Tag Archives: Art Bubble

Record-Setting Art Sales Confirm Global Liquidity Bubble

Art and collectibles prices have exploded in the past decade as a result of the extremely frothy conditions created by central banks. Hardly a week goes by without news headlines being made about ugly, tacky, or just plain bizarre works of art fetching tens of millions, if not hundreds of millions, of dollars at auction houses like Sotheby’s and Christie’s (often sold to rich buyers in China or Hong Kong). Make no mistake: we’re currently experiencing a massive art bubble of the likes not seen since the Japan-driven art bubble of the late-1980s that ended disastrously. Two art market records were made in the past week: the $91.1 million “Rabbit” sculpture by Jeff Koons, which set the record for the highest amount paid for a piece of art by a living artist, and the sale of Monet’s ‘Meules’ painting for $110.7 million, which set a record for an Impressionist work.

The New York Post reports on the Koons sale

A sculpture of a silver rabbit by artist Jeff Koons sold at Christie’s auction house in Manhattan Wednesday for $91.1 million, setting the record for the highest amount fetched for a piece of art by a living artist.

Koons’ “Rabbit” surpassed the previous record, which was set just last November when British painter David Hockney’s “Portrait of an Artist (Pool with Two Figures)” sold for $90.3 million. Both totals include the auction house fees.

Art dealer Bob Mnuchin, the father of Treasury Secretary Steven Mnuchin, made the winning bid for the Koons work, Bloomberg reported. Mnuchin made the purchase for a client, according to the report.

The sculpture, which stands just over 3 feet high, is made of stainless steel and based on an inflatable children’s toy, according to the auction house.

“Rabbit” by Jeff Koons is displayed at Christie’s in New York on May 3, 2019. Photo credit: AP

Reuters reports on the Monet sale

One of the few paintings in Claude Monet’s celebrated “Haystacks” series that still remains in private hands sold at auction on Tuesday for $110.7 million, setting a record for an Impressionist work.

The oil on canvas, titled “Meules” and completed in 1890, is the first piece of Impressionist art to command more than $100 million at auction, said Sotheby’s, which handled the sale.

That also represents the highest sum ever paid at auction for a painting by Monet, the founder of French Impressionism and a master of “plein air” landscapes who died in 1926, aged 86.

“Meules” was one of 25 paintings in a series depicting stacks of harvested wheat belonging to Monet’s neighbor in Giverny, France.

The works are widely acclaimed for capturing the play of light on his subject and for their influence on the Impressionist movement.

“Meules” by Claude Monet is displayed at Sotheby’s New York on May 3, 2019. Photo credit: Reuters

Last month, I wrote about “bubble drunk” millennials in Hong Kong who paid $28 million for Simpsons art:

The Kaws Album’, KAWS. Courtesy Sotheby’s.

Today’s art bubble (like many other bubbles that are currently inflating) formed as a result of the Fed and other central banks’ extremely loose monetary policies after the Great Recession. In a desperate attempt to jump-start the global economy again, central banks cut and held interest rates at virtually zero percent for much of the past decade. The chart of the Fed Funds rate below shows how bubbles form when interest rates are at low levels:

In addition to holding interest rates at record low levels for a record length of time, central banks pumped trillions of dollars worth of liquidity into the global financial system in the past decade:

Assets around the world – from art to stocks to property – have been levitating on the massive ocean of liquidity that has been created by central banks. For example, the S&P 500 has soared 300% since its low in early-2009:

In order to understand today’s art bubble, it is helpful to learn about the art bubble of the late-1980s that ultimately crashed and burned. Throughout the 1980s, Japan had a bubble economy that was driven by debt and bubbles in property and stocks. Japan’s economy was seemingly unstoppable – almost everyone in the West was terrified that Japan’s economy and corporations would trounce ours while destroying our standard of living in the process. Of course, few people knew how unsustainable Japan’s economy was at that time.

As a result of hubris and the enormous amount of liquidity that was flowing throughout Japan’s economy in the late-1980s, Japanese businesspeople and corporations started to speculate in art, often bidding previously unheard of sums that Western art collectors would never have dreamed of paying. For example, Yasuda Fire and Marine Insurance paid a record $39.9 million for Vincent van Gogh’s “Sunflowers” at a London auction in 1987. Ryoei “wild fellow” Saito, Chairman of the Daishowa Paper Manufacturing empire, paid $160 million for the world’s two most expensive paintings – a Van Gogh and a Renoir. At the peak of the art market in 1990, Japan imported more than $4 billion worth of art, including nearly half of all Impressionist art that was on the market. Of course, the art market plunged along with Japan’s bubble economy in the early-1990s.

