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October 30, 2015

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Market slowdowns, interest rate hike poised to dampen fine art of bubble

A few months ago, Larry Fink, Chairman and CEO of BlackRock, the world’s largest asset manager, told an audience in Singapore that contemporary art has become one of the two most important stores of wealth internationally, along with apartments in major cities such as New York, London, and Vancouver. Forget gold as an inflation hedge; buy paintings.

I am certainly not celebrating the trend. I tend to agree with the philosopher Peter Singer that the obscene sums being spent on premier pieces of modern art are disquieting.

In May, Pablo Picasso’s “Women of Algiers” sold for US$179 million at a Christie’s auction in New York, up from US$32 million in 1997. Okay, it’s a Picasso. Yet it is not even the highest sale price paid this year.

A Swiss collector reportedly paid close to US$300 million in a private sale for Paul Gauguin’s 1892 “When Will You Marry?”

Picasso and Gauguin are deceased. The supply of their paintings is known and limited. Nevertheless, the recent price frenzy extends to a number of living artists, led by the American Jeff Koons and the German Gerhard Richter, and extending well down the food chain.

For economists, the art bubble raises many questions, but an especially interesting one is exactly who would pay so much for high-end art.

The answer is hard to know, because the art world is extremely opaque. Indeed, art is the last great unregulated investment opportunity.

Much has been written about the painting collections of hedge fund managers and private equity art funds (where one essentially buys shares in portfolios of art without actually ever taking possession of anything).

In fact, emerging-market buyers have become the swing buyers in many instances.

It is extremely difficult to estimate capital flight, both because the data are insufficient and because it is tough to distinguish capital flight from normal diversification. As the late MIT economist Rüdiger Dornbusch liked to quip, identifying capital flight is akin to the old adage about blind men touching an elephant: It is difficult to describe, but you will recognize it when you see it.

The paintings are just an investment vehicle that is particularly easy to hold secretively.

The art is not necessarily even displayed anywhere: It may well be spirited off to a temperature- and humidity-controlled storage vault in Switzerland or Luxembourg. Reportedly, some art sales today result in paintings merely being moved from one section of a storage vault to another, recalling how the New York Federal Reserve registers gold sales between national central banks.

How, then, will the emerging-market slowdown affect contemporary art prices?

In the short run, the answer is ambiguous. In the long run, the outcome is pretty clear, especially if one throws in the coming Fed interest-rate hikes.

With core buyers pulling back, and the opportunity cost rising, the end of the art bubble will not be a pretty picture.

 

Kenneth Rogoff, a former chief economist of the IMF, is Professor of Economics and Public Policy at Harvard University. Copyright: Project Syndicate, 2015. www.project-syndicate.org. Shangghai Daily condensed the article.




 

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