Thursday, February 7, 2013

Review of The 12 Million Stuffed Shark: The Curious Economics of Contemporary Art

I've written in the past about hideous contemporary "art" like that of Damien Hirst or Andrew Warhola. You might not think that contemporary art (or The 12 Million Stuffed Shark: The Curious Economics of Contemporary Art) has any relevance to investing, but consider some puzzling aspects: Why are masterpieces so expensive? Why is bad art now so expensive, too?

Art shows how quickly most men grow tired of compounding wealth and what little imagination most men have at finding a use for vast wealth. Planes and boats are classic rich man's toys and credit bubble assets, because you can get them as big as your heart desires. There is a long lead time to build them, making the price swings extra-volatile. But nothing compares to the perfectly inelastic supply of artworks where the artist is dead, because the supply has zero elasticity so the prices can theoretically get bid to infinity, and relative to the value of the materials, they do.

Stuffed Shark author Thompson mentions Tatar vodka billionaire Roustam Tariko, who supposedly paid over $100 million for the hideous Dora Maar au Chat by Picasso, although Tariko has denied it. This is notable because Tariko is working to wrestle control of U.S./Polish vodka maker Central European Distribution Corp, which has the wonderful distinction of having the highest yielding corporate bond that is not in default (over 1,000 percent YTM).

The masterpieces become staggeringly expensive because the number of museums grows while the number of masterpieces is constant. Meanwhile, estate taxes and reversion to the mean make it difficult for these paintings to remain in private hands. If your heirs were lucky enough to inherit your Vermeer, could they afford to pay the $40 million dollar estate tax on it?

Once the paintings are owned by museums they rarely trade again. This means that new museums have a difficult time finding a respectable complement of works, and have to bid against each other for whatever comes on the market. Hence the high prices.

The junk art is expensive due largely to corruption but also stupidity. Corrupt for several reasons. First, museums are either explicitly or implicitly buying it with our money, since the donor of the work gets a tax deduction. This is true even though a donation increases the value of an artist's other works still owned by the donor. According to Thompson, not only do recent or pending museum shows for an artist increase the value of that artist's work, but a single artist show at a major museum can increase value by "50-100%".

That means if you are in a position of power at a museum (curator, board, donor), you can have the museum buy or borrow works that you have a financial interest in and increase the value by showing them - pumping their own portfolios. Apparently this goes on all the time. 

A Business Week article claims that ghastly Damien Hirst pieces "acquired during his commercial peak, between 2005 and 2008, have since resold at an average loss of 30 percent." Amusingly, Alberto Mugrabi thinks that people will still be talking about Hirst in 2,000 years.

Apparently, the contemporary art virus is now infecting China too. I'm surprised that they are falling for junk like this, but it goes with my China skepticism thesis.

Overall, I give this a 3/5.

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