Vincent van Gogh “Sunflowers” 1888.

Unfortunately, today’s art bubble will burst just like the art bubble of the late-1980s. China, with its massive debt bubble, is currently playing the role that Japan played in the Eighties. While most people are probably not worried about the coming art market bust and won’t be directly affected by it, the point of this piece is to show how the art market acts like a barometer for the amount of froth there is in the global economy and financial markets. When the art market goes ballistic, that is typically a sign that the economic cycle is in its latter stages. We are fast approaching a time when art speculators will deeply regret paying $91.1 million for a steel rabbit sculpture and tens of millions of dollars for Simpsons art.

“Bubble Drunk” Asian Millennials in Hoodies Blow $28 Million on Simpsons Art

During an economic bubble like the late-1990s dot-com bubble or the U.S. housing bubble, frivolous, hubristic investments and business decisions become appealing to many people who are what I call “bubble drunk.” In a bubble, money is flowing, the social mood is euphoric, and asset prices are surging – greed is the dominant emotion and risk is barely an afterthought. In this type of environment, speculation in art and collectibles becomes popular, often leading to an art bubble (for example, Japan’s bubble fueled an art bubble in the late-1980s). Of course, after a tremendous surge, the bubble eventually bursts and speculators are left holding works of art that are worth a fraction of what they paid. For the past several years, there has been an art bubble that has been primarily driven by the Greater China region – here is a recent anecdote reported by Bloomberg:

Millennials snapped up $28 million worth of art inspired by the Simpsons television show, along with skateboarding shoes and cans of spray paint at a Sotheby’s auction in Hong Kong as a new generation of collectors comes of age.

“The auction room suddenly got a lot hipper, with all these cool millennial buyers in hoodies,” said Edie Hu, art advisory specialist at Citi Private Bank in Hong Kong. “Their tastes are very different from their parents, and Sotheby’s is tapping into that.”

The highlight of the 33-lot auction of items belonging to Japanese fashion designer Nigo was a painting by Brooklyn street artist KAWS based on the Beatles’ “Sgt. Pepper’s Lonely Hearts Club Band” album but populated with Simpsons characters. It sold to an unidentified buyer for $14.8 million including fees, a record for the artist and about 15 times the estimate.

A young Chinese buyer with a short back and sides haircut, who was wearing a green army camouflage jacket, shelled out $2.6 million for another KAWS piece called “UNTITLED (KIMPSONS #3).” The work depicts the Simpson family sprawled unconscious on their couch, with the artist’s signature crosses for eyes.

“I am not surprised by the demand, but I am surprised by the final number,” said Max Dolgicer, a New York collector who’s been buying the artist’s work for seven years. “It’s a very fast-moving market.”

Simpsons Art
‘The Kaws Album’, KAWS. Courtesy Sotheby’s.

Young, hip millennials paying jaw-dropping amounts for trendy, lowbrow art is the type of behavior that you see in a bubble. That Simpson’s “art” is tacky and sophomoric – it’s what would pass as art in the year 2505 in the movie Idiocracy, except this is real life. Art from 500 years ago is objectively more beautiful and sophisticated than that Simpsons art, which is just more evidence of the dumbing down of modern culture. These young, hip millennial art buyers in Asia are drunk on easy money – plain and simple. In the next few charts, I will explain why a dangerous bubble is inflating in China and Hong Kong, where the Sotheby’s auction discussed earlier took place.

Since the 2008 global financial crisis, Hong Kong has held its benchmark interest rate at record low levels for a record length of time. These interest rates were far too low for Hong Kong’s economy – this anomalous situation only occurred because Hong Kong was trying to match U.S. interest rates to keep the currency exchange rate between the two countries stable. After 2008, the U.S. was a post-bust economy that was struggling with deflationary pressures – Hong Kong was not. Unfortunately, Hong Kong’s excessively low interest rates have helped to inflate a massive credit and asset bubble.

Hong Kong’s housing prices have quintupled since 2003:

Similarly, total outstanding private sector loans have quintupled since 2003:

Mainland China has also been experiencing a tremendous credit bubble in the past decade that has been artificially boosting economic growth:

Ultra-low interest rates and other stimulative central bank policies are creating bubbles (and stupid decisions) across the globe. These bubbles are everywhere from China to Singapore to Australia to the U.S. to Canada to Western Europe. When asset prices are soaring and cheap credit is flowing, the result is “easy money” that finds its way into art and supercars. Unfortunately, as the Japanese art speculators experienced in the early-1990s, art bubbles always burst. The Chinese are going to be taught this lesson very soon. Even if you don’t live or invest in Asia, you are still tied into the same global economic system, which means that your investments and way of life are at risk.