Is the Art Party Over?
Posted November 3, 2007
Note to readers: For those of you who "invest" in art rather than collect it, the following article examines the probable impact of recent financial events on the speculative or investment sector of the business, a sector which has been, to resurrect the dotcom homily of Alan Greenspan, "irrationally exhuberant" over the past several years. On a broader level, it clarifies risks and misconceptions inherent in art speculation. And now back to IS THE ART PARTY OVER?...
It's been a long and glorious run, hasn't it my lovelies? For years, fine art, that bulwark of inscrutable intangibility, has increased in value by a mind-blowing thirty, forty, fifty percent per year, and sometimes even more if you wagered your wampum on the right properties. Yes, prices have bloated faster than a beached whale carcass in the hot summer sun, and currently hover oh so precariously in rarified territory never before transgressed in the history of humanity. Firmly supported by a wing and a prayer, we the faithful hope against hope that what has come to pass shall continue to be.
But wait. Cracks appear. Credit's dried up; the Dow's hit the skids; fast money barely hobbles along in the slow lane. And those pesky bills keep mounting. That introductory mortgage rate on your "investment" house-- the one that's been languishing on the market for over a year now-- just got another goiter, not to mention those margin calls on your down stocks. But you're not worried, are you? You'll just cash out that graff bomb du jour on your living room wall, the one you bought six months ago for $150,000 (leveraged) and could have flipped yesterday for $250,000, right? But that was yesterday. Today tells a different tale, and your golden goose is beginning to look more like a knee to the nuts. What in Rembrandt's name is going on?
For starters, let's take a crash course in the fundamentals of speculating. By definition, a speculator is someone who buys (invests) based not on current value and demand, but rather based on predictions of what value and demand might be at some point in the future, the object being to resell at a higher price at that future point, an outcome commonly referred to as making easy money. The purchase or investment is little more than a means to an end-- a vehicle to grow wealth, wealth that materializes when a fresh buyer is found to pay that higher price. That buyer, in turn, continues the speculation at the upped ante, hoping to resell at a later date at yet a higher price to a subsequent speculator, who will in turn continue the speculation at that newly established benchmark, and so on and so forth ad infinitum, the whole shebang secured by the premise that prices will never stop rising. But a premise is merely a premise, not a fact, and it's only true as long as people continue to believe it. And the "ad infinitum" part is pretty much a bamboozle too because as all rational thinkers know, sooner or later you run out of speculators, aka there's no one left who's patsy enough to pony up the buy in.
An aggravating factor, specific to speculating on art, is that art has no tangible value. Artists sit in their studios and manipulate various mediums into various forms that either they or their galleries, dealers, or agents declare to be art, declare to be worth certain dollar amounts, and the most entertaining part, claim to have concrete corroborations to substantiate those declarations, and the most absurd part, prognosticate with fool's gold confidence what the future holds for the significance of that art, financial and otherwise. Now people who love art and know something about it generally tolerate the declarations, corroborations, and prognostications, take them in stride, but ultimately buy based on how the art impacts them personally. In other words, they concoct their own rationales as to why it's art, why it's significant, how much it's worth, why it's worth it, and why it's worth owning. And if they can afford it, they buy it. Why? Because it enriches their lives, they intend to keep it forever, and they could care less what other people think or say or claim or declare. They buy it now because they love it now-- what may or may not happen in the future is irrelevant. That simple and no more complicated.
People who speculate on art are different. They buy to sell. The problem with that plan is that whereas securities, commodities, precious metals, raw materials, and other traditional investment vehicles have widely accepted, documented, and continuously quantifiable values across the entire breadth of the marketplace-- including places where they can be bought, sold, or traded literally instantaneously-- the edicts and explanations associated with art only have value to those who issue them and to those who believe them. To complicate matters, the same work of art and/or artist can have widely disparate "values" depending on whom you talk to. As if that's not enough, the more contemporary the art and the more untested the artist, the more subjective the value, the greater the ongoing debate over what that value actually is, the wider the gap in cognoscenti-to-cognoscenti perceptions of that value, and the more vulnerable that art and artist are to the capricious nature of the marketplace. And the contemporary market for art by untested artists is precisely where a substantial percentage of recent speculative activity has occurred. A recipe for implosion? Not entirely.
As long as too many people who know too little about art have too much money, more than they know what to do with, the applecart is OK. They buy and buy and buy and buy, bulking their "portfolios," inflating prices, buckling the demand curve, all the while hyping themselves into oblivion (with periodic assistance from their fine art providers) about the escalating values of their creative hedge. They call themselves collectors, but secretly, or perhaps not so secretly, they're really in it for the money. And all is well as long as nobody tries to sell anything. But when too many art buyers are people with poor credit who've lucked into too much money, for example, because irresponsible lenders have blessed them with treacherous mortgages on speculative real estate they can't possibly afford (among other questionable ventures), things begin to get sticky.
But let's digress. In case you don't know it, people with poor credit ratings usually have poor credit ratings because they suck at managing money. So it would seem to follow that if the so-called art boom is being financed in part by people who are bad with money that the so-called art boom is at best on shaky ground. The problem, of course, is that people who are bad with money tend to run out of money because interest rates on their subprime mortgages suddenly turn prime, they buy on margin, fund glib charlatans proffering harebrained investment opportunities, overspend on discretionary indulgences, plus all kinds of other dumb shit, and sooner or later find themselves in hock up to their eye balls. What does it all mean? They can't buy any more art.
Not only can't they buy any more art but-- doom of dooms-- they're forced to sell the art they already own. And given that the large majority of them bought in knowing little or nothing about art in the first place, they are officially certifiably screwed. Among their multitudinous misconceptions, they likely believe that just because a dealer tells them something is true, it's true. And worse yet, that if it's true today, it's true forever. And worse yet, that everybody believes it. And worse yet, that art is liquid in the marketplace. And worse yet, that whatever it sells for at galleries is what they can sell it for out of the trunks of their cars. And worse yet, that art is flippable for profit at the whim of the owner. And worse yet, that there are actual places where you can go to flip it.
What a monumental morass of inanity! Yes, my darlings-- these fiduciary flunkies in it for flip are headed straight for an exceptionally excruciating fleecing. You know where I'm going with this, don't you? Right. In addition to the panoptic mountains of art already interminably on the market, we're about to be deluged with a fire-sale tsunami dump the likes of which we haven't seen since the early 1990's, perpetrated by pinheads drowning in debt, in pathetic attempts to right their foundering finances.
The sad truth is that the degree of decline in value of any commodity is directly proportional to the extent of speculation in that commodity once speculation stops-- and art has been heavily speculated on for too many years now-- particularly with respect to the contemporary sector. You have people who love art and you have people who love money. The people who love money will exit the art market the moment it goes south. In this current incarnation, those money lovers will either be forced out due to lack of funds or will get out when they realize they can't liquidate their "assets" like they thought they could, the upshot of which will inevitably precipitate a rather unpleasant downward price spiral.
Art is generally the last item added to someone's list of discretionary expenditures when times are good, and the first to be lopped when times turn tart and those discretionary dollars commence to curtail. Meanwhile back at the ranch, hardcore art lovers will continue to love art and will stay in the game regardless (they'd rather buy art than eat)-- impending events leaving them more art to choose from, and at better prices than they've enjoyed in years. They couldn't be giddier. But for everyone else, including you precocious unproven young art stars who've been traipsing the fast track, it's safe to say the party is over.
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