In 2017 at Christie’s Auction House in New York, a mysterious art buyer won this painting
after bidding a record-breaking $450 million dollars.
But this wasn’t just any piece of art: this was the Salvator Mundi;
a painting by the legendary Leonardo da Vinci.
News of the staggering purchase price sent shockwaves throughout the entire art market
– which, interestingly, has been a reliable indicator of impending market bubbles for
decades.
$450 million dollars is enough money to purchase an array of all kinds of investments, from
1% of General Motors, a small suburb of investment properties or an archipelago in the south
pacific, all while still having $50 million leftover “walking-around-money”.
Even better, each of these investments would generate income, allowing you to retire quite
comfortably from the yield generated by these assets.
a painting on the other hand, regardless of whatever any art broker tells you,
is just that: a painting.
And although it may look great over your fireplace, it will never bring in cash flow.
That’s because the only way to make money in the art market is if someone is willing
to buy your artwork at a higher price than the price that you paid – perhaps for some
emotional reason.
In essence, it’s the epitome of the Greater Fool Theory: the idea that some fool
(oops, I mean buyer), will eventually come along and purchase your artwork,
with the hope to eventually resell it to yet another buyer at an even higher price,
much like a game of hot potato.
Arguably, this isn’t investing – it’s speculating – because any appreciation is
held entirely within the eyes of the beholder.
And when it comes to the world’s most-expensive painting, the Salvator Mundi, there’d probably
only be a few dozen people on the planet with the ability to make such a purchase – therefore
limiting the market for prospective buyers.
So, how is it that this illiquid asset class reserved for the elite has been able to command
such lofty valuations for, let's face it, strokes of paint on a canvas?
What drives the high-end art market? How can art be used to move money in creative ways
and get around taxes? And perhaps above all, why would anyone park so much money in a picture
when there are other asset classes that actually generate cash,
like real estate rentals or dividend paying stocks?
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Without further ado, let’s explore The Economics Of The Art Market.
Investments are often viewed through a black and white lens: you’re either making money
or you’re losing money – there isn’t any grey.
That’s as true for corporate earnings as it is for the colorful art market.
And despite the headlines of the latest jaw-dropping art sales, this market isn’t exclusively
reserved for the super-rich.
In fact, the art market has quite a range; from prints that you can pick up online created
by freelancers and aspiring artists, to higher-end pieces you can find at your local art gallery.
like everything in the universe, the price of a painting is ultimately the function of
the same supply and demand forces that all other products are subject to.
On the lower end of the spectrum art provides a nice pop of colour to an otherwise dreary
studio apartment, so people are happy to buy it
so long as they are willing to pay enough to cover the costs of the materials and construction
for the business selling these items with a bit of profit, hey presto you got yourself
a transaction.
Some might argue that these sorts of decorations are not real art, but you know what, most
of it looks just fine to me, we are not art critics we are economists, and for the sake
of describing how a market works these little feature walls will work just fine.
As things get slightly more rarefied though, the supply side of our equation is no longer
limited by how much it costs to produce these items, but rather how many examples physically
exist. If we assume that an original Picasso is inherently more pleasing to the eye than
a $20 print from ikea, then people are going to want the original Picasso.
Now since there are only a few hundred original Picasso’s in existence these pieces are
going to be allocated to the people with the means to purchase them, and those people will
only be able to purchase them from people who already hold onto them which is the foundation
of a collector’s item.
Collector’s items are a really really cool economic anomaly when it comes to the normal
functions of supply and demand. A collector’s item is normally defined as any item that
can no longer be produced, has a relatively limited supply and is somewhat enticing to
own because it provides some material benefit. Rare artwork ticks all of these boxes.
The ability to produce new items, and the current supply is part of the reason people
joke about artists’ works being more valuable when they’re dead. You aren’t getting
anymore Velasques, or Goya’s, or Rembrandt’s so if you want one you gotta hunt down what
we’ve got left here on earth.
Why these items become such an anomoly is because of the lesson they show in opportunity
cost. If a wealthy family did hold onto one of our original Picasso’s and was offered
5 million dollars to purchase it, they may choose not to sell it. Economic logic would
dictate, this would mean that if there was another similar Picasso for sale for 5 million
dollars the family would choose to buy it.
