Games Billionaires Play

And why the contemporary art bubble has no end in sight

Prices for modern and contemporary art are soaring — $82 million for a Warhol print, $101 million for a Giacometti sculpture, $142 million for a Francis Bacon triptych. James Stewart assures us, however, that this isn’t a bubble — it’s just money flowing into a new asset class in search of innovative works that are likely to rise in value.

Felix already pointed out one of the fundamental problems with this picture: these are investments in fundamentally unproductive assets, which is exactly where we, as a society, should not want money to flow. It’s no different from pre-modern rulers sinking their wealth into ornate palaces or tombs that you can see from space.

There’s another, related problem with contemporary art as a new asset class: of course it’s a bubble.

In general, investments have a fundamental value because they can generate cash without being sold. General Motors has value because it is expected to generate future positive cash flows, and hence GM stock has value. Bonds are promises of future cash flows. Timber forests generate lumber, which can be sold for cash. Land can be used to grow crops or, more often, to build an office building that can be leased to tenants. The exact fundamental value of an investment asset can be difficult or impossible to measure precisely, but it exists. By contrast, a dinner at the French Laundry has value because it can be sold for hundreds of dollars to eat it, but that’s the only want it can be transformed into money; that’s why it’s a consumption good, not an investment.

Art has no fundamental value because it can’t generate cash except through a sale.

This is basically what Felix said: art isn’t a productive asset. It doesn’t throw off cash. In that sense, it’s like a consumption good — if you can believe that Steven Cohen derives $101 million of pleasure from looking at a sculpture (or, more likely, from other people knowing that he has $101 million to spend on a sculpture).

If we assume that art is an investment, however, the only way you can ever get a return from art is by selling it to someone else for more than you paid. (The return you would get by charging individuals to look at Bacon’s Lucian Freud triptych would constitute a miniscule return.) If that someone else is buying it as an investment, then she can only get a return by selling it to a third person for more than she paid. And so on and so on. At each link in the chain, the buyer is betting that someone else will pay a higher price later.

There’s a word for that type of behavior. It has six letters and begins with “B.”

It doesn’t matter how long this game can go on, or what returns you can get during that time; it’s still a bubble. Of course, in this case it’s a game being played by the ultra-rich, and if Steven Cohen sells his Giacometti for $200 million five years from now, that’s just redistribution from one billionaire to another.

Actually, art does have a kind of fundamental value that puts a floor under the market. It’s the value created by the tax code. If the market for contemporary art cools off and you can’t find another billionaire to sell your Warhol print to, you can always donate it to a museum. Assuming you can get a defensible appraisal saying it’s worth what you paid for it — probably a safe bet given that art works are unique and down sales (of comparables) are often handled quietly — you can probably recoup one-third to one-half the value in short-term income tax savings, plus you’ll get another 40 percent in reduced estate taxes at some point in the future. So, in effect, you can pass off your downside risk to the government — which makes this bubble a lot less risky for “investors.”

The other thing makes high-end contemporary art less risky than the fundamentals imply is that this bubble is likely to continue as long as the 0.01% continue to take home a larger share of societal income. As long as the supply of billionaires continues to increase, demand for trophy artworks will increase as well, while the supply of trophy artworks — which is a function of media attention — will remain more or less constant. (At any moment, there can only be one most expensive piece of art in the world, and many people who want to own the most expensive piece of art in the world.) And with no end in sight to increasing inequality, this bubble still has a long way to go.

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