan Sundheim, the Fertitta brothers, David Ganek, and the Al-Thani family of Qatar through their QMA.

It’s all very tantalizing but just when you think he’s made his point, Schachter shifts gears again closing this line of argument by underscoring another point: “an increasing number of galleries (more than ever) are in on the action.”

In on the action how? Buying from the Cohens, Ganeks, Sundheims and Fertittas of the world? In the current high value art asset world where dealers need others to provide the capital and make their money from the trading commissions, that would make sense. Or does Schachter mean that his rich-as-their-client dealers are simply partnering with these trading collectors as peers?