Articles

Art Market Report, 2014

The Investment Game

“I want to start investing in contemporary art, but I can’t afford a good art advisor, so I don’t know what to buy."

-- “Millennial” talking to her friends at the Frieze Art Fair


The art critic and philosopher Arthur C. Danto, who died last year, was instrumental in describing and reifying the concept of the “art world”: an amalgamation of collectors, dealers, artists, curators, critics and art historians who have the power, collectively, to determine what is, or is not, art. A urinal ceases to be a plumbing fixture when the art world recognizes it as a vessel filled with artistic meaning. Removed from the bathroom and installed in a museum, the urinal becomes a work of art through the simple magic of re-contextualization. Danto’s art world is hermetic and tautological; a coven of self-anointed insiders. Whereas the early modernists (including the urinal’s “creator,” Marcel Duchamp) reviled the art establishment, the contemporary art world institutionalizes the avant-garde.


Danto’s other big theory involved the “end of art.” Conceived in the late 1980s, around the time that Francis Fukuyama was writing about the “end of history,” Danto’s idea was that art had reached the end of a progressive linear trajectory which began around 1400. Just as Fukuyama did not really believe historic events would cease to occur, Danto did not think people would stop making art. Both men, rather, sensed that the old unifying meta-narratives of history and art history were losing traction. Centuries of ideological squabbling had been superseded by the unopposed triumph of global capitalism. Similarly, modernism’s dogmatic manifesti, stylistic affiliations and sequential “isms” had been replaced by a tasting menu of disparate aesthetic options. These centrifugal forces, augmented by the decentralization intrinsic to globalization, chafe against the art world’s superstructure. Nonetheless the need for order and hierarchical values remains. In the absence of any overriding aesthetic consensus, judgments of relative importance are now increasingly made on the basis of financial worth. The art world still rules, but it is largely ruled by money.


Although art has always been associated with wealth, collectors were traditionally motivated primarily by aesthetic pleasure. The art world’s obsession with investment as an end unto itself is a comparatively new development, traceable in part to the inflation of the 1970s. While inflation causes all prices to rise, art values tend to lag, increasing more slowly than those of more frequently traded goods. Thus the illusion of windfall profits was created when, in the early 1980s, art prices finally caught up with everything else. As more sellers and buyers were drawn into the market by this illusion, it became a reality, at least for some. At the same time, art sales were becoming more public than ever before. In 1983 the shopping mall magnate Alfred Taubman bought Sotheby’s and began courting a retail clientele, turning what had heretofore been largely a wholesale marketplace for dealers into an arena for conspicuous consumption. The press was delighted to support the auction houses’ publicity machines, breathlessly touting each record price. Only the usually mild-mannered New York Times art critic John Russell demurred, remarking that the glamorous evening auctions had all the appeal of public executions.


The euphoric run-up in prices came to a temporary halt with the market downturn of the early 1990s. Sidelined by deep systemic economic woes, the Japanese were blamed for creating a bubble by buying indiscriminately in the 1980s. The rising tide of that decade had lifted all boats more or less equally, and people were now quick to point out that not everything created by a master is a masterpiece. Henceforth, “selectivity” became the mantra of dealers, collectors and auctioneers. However, even assuming that the marketplace is in every instance capable of discerning the nuances that distinguish a masterpiece from the average work, the market cannot always be relied upon to accurately calculate the price differential between the two. Is a masterpiece worth twice as much as an average picture? Ten times as much? More? With the rise of the so-called 1%, the differential has grown ever greater, as the auction houses focus more attention on the very top of the market. Along with the middle class, the middle market has atrophied. Auctions today are dominated by a small group of billionaires who literally make the market. If a work sells for an enormous sum, then it is, by definition, a masterpiece.


Through much of the last century, investment returns accrued relatively slowly. Just as it took time for new businesses to develop market share and become profitable, the art world reached a consensus regarding an artist’s importance gradually. In the interim, dealers nurtured the artist’s art-world credentials and raised prices incrementally, in sync with rising demand. Twenty-first-century investors crave faster returns, speculating on startups regardless of whether they are profitable and in the process causing stocks to rise in defiance of conventional price/earnings ratios. Similarly, those who view art as an investment asset are not in it for the long term. They are looking for a speedy turnaround, and the art world has, to some extent, learned to accommodate them.