In reality that’s not actually the case, they may not have 5 million dollars on hand,
they may not want another Picasso, or they just might not be able to justify spending
that money on a painting.
Opportunity cost would dictate that if you are not willing to sell something for 5 million
dollars then that means you are giving up 5 million dollars to own that item. Which
on the other side should mean that you would be willing to buy that same item for 5 million
dollars, in both examples you would be giving up 5 million dollars to own that item.
Sounds logical right? And that’s why it's one of the foundational rules of economics,
but of course it's wrong. People are dumb and emotions frequently impact these types
of decisions, and nowhere is that more apparent than in collectable items that have a perceived
value as an investment.
Opportunity cost is a really valuable tool to incorporate into your thinking when making
any type of financial decision, be it investing in shares, buying a house, selling a car or
whatever it may be. if you would be happy to sell and buy it at the price discussed,
you are probably paying a fair price.
Now as for our davinci here, one could feasibly argue that simply because there was only one
example of this painting in the world on the supply side, and there was someone willing
and able to make this purchase on the demand side, hey presto you have your sale right
there, no more questions to ask. So instead maybe what we should ask is not why is this
painting so expensive, but rather what made someone that was rich enough to be able to
make this purchase willing to do so.
As we saw earlier, people normally value items that they already own higher than items they
are considering purchasing. Since all collector items are already owned, any potential buyer
is going to have to buy an item from someone who is going to inherently apply this psychological
mark-up. so, the price in theory should keep appreciating within reason.
In turn because people expect the price to keep appreciating, they are more inclined
to hold onto things that they now see as an investment… with this you very quickly get
yourself the makings of a speculative asset bubble.
An asset by definition is a resource with economic value that an individual, corporation,
or country owns or controls with the expectation that it will provide a future benefit, like
cash flows, capital appreciation, or productive potential. So is art a wise investment?
Well historically yes, but potential investors need to be well aware that a lot of its value
is derived from what people think it will be worth in the future rather than based on
any tangible benefits of holding onto this asset, like cash flows or productive potential.
It must also be recognized that a lot of this kind of speculation goes beyond just art.
It can be seen in high end markets around the world, things like watches, motor vehicles,
and even high end bottles of whiskey and wine. Anything that is limited in supply, with a
hint of prestige is up for this kind of wild ride.
So with that out of the way, let's look at where art can be really handy.
Alrighty, so now dear modern global billionaire you fully understand speculative investments,
you are welcome, fingers crossed you already understood these but it's all the same, now
you are fully up to speed. So it’s time to start getting really creative with your
use of art, this is what you do.
Go and find yourself a reputable art dealer with a long history of campaigning new and
upcoming contemporary artists, or driving up the value of already dead artists, whatever
it is you prefer to look at up there on your wall I guess.
This art dealer will advise you of a collection of paintings to purchase, and you take his
advice to decorate that $100 million dollar London townhouse you purchased in the last
video. Let's say in total you spend 20 million dollars. It sounds incredibly expensive for
some art, but it gives you a collection of lets say 20 paintings, for an average value
of 1 million dollars each.
Now you let your art dealer do their thing, they write about this exquisite artist in
magazines and regale other billionaires with a diatribe about how the white canvas is a
reflection of a blank society or whatever it is, all in an attempt to drum up some attention
surrounding this new artist.
Then it is time for part B of the operation, you sell a painting or two through a very
public auction house like Christies or Sothebys and bid on it yourself through an agent, or
get a trusted confidant to do the same thing, and throw a few fake bidders in there to make
the whole thing look legit.. Let's say you bid your artwork up to 10 million dollars!
Fantastic, but don’t celebrate too soon because all you have done is actually purchased
this artwork off yourself and probably lost a 2% commission to the auction house in the
meantime, But here is where it gets good.
Suddenly on paper, your artworks are now worth 10 million dollars each based on historical
sales figures, bringing the net value of your portfolio from 20 million dollars all the
way up to 200 million dollars.. It sounds great right? Well yeah but in reality you
would struggle to actually sell those paintings to a genuine buyer so you aren’t actually
any richer in practice, but what you can do is this.
Say you make a lot of money one year and would have to pay tax on that, sounds terrible right?
But don’t worry, what you can do is donate one or two of your paintings to the local
museum, you can call this a charitable donation of 20 million dollars and the museum will
be more than happy to nod along with this because at the end of the day they are getting
free paintings that your art dealer has drummed up some interest in.
