The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

From Econompic Data, comes this look at July’s ETF performance by asset class:

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click for larger chart

Source: Econompic Data

One of the biggest problems caused by the Contemporary Art market boom of the last 13 years is the ways in which it has confused the world about how the art market works and what determines value. The issue isn’t trivial. The art market is generally believed to have $50-60 billion dollars a year in global turnover. Which makes it a substantial industry by any measure.

The problem is that very little information about this non-trivial industry is available. The two main auction houses—Christie’s and Sotheby’s—together represent less than 20% of the overall industry which remains dominated by small private firms that do not disclose information about sales or prices. A few services like Artnet.com provide auction prices for art and the New York Times has seized upon this information to point out that not all artists are rising in value.

Imagine the Times running a story on the front page of the business section that says “Some Bond Prices Fall as Most Rise.” If you were to read that story, your interest would be in the credit issues specific to the companies with falling bond prices. It would be an indication that the companies themselves faced peculiar problems unrelated to the overall bond market which is rising. So what you would want to see from the story is details on why each company’s bonds were scaring investors.

That’s essentially what today’s art market story is about. Each of the three living artists whose Artnet market indices—a product that doesn’t seem to be available through artnet.com—are the featured graphic in the Times story online has his own market story to tell. It’s a little like Tolstoy’s famous line about families: All artists with rising markets are all alike; every artist with an unhappy market is unhappy in its own way.

The Times picks out Larry Rivers, Francesco Clemente and Eric Fischl as examples of unhappy artists. Looking at the chart for Rivers, we see that his price index rose during the last great art recession. While others were licking their wounds on the art market in the early 1990s, Rivers was enjoying a moment in the spotlight. Then, again, in 2002, another short trough in the art market, Rivers rises through it only to fall again before next market acceleration.

According to the Times’s chart, Rivers’s prices are waxing even as the story adduces this bit of market ugliness:

For example, a Dutch Masters painted cigar box, created by Rivers and valued as high as $40,000 last year, sold in September for less than $4,000.

There could be many reasons for the difference in prices reflected here. One is that the two works are from a similar series but wildly dissimilar in size, condition or quality. There’s also the chance that the market for Rivers’s work was effected by the revelations in the Times nearly a year ago (a couple of months before the $4,000 sale) of Rivers’s daughters accusations about a disturbing and distasteful video project undertook with her.

The Times does at least try to explain that Francesco Clemente’s market has changed since leaving Gagosian gallery. It would be difficult to trace the cause and effect of the loss of representation. An artist and a gallery have a complex relationship. The gallery supports and shapes the artist’s market but tensions can come from either end of the value chain. The artist’s new work–its volume or quality–may make the gallery’s role untenable. On the other side, collectors taste, interests or estimation of art history may move away from the artist leaving him frustrated with his gallery’s lack of sales.

Art advisors will tell you that Clemente has some supply issues that gum up his prices. Then, again, looking at the chart, Clemente seems to have had a fairly consistent market since 2004.

Then there is Eric Fischl whose charts show a bubbly path that follows the boom, bust and recovery before falling off a cliff in the last year and a half. Whether Fischl, still a fairly young artist when one looks at an old lion like Lucien Freud who had to wait will into his senior years to command impressive auction prices, will eventually be seen as an important artist remains to be seen. But then, again, the art market is cluttered with painters who were huge during their lifetimes but faded into obscurity as time went on.

Value in the art market is conferred by art history with an emphasis on the history. Artists and artworks become more meaningful and valuable over time because of events beyond the artist’s control. If you anticipate or influence later artistic achievements, your work becomes more valuable to museums and collectors. One of the goals of art collecting is tracing ideas through art history. That’s what many collectors are after when they buy—something significant, something meaningful, something lasting.

Unfortunately, there’s no telling in the short term which artists will remain relevant. Like stocks or options, art prices are really just claims on an artist’s future cultural relevance and importance. So we shouldn’t be surprised when that value fluctuates.

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Source:
Does Money Grow on Art Market Trees? Not for Everyone
ROBIN POGREBIN and KEVIN FLYNN
New York Times; May 30, 2011
http://www.nytimes.com/2011/05/31/arts/design/not-all-art-market-prices-are-soaring.html

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European governments are preparing to borrow at least $43 billion this week, reflecting deterioration in the sovereign debt story.

This loan/bailout is  pressuring markets around the world; the MSCI World Index lost half a percent, and US Futures, especially SPX futes, are showing modest pressure. Bloomberg reports that the Stoxx Europe 600 Index fell 0.8%, while the Hang Seng lost 1%.

The Street, however, is in the midst of a major rotation, dumping bonds for stocks.Whether its in anticipation of Growth, Inflation, political restraints on the Fed, or  some combination of all three is difficult to say. Earnings may be peaking, and could have a hard time maintaining their torrid pace.

Regardless, this rotation has kept a firm bid under equities. It has contained market downside, with markets not falling quite as far as the early morning futures have indicated.

Edward Harrison here. This is an updated version of a post I wrote about two-and-a-half months ago over at Credit Writedowns.  When I wrote it, I had been looking for bullish data points as counterfactuals to my bearish long-term outlook. I found some, but not nearly enough.

Early this year, I wrote a post “We are in depression”, which called the ongoing downturn a depression with a small ‘d.’ I was optimistic that policymakers could engineer a fake recovery predicated on stimulus and asset price reflation – and this was bullish for financial shares if not the broader stock market. But, we are witnessing temporary salves for a deeper structural problem.