Dealers and auction houses offer their best clients special deals that essentially make it possible for them to game the system. Roughly 50% of the lots in this spring’s Contemporary Art auctions were guaranteed. What this means is that in each such case a collector/investor was allowed to lock in a presale bid and to participate in the upside (including the auction house’s commission) if bidding rose above that amount. Guarantors receive inside information about the seller’s supposedly secret reserve price and a chance to profit regardless of whether the lot sells high or low. Deep-pocketed investors, such as the Muhgrabi and Nahmad families, have accumulated vast inventories by taking advantage of vagaries in the auction process to buy works at less than what they perceive to be full retail value. The Nahmads (whose scion, Helly, was recently sentenced to a year prison for his participation in an international gambling ring) have at times reportedly bid on up to one third of the lots in the Impressionist and Modern sales.


Those with lesser resources try to cash in on rising new talent. “People talk about flipping an artwork in a year or two,” writes contemporary dealer Kenny Schachter, “but I’ve admittedly done so within a matter of months, even weeks.…This practice is fueled by the recent phenomenon of historic prices being achieved for very young artists with little or no market or exhibition history.” Olyvia Kwok, founder of an art fund predicated on reselling works within three months to a year, notes that, “If you see art purely as a commercial investment, it is important to create or follow a trend, which in art changes every two to three years.” Schachter ascribes this frothy action in part to newly rich buyers from Russia, China and the Middle East. “With low interest rates and volatile stock and commodities markets, where else can you attain such high returns in no time at all?” he asks. “The wealth of new buyers is growing exponentially, but they only want the obvious things by obvious artists, which is why you read of so many artists’ markets snowballing into self-fulfilling prophecies.” “Especially for pieces by younger artists,” notes a critic in The Guardian, “the value of a work of art inheres primarily in the faith that a few very rich people believe it matters.”


The meta-narratives alluded to by Fukuyama and Danto were resoundingly Eurocentric, crafted by philosophers like Georg Hegel and art historians like Alfred Barr. Today’s money narrative is global. Beyond its investment potential, art is a way for the citizens of volatile non-Western countries to shelter income abroad, perhaps in the process evading the scrutiny of domestic tax authorities. Like real estate in global capitals such as New York or London, art offers a safe haven should things turn nasty at home. But in order for art to serve this purpose it must be recognized as an international commodity. Thus Western dealers and auctioneers are battling to establish credibility with non-Western collectors. Art Basel has expanded to Hong Kong, and Christie’s was proud to announce that half the top buyers in its evening auction of contemporary art were Asian. So far Western art still dominates the international marketplace, but that may change. America’s nineteenth-century industrial titans collected European masterpieces; the “American century” was half over before New York was internationally recognized as a center of artistic production. Art follows the money, and the money is heading East.


One of the dangers of the current obsession with quick profits is that it belies the traditional connection between supply and demand. Prices get pushed up before an artist has acquired a meaningful collector base. Even with all those guarantees and Asian bidders, there were not enough buyers to sustain three nights of successful Contemporary sales in New York this year. After two buoyant evenings at Christie’s, Sotheby’s Contemporary auction failed to meet its low estimate and ended with 12 unsold lots. The Impressionist and Modern sales the week before were lackluster for both houses. As classical modern material becomes harder to find, the buzz has moved on to the contemporary arena, creating a paradoxical situation in which rarity can actually cause prices to drop by weakening demand. Much like Old Masters, the Impressionist/Modern sales category may one day revert to pre-Taubman conditions, becoming a quiet backwater visited mainly by dealers. Difficulty summoning enough bidders to make auctions viable at a retail level has pushed Sotheby’s and Christie’s to beef up their private-treaty sales operations. Yet it is debatable whether the auction houses, whose “experts” are of necessity generalists, are as effective as specialist dealers in serving niche markets.