This means that you will be able to report a 20 million dollar donation to the IRS by
just giving away paintings that only originally cost you 2 million dollars, saving yourself
about 10 million dollars in taxes. with any luck the museum might even name a wing after
you, or invite you to their next upper crust soiree as a token of their appreciation, Which
is a great boost to the EGO
This is kind of a win-win all around, it’s a win for you because you don’t have to
pay tax, it’s a win for the artist who gets to sell their paintings at a markup, it's
a win for the art dealer who gets to charge for their services, it’s a win for the auction
houses who get to charge a commission for a sale that went nowhere and of course it's
a win for a museum who get some shiny new paintings.
In fact all the key players in this game are incentivized to play along with the little
charade of fine art, because they are all better off for doing so. In a sense this whole
great big industry is directly subsidized by the IRS.
This whole thing gets even better thought, because when you really think about it, artwork
is just a rectangle with pretty designs on it that has a nominal value based on what
people agree it is worth, just like say a dollar bill.
Works of art are unbelievably useful for moving money around in creative ways because it is
easy to transport, hard to track, widely recognized and very useful for all of the reasons we
saw above. In a sense, art is like bitcoins for billionaires.
But it still plays one last very important role
So art is very useful for all manner of financial maneuvering, but one of the biggest reasons
the wealthy elite of the world love it so much is because it is a very cost dense physical
asset.
If you think of things that you could buy for 100 million dollars, you could get a private
jet or a yacht, maybe some very high-end real estate, or a portfolio of stocks and bonds.
The first few are great but they are huge. If you want to stash wealth discreetly then
a 300-foot mega yacht is not the most low key approach, plus the running costs and depreciation
make it a pretty terrible investment anyway.
A share portfolio could be better; but most share ownership is electronically certified
these days and falls under the jurisdiction of pesky government authorities that may look
to seize your assets in the event that you are, oh well I don’t know, laundering money.
Artwork is small, easy to store, holds its value, and can be worth an insane amount of
money, which means its ideal to keep in a bunker somewhere in some tax haven or port
authority to ensure it is there and ready to sell if ever you need it.
One of the most fascinating applications of this type of asset is something the average
person would never even think of.
This is a Richard Mille [show promotional footage of a Richard Mille Watch], watch aficionados
are divided on this timepiece but those who like them, love them, and one could argue
that they are basically akin to works of high-end art, at least in the way their market works.
This watch here is worth 3 million USD’s which sounds just as insane as some painting
costing 450 million.
The reason that it can get away with costing so much is the same as with artwork. it’s
rare, people expect it to appreciate in value, you can show off to your other rich friends
and sometimes you can pull off some financial funny business, but a key benefit here is
that it is strapped to your wrist.
In the event that a billionaire in a less than stable country is forced to leave in
a hurry, they can literally establish themselves financially in any nation around the world
simply by using the watch on their wrist. It is unknown if anybody has actually used
a watch of this scale for this type of desperate cashflow boost, but wristwatches are a well-known
way of keeping some functional cashflow on your wrist.
Art is weird, it is difficult to understand its hidden meaning, and it is more difficult
to understand its hidden markets and outrageous prices.
The old adage that something is only worth as much as someone is willing to pay for it
may not hold true in this weird and wonderful world of the global elite.
But for now dear billionaire, you have yet another tool in your arsenal to properly move
money around in creative ways to ensure that it is working for you, and not for some government
somewhere.
This is not a world filled with passionate aficionado’s willing to drop tens of millions
of dollars in the name of the arts. It is a world filled with savvy investors, businesspeople,
and moneyed elite.
High end art is not some abstract expression of society conveyed onto a canvas through
labored brush strokes, it’s a financial instrument to move money around the world.
The high end art market is not filled with creative artists… it’s filled with creative
accountants.
… If you’d like to learn even more about the economics of the art market, be sure to
check out “EconomicsOf.Art”, which is a website that we created in partnership with
the sponsor of today’s video, Squarespace.
On the site, you’ll find interesting articles about the art market,
including a list of the top 20 most expensive art sales in history,
as well as other interesting data that we didn’t have time to include in this video.
So be sure to check it out, at “EconomicsOf.Art”.
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