Speculating on the art market

The Galerie St. Etienne, founded by my grandfather Otto Kallir in 1939, is the oldest gallery in the United Stares specializing in Austrian and German Expressionism. During the gallery’s early years, Austrian artists like Egon Schiele and Gustav Klimt were completely unknown here. We couldn’t give Schiele’s work away. Alfred Barr, the legendary founding director of the Museum of Modern Art, turned down the donation of Schiele’s Portrait of an Old Man, which my grandfather later gave to the Guggenheim. A Schiele painting like that would now probably sell for over $20 million. Schiele drawings and watercolors, which in the 1940s went begging at $25, command hundreds of thousands of dollars. Clearly, anyone who bought a Schiele for $25 in 1940 made a good investment. But the choice was not an obvious one, and the results took decades to achieve.

Today, in all sectors of the economy, power players try to game the system for quick returns. The art world has likewise been influenced by a gambler’s mentality. Small galleries act as unwitting incubators for mega-dealers such as Larry Gagosian, who poach promising artists and then raise their prices exponentially almost overnight. According to a Wall Street Journal profile, Gagosian’s allure is such that buying from him is, for some collectors, a privilege worth any price. Gagosian’s empire, and the implicit worth of his artists, have been enhanced by rapid global expansion: eleven galleries worldwide, churning out some sixty exhibitions per year. Gagosian’s annual revenues are said to exceed $1 billion, though the galleries’ net earnings have never been publicly disclosed.

Today, in all sectors of the economy, power players try to game the system for quick returns.

The commodity value of “blue-chip” art is ostensibly affirmed by a certain number of high-profile collectors buying or selling a certain number of high-priced artworks, either through high-profile dealers or at auction. It is sometimes debatable, however, whether these collectors, and these sales, actually constitute a full-fledged market for the artists in question. In 2004, the hedge-fund mogul Steven Cohen paid a well-publicized $8 million for Damien Hirst’s pickled (and, as it turned out, rotting) shark. In 2007, Hirst upped the ante considerably by offering his diamond-encrusted skull, ironically titled For the Love of God, for $50 million and then, in the space of a few months, capriciously raising the price to $100 million. The skull was subsequently “sold” to a group of investors who included Hirst’s London dealer, Jay Jopling, his business manager, Frank Dunphy, and the artist himself. In 2008, The Art Newspaper revealed that Jopling was warehousing over 200 unsold Hirst objects, including dozens of paintings, six “classic” medicine cabinets, and a pickled cow. Shortly thereafter, on September 15 and 16, 2008, Sotheby’s hosted a sale of 223 Hirsts created specifically for that auction. The sale was at the time deemed a major triumph, not only because 218 of the lots sold (many of them to new buyers), but because it seemed to confirm the vitality of the art market in the face of Lehman Brothers’ coincidental declaration of bankruptcy. Subsequently, however, Hirst’s market has become considerably more subdued, and some have questioned whether all the Sotheby’s transactions were actually concluded.

Auctions have long been a popular way to pump up the market, because they are public and because most of the key players—the auctioneers, the press, and a significant number of dealers—share a vested interest in touting record results and ignoring everything else. The vaunted transparency of auctions is often a fiction. Bidders can easily collude to either depress or raise prices, and secret reserves turn a portion of the bidding process into a theatrical performance. None of this is new, but the amount of money now at stake and the concomitant development of arcane financing arrangements increase the potential for abuse. Guarantees, when funded by the auction house, give the auctioneer an incentive to favor the guaranteed works over others in which the house does not have an interest. Third-party guarantees—in which a collector/investor funds a guarantee in exchange for a share of the profit above the guaranteed amount—offer the guarantor (who is usually allowed to bid) an inside track on the lot in question and a de facto (and undisclosed) discount on the gross selling price if he or she ends up buying the work at the sale. The big-ticket evening auctions are frequently dominated by the same few individuals, acting interchangeably as buyers and sellers. Synergy between a closely-knit group of consignors and bidders is thought to have been responsible for the success of the sale-within-a-sale “curated” by the dealer Philippe Ségalot for the auction house Phillips de Pury in November 2010. While the thirty-three lots in Ségalot’s sale commanded an impressive $117 million, the twenty-six lots in the remainder of the auction brought only $19.9 million, less than the low estimate.

Today’s mega-dealers and their mega-clients reflect the ethos of a new global economy in which a relatively small elite has accumulated vast wealth and sees art as just another asset class, to be traded much like any other investment. The problem is art does not behave like any other investment. Economists may generate fancy charts to show, say, that the market for Chinese art is rising or declining, but these charts have little bearing on how a specific item will perform. Every art object is unique. For example, in February 2010 an Alberto Giacometti sculpture brought $103.4 million at Sotheby’s and, in May of the same year, another sculpture by the artist fetched $53.5 million at Christie’s. In February 2011, however, all the Giacomettis (of lesser quality and with lower estimates than their two predecessors) in the evening sales at Sotheby’s and Christie’s failed to sell at all. Because the value of a given work is often determined by the subjective judgments and desires of a handful of collectors, art is notoriously illiquid. Art funds have repeatedly tried to solve this problem, but the unpredictable nature of the market makes it hard for any such fund to generate consistent returns. Buying shares in a portfolio of artworks is not necessarily more secure than buying a single work of art, and it is a lot less enjoyable.

While art may indeed be a good investment over time, the question is: Which art, and how much time? In order to assess an artist’s investment potential, one needs to know not only whether the work has appreciated in the past, but whether there is a collector base large enough to absorb the number of works likely to come to market in the future. This last is a tricky point, because if prices rise too rapidly, the collectors who supported the artist at price A may be unwilling to step in at price B. That is why dealers, as a rule, like to feed works into the marketplace slowly and to increase prices gradually, judiciously balancing supply and demand. Simultaneously, dealers try to enhance the artist’s reputation by encouraging scholarship and placing works in major museum and private collections. Ideally, an artist’s market value should reflect his or her art-historical stature. Since it takes time to build a lasting critical consensus and a solid market, art has tended to appreciate (if at all) relatively slowly.

A great many dealers and collectors still operate according to the preceding tried-and-true principles.

A great many dealers and collectors still operate according to the preceding tried-and-true principles. This contingent is, in fact, the core of the art market, more numerous and cumulatively better funded than the high-profile players who bat expensive artworks back and forth among themselves like so many ping-pong balls. During the recent boom, the latter group pushed prices up for everyone, but now that casual speculators have been driven from the field, the machinations of would-be market manipulators stand out in harsh relief. While auctions still generate a handful of stellar results, the once glamorous evening sales have become comparatively lackluster. The shrunken market makes it difficult for auctioneers to sustain a continuous stream of multimillion-dollar bids. This sets up a vicious cycle, wherein consignors become reluctant to sell at auction, prompting the houses to offer unrealistic estimates, which increase the buy-in rate and hence the reluctance to consign. Yet the core of the market remains solid—perhaps more solid than it has been in years. Dominated by buyers who understand both quality and value, present circumstances encourage—indeed require—sellers to price works appropriately.

There is an ongoing tug-of-war between these more sober attitudes and attempts to rekindle the speculative excess that permeated the art market a few years ago. In the short run, markets can be manipulated, but it is impossible to predict whether a given art purchase will really be a good long-term investment. All that can be known is whether the price is in line with today’s market, given the relative importance, rarity, and condition of the work in question. Crucially, however, the collections that appreciated most in the past were not formed with investment in mind. Passionate engagement with the art is the key prerequisite for cultivating the aesthetic discernment and knowledge necessary to make wise choices.

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This article originally appeared in The New Criterion, Volume 30 Number 4, on page 33
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