The winner-take-all dynamic that permeates both the art world and the larger economy has had a devastating effect on America’s smaller museums, many of which are struggling to stay afloat. The outrage that greeted the Museum of Modern Art’s recent decision to tear down the American Folk Art Museum’s former home had less to do with the destruction of an architectural gem than with the seemingly unjust triumph of a veritable Goliath over a smaller, less solvent competitor. The Folk Art Museum was able to regroup without selling any of its collection, but other institutions, including the National Academy of Design and the Delaware Art Museum, have not been so fortunate. Detroit’s creditors are ogling the bankrupt city’s Institute of Arts, and with offers of up to $2 billion on the table, there is a possibility that the museum’s treasures will be sold to the highest bidder. When art is viewed merely as an asset, the intangible benefits provided by museums—as sources of community pride, educational centers, bastions of collective cultural heritage and inspirations for future generations—fall by the wayside.


Another byproduct of the investment mentality has been a sometimes vindictive or opportunistic backlash against the art world. The rising value of art, combined with the bitterness produced by income inequality, has led to a marked increase in art-related litigation. Authenticators are imperiled equally by suits from disgruntled collectors and by the deceptive allure of skillful forgeries. Even as people try to come to terms with the fact that the esteemed Knoedler Gallery sold a raft of fakes, there are those who think finding a “Pollock” or a “Rothko” at a flea market is like winning the lottery, and that authenticators who withhold approval are part of a conspiracy to defraud them. Copying—an age-old staple of art-school training and the métier of certain contemporary artists—is under threat from infringement suits both by mega corporations and by lesser-known creators of source images who have failed to reap the financial rewards of appropriators like Richard Prince and Jeff Koons. The mere threat of litigation—over a deal gone wrong, a work sold for too little or bought for too much—is frequently used to extract financial retribution from potential defendants unwilling to endure the strains of a trial. Sadly, this form of extortion has also infected the realm of Holocaust restitution, where art works can be rendered virtually unsalable by unsubstantiated claims that would never stand up in court. While there are clearly instances of malfeasance that justify legal action, the art world is often targeted simply because it is perceived as a repository of illicit wealth.


Perhaps the most pernicious aspect of the investment game is that it is, on many levels, wrongheaded. Art is inherently resistant to the objective metrics that underpin rational investment strategies. “A business needs to be profitable to exist,” writes Melanie Gerlis, author of Art as an Investment? A Survey of Comparative Assets. “It therefore makes sense that people should want to invest in its possible growth through shares. A painting can exist perfectly easily without generating any profit at all.” Unlike real estate, art does not produce rental income. On the contrary, it costs money to insure, store and conserve. Art’s relative illiquidity and the uniqueness of each individual object distinguish it from commodities like gold. Uniqueness also distinguishes art objects from commercially manufactured luxury products, although the two realms increasingly share a fixation on branding, status and celebrity. “Even when there are several items that are seemingly identical, such as editions of the same photograph or sculpture,” Gerlis writes, “each has a history of ownership, trading or exhibition that separates one ascribed value from another.” “Art,” she concludes, “is probably the least commoditized asset in the investment universe, offering the potential for great returns but also subject to enormous risk.”


For a time, speculative markets are self-perpetuating, but eventually they collapse due to poor underlying fundamentals. The art market today is weakened not just by inequities between demand and supply, but by the superficial goals of the investment community. Vast segments of the art world have come to resemble the fashion and entertainment industries, with their focus on fleeting trends and ephemeral spectacle. The judgment required to ascertain long-term value is sorely lacking.


In retrospect, the narratives that shaped twentieth-century aesthetic judgments were never wholly accurate, and they grew less so when critics and art historians forced the disparate strains of European modernism into a cohesive theoretical package designed to justify America’s cultural ascendancy. The linear trajectory of which Danto wrote was an illusion. Today’s art world is potentially far more egalitarian, open to the work of all nations and all cultural traditions. But the lack of any overriding structure poses unprecedented challenges to connoisseurship. In its misguided attempt to commoditize art, the art world has forgotten that art’s greatest achievements lie in its ability to transcend material values, to embody such ineffable qualities as empathic humanism, spiritual uplift and beauty. The art world needs to redirect its focus and start doing its job.