So my goal was to find data which disproved my original thesis. But, I came away more convinced that we are in a tenuous cyclical upturn. This post will discuss why we are in a depression, not a recession and what this means about likely future economic and investing paths. I pull together a number of threads from previous posts, so it is pretty long.  I have shortened it in order to pull all of the ideas into one post. So, please read the linked posts for background as I left out a lot of the detail in order to create this narrative.

Let’s start here then with the crux of the issue: debt.

Deep recession rooted in structural issues

Back in my first post at Credit Writedowns in March 2008, I said that the U.S. was already in a recession, the only question being how deep and how long. The issue was and still is overconsumption i.e. levels of consumption supported only by increase in debt levels and not by future earnings. This is the core of our problem – debt.

I see the debt problem as an outgrowth of pro-growth, anti-recession macroeconomic policy which developed as a reaction to the 1970s lost decade trauma in the U.S. and the U.K.. The 70s was a low growth, high inflation ride that generated poor market returns.  The U.K. became the sick man of Europe and labor strife brought the economy to its knees.  For the U.S., we saw the resignation of an American President and the humiliation of the Iran Hostage Crisis.

In essence, after the inflationary outcome that many saw as an outgrowth of the Samuelson-Keynesianism of the 1960s and 1970s, the Reagan-Thatcher era of the 1990s ushered in a more ‘free-market’ orientation in macroeconomic policy. The key issue was government intervention. Policy makers following Samuelson (more so than Keynes himself) have stressed the positive effect of government intervention, pointing to the Great Depression as animus, and the New Deal, and World War II as proof. Other economists (notably Milton Friedman, and later Robert Lucas) have stressed the primacy of markets, pointing to the end of Bretton Woods, the Nixon Shock and stagflation as counterfactuals. They point to the Great Moderation and secular bull market of 1982-2000 as proof. This is a divisive and extremely political issue, in which the two sides have been labeled Freshwater and Saltwater economists (see my post “Freshwater versus saltwater circa 1988”).

Read the rest of this entry »

We have a few slots left to meet with folks next week in south Florida (Mon/Tues/Weds, December 14 -16th).

Anyone in the Miami/Fort Lauderdale who would like to sit down one-on-one with us to discuss their current and future financial circumstances investments, retirement accounts, etc. please email Joe Fitzgerald with your contact information to schedule a time.

I am looking forward to checking out our new office in Coral Springs. Now that we are in the South Florida Community, I will be in the Sunshine State at least twice a year. But we are filling up quickly, so unless you want to wait until May, please book a slot now.

Additionally, those investment advisors/brokers/RIAs who are looking for a better alternative to their current platform, and would like to learn about the Fusion Advisor Platform, can also meet with us. Advisors who are interested should email Joe Conte, who heads our Florida office.

Those who believe the rally in gold is sending the wrong message on inflation might take comfort from the fact that the price of the yellow metal relative to that of the 30-year Treasury bond is approaching a 30-year high.

Perhaps not coincidentally, the earlier run-up marked the peak of hysteria about inflation — and a multi-decade top in gold.

Of course, there may be other reasons why precious metals (and other commodities, for that matter) are rallying, including safe haven buying and the torrent of cheap money flowing into a wide range of speculative asset classes.

Still, it seems like the gold bulls may be getting a bit ahead of themselves.

Interesting New York Times article about the overall markets’ valuation:

“Market valuations are another consideration. By almost every measure, stocks are far cheaper at Dow 10,000 today than at Dow 10,000 in March 1999.

Back then, the price-to-earnings ratio for domestic stocks stood at a very high 41.4. That’s based on 10-year average earnings, a conservative measure that smoothes out short-term swings in corporate profits. Since then, using the same measure, the market’s P/E has fallen to 18.9. While that’s not necessarily a screaming bargain — the market’s long-term average is closer to 16 — stocks are trading at a discount of more than 50 percent to their 1999 prices.”

That would seem to argue for the value player’s approach to investing. And over long periods of time (decades), the value approach is indeed valid.

However, academic studies have shown conclusively that it is your asset allocation strategy that is the greatest determiner of your returns. The best stockpickers out there got crushed if they were 100% long US equities in 2008; The worst bond mangers still did well relatively.

Consider:

“The return to 10,000 also serves as a bitter reminder that stocks have gone virtually nowhere, on balance, for more than a decade. It was in March 1999 that the Dow first climbed above 10,000, before soaring as high as 14,164 two years ago and plummeting as low as 6,547 this past March . . .

Look a bit deeper, though, and you’ll find that there have been some changes in the domestic market, too, in the last 10 years — and largely for the better. Some of them, however, are hard to see at first glance.

For example, a majority of sectors have actually posted positive returns since the end of 1999 — in some cases sizable gains. On average, including dividends, energy stocks have returned nearly 150 percent, shares of consumer staples companies (like Procter & Gamble and others that sell necessities) have gained nearly 65 percent and utility stocks have risen nearly 50 percent . . .” (emphasis added).”

What is also be worth looking at are other investable asset classes beyond US equities: How did emerging markets do? Convertible Bond Arbitrage? Private Equity? Real Estate? Commodities? Munis? Gold?

Even within the equity slug of your allocation, there are small cap value, big cap tech, alt.energy, etc. that may have outperformed the overall market over the same time period.

And when all of the above asset classes become correlated and start to head down, as they did last October, that is your signal to move aggressively to cash.

The overall conclusion of this article, which the Times did not explicitly state, is that most investors would be better off with an asset allocation strategy rather than sticking to the traditional stock picking or even index approaches so common amongst mom and pop . . .
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Source:
10 Years Later, a Much Less Expensive Dow 10,000
PAUL J. LIM
NYT, November 14, 2009

http://www.nytimes.com/2009/11/15/business/economy/15fund.html