Anyone looking for ominous signs of a coming market blowout might want to keep a close eye on the art world, where auctions have been luring wealthy customers from emerging markets and smashing sales records by wide margins.
Investors, collectors and dealers forked out nearly $1.2-billion (U.S.) last week – far above industry expectations – for a handful of illustrious names at the fall contemporary art auctions in New York. A 1969 tryptych by late British artist Francis Bacon fetched the top price – a staggering $142.2-million, way beyond its pre-sale estimate of $85-million. Bidding on an Andy Warhol painting topped out at $105.4-million, another record. And famous living artists aren't doing badly either. A colourful sculpture by Jeff Koons went for $58.4-million, the largest sum ever paid at auction for work by someone still breathing. "For a moment last night, I thought I was in the commodities market," one collector told Bloomberg after an auction at Christie's.
It's worth noting that the last record for a Bacon was an impressive $86.3-million in 2008. Ron DeLegge, editor of ETFGuide.com, has done some work on what he calls the Francis Bacon Indicator. From the time of the previous record Bacon deal in May, 2008 to the end of that annus horribilis, the S&P 500 plunged 36.2 per cent. A similar drop this time, he says, would take the benchmark index back to prices last seen in 2010.
Art market experts, just like their counterparts in commodities, real estate, stocks and bonds, insist this is no bubble: The market is healthy, demand is growing and supply is limited. Not even sales of six works last week by avid collector Steve Cohen, whose once high-flying hedge fund must pay penalties of $1.8-billion to settle government charges of illegal trading, was enough to dampen auction prices.
Stocks may be overvalued, bonds have growing downside risks, gold has definitely lost its attraction and real estate is deep in bubble territory in China and some other key markets. But the rich are eagerly parting with their money for art for a variety of personal and financial reasons. As a rising asset in a low-interest rate world, it's viewed as a potential hedge against future financial storms. After all, demand remained relatively stable in the aftermath of the Great Meltdown. Also, owning a famous piece of art offers a heck of a lot more prestige than buying another commercial property. And it's a lot cheaper than trying to compete with the Russian oligarchs (who are also big art buyers) for sports franchises.
"The market is alive and happy," declared a Sotheby's official. And if you're the owner of Christie's or a long-suffering Sotheby's shareholder, you should probably be happy, at least for now.
But Mr. DeLegge reminds his readers that after the art market sank in the early 1990s, it didn't reach its 1989 top again until 2003.
"Although the connections between Francis Bacon and surging asset prices may seem like a stretch, the re-invention of facts to justify higher and higher prices for stocks, real estate and objects of wealth is predictably human," he says.
So is forgetting that all bubbles burst sooner or later.