The Da Vinci omen

Boaz Shoshan

On the very same day Lehman Brothers filed for bankruptcy, the art market was booming in ways nobody had seen before.

Damien Hirst had bypassed his art dealer and his gallery, and listed a large collection of his work directly at an auction in Sotheby’s saving himself millions in fees. He was so confident that his artwork would sell that he was bypassing all market conventions and drinking straight from the tap.

Despite Lehman going bust, the auction was a roaring success, netting him £111 million. But this was the last drop of juice to be had in the art market, which crashed soon after, along with almost everything else.

With a restored Da Vinci painting becoming the most expensive ever at £346 million, and art aficionados climbing over each other to declare that Banksy’s work is worth more shredded than intact, it’s worth asking contemplating whether we are seeing a similar indicator that we’re near, or at, the top of this bull run.

My colleague Akhil Patel over at Cycles, Trends & Forecasts thinks we ain’t seen nothing yet. Now that banks are allowing art to be used as collateral for loans, the wealthy can now borrow against their art collection to buy even more art, at ever higher prices. In fact, he thinks a billion-dollar painting is in our future…

I’ll leave you with a short snippet from his latest update:

The $1 billion painting?

The value of a piece of art has more than an element of economic rent, because each piece of art is unique and its value ultimately is reflected in what other people will pay for it (which in turn reflects the wealth in the economy, availability of finance and other factors). This makes this type of asset ripe for speculation. Add bank lending into the mix and you will get a huge boom in the price of artworks over the course of the cycle, especially the second half.

In fact, sales at art auctions can be a good indicator of a peak in the cycle and previous peaks have been characterised by eye-watering art valuations. For example, on 15 May 1990, Vincent van Gogh’s Portrait of Dr Gachet fetched $82.5 million at auction in New York, a then record for a painting. This was right at the high point of the real estate cycle that peaked in 1990. It was a record that would stand for over 16 years, until Gustav Klimt’s Portrait of Adele Bloch-Bauer I was sold for $135 million in June 2006, just before the peak in the US housing market.

Imagine what valuations we will we be seeing at the end of this cycle when buyers can be assisted by a loan from the private wealth arm of a major bank. The current record stands at $450 million (for Leonardo da Vinci’s Salvator Mundi) – it’s quite feasible that we might get the first $1 billion artwork before the present cycle. You’ll know we are at or very close to the peak when that happens.

The other thing to watch out for are stories on the other side of the lending boom – when loans can no longer be repaid and the assets have to be repossessed.

Last year, an American oil mogul, William Kallop, had his yacht repossessed by Goldman Sachs after he failed to service his $32 million loan taken out to buy it. You can read about the rather amusing anecdote here. We shouldn’t feel too sorry for Mr Kallop because he owns several other yachts, though it may be a while before he will be able to secure finance on that scale again.

You will also see more stories like this in the coming years, though most of them will come out after the peak. It is only then that we will find out what the super-rich and their bankers have really been up to.

I attended a presentation by an art analytics firm recently, and was interested to hear what it made of the Da Vinci sale. Its view was that the Salvator Mundi only sold for such a high sum because it was cunningly placed in a contemporary art auction, which is where all the big money is these days.

The trend for more than a decade has been for investors to favour contemporary art and disregard the old masters. But by placing the Da Vinci piece in with the modern art where billionaires could fight over it proved to be a spectacularly shrewd choice for the seller and the auction house.

As for when that trend will reverse, I’ll need to ask Akhil…

Until next time,

Boaz Shoshan
Editor, Southbank Investment Research

Category: Market updates

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