Auctions and the Economy

[seattle1]

Hello:

What impact will the current economic impasse in Washington, DC, have on the forthcoming Bonham's auction in NY, Oct. 8? Who knows, but it will be interesting to watch. I have no data to present, however I have observed on several occasions that expectations about an auction have been badly derailed by some unanticipated event - a stock market cave in, a political crisis, a major terrorist threat, etc. That demonstrates once again the "black swans" representing the unknown, the exogenous event, anything that confirms man's inability to see what is around the corner, can occur. There is a rather nice sale planned for the 8th and undoubtedly no one saw the economic storm clouds coming.

It is bad enough that Congress cannot agree on the financing of programs they themselves had approved, but it is much worse that the impasse may carry over to the perfect storm of a join up with the issue of a US Federal debt (borrowing) limit. If lifting the limit does not occur the US will face an historically unprecedented crisis. It is bad enough that aggregate Government expenditure will cease as tax revenue alone will not cover programed expenditures, but worse yet bond and stock markets world wide will be in chaos. The public does not yet realize that the mechanism for the latter is related to the now current risk free Government obligation rates that characterize all US Federal debt. Once risk is introduced US borrowing rates will rise and the Federal rates will spill over into all bond rates domestic and foreign. Insofar as stock and bonds are alternative assets, stock prices are partial functions of bond rates and then stock values every where in the world will, for a while, be beyond calculation. Markets will fall.

What about auction sales? The uncertainty over the foregoing will make most buyers reluctant to buy anything, and insofar as some buyer of swords and armor believe they are making "investments" (they are not), they will step out of the market until the DC struggles are over. The moral to this story is that for a careful buyer the things they are interested in will likely go for less than they otherwise would. This in fact might be a good time to buy! That implies "all other things equal" of course, but they never are. Buyer X might not be bothered by other variables, however buyer Y might be, for example if he thinks a borrowing impasse in Washington will devalue assets he owns and that so called "wealth effect" will make him poorer, so why spend at an auction? Expectations are everything and while I do not how the sale will be affected because it is impossible to know the auction performance before the fact, even if there were no budget or debt impasse, I do know the market does not like risk, and new risk is always a threat. The overall net effect of the foregoing is what cannot be known.

Arnold F.

[kusunokimasahige]

Arnold, to be honest I do not think the 1% in the USA cares much about money.

 

Notwithstanding some of the items in the auction might not fetch top prices, the auction itself seems to me to be more pointed towards the high end of collecting and collectors than to the beginning and lower/medium end of collecting and collectors.

 

That means that people who will bid will probably have the funds for it.

 

You will not see a jobless history teacher like myself for instance bidding on such auctions.

 

KM

[cabowen]

Timing, as they say, is everything. Just ask the Hawley (EDIT) Compton family

[Surfson]

Chris, can you expand on the Hawley family comment? Sorry if it's been covered before. Cheers, Bob

[cabowen]

My apologies, I mean the Compton's.....They sold the Dr. 's collection at the very peak of the bubble in Japan. Within a few years afterwards, items from the auction were reselling for a fraction of what people paid....They couldn't have timed it better....

[seattle1]

Hello:

Well yes KM I do think the 1% does care and care vitally about money; they didn't win it in a lottery and most didn't inherit it. Even more strongly I think auctions, Bonham's number just came up, are very substantially affected by abrupt market conditions. I also think that no auctions would be held for swords and armor and the like if the market were just the 1%. Again, I have no data but I suspect the typical buyer at most such auctions are quite a few percentiles away from that major upper 1%.

Chris Bowen is exactly right on the Compton - I couldn't go, teaching economics of all things - but I understand they really did not know what to expect, though after the first few sales, the champagne began to flow, figuratively speaking. They had put their chips on red, and red came up.

I do hope that the budget foolishness does get over this weekend and that the debt limit issue will be faced squarely (there is no reason to have it at all except for the political mileage that can be made out of it), for if it does lead to a US default, watch out as you've seen nothing yet!

Arnold F.

[kusunokimasahige]

There are different views on art in an economic crisis. Some say Art sales go up, others disagree :

 

No Sign of Financial Crisis at Postwar Art Sales

http://www.nytimes.com/2012/05/11/arts/ ... .html?_r=0

 

Art Market Crisis ?

http://artpulsemagazine.com/art-market-crisis

 

American Art Auctions at Sotheby's and Christie's Soar to Pre-Crisis Heights :

http://www.blouinartinfo.com/news/story ... oar-to-pre

 

Global art sales unaffected by economic crisis: Leading art investment group

http://english.ahram.org.eg/NewsContent ... s-Lea.aspx

[Curran]

Arnold,

 

Sort of a Miller & Modigliani circular argument is it not?

In Warren Buffett speak: be fearful when others are greedy, and be greedy when others are fearful.

 

Though quite the fan of Art, I have long advised against the Art allocation many of the wealthy are told to embrace.

However, holding a non USD denominated Art with increasing international appeal is *not* a bad thing at the moment. The debt issue and topics like the 1 Trillion dollar coin are all interesting. It gets a double dose of fear mongering in the 24/7 media. Is it a black swan? Well, I can confidently say the 1% I deal with are very well hedged. It wouldn't be a John Paulson subprime mortgage sized bet for them, but they'd have a very _VERY_ good year.

[nagamaki - Franco]

[seattle1]

Hello:

Henk-Jan it is exactly a distinction that I tried to make between the conventional notion of art buying over time, or at a time when "the coast is clear" which were the themes of the references you supplied, vs. the impact of an exogenous shock like a US debt default which is the setting for the Bonham and other auctions scheduled for the near future. I believe that the most obvious effect of very much heightened uncertainty is for people in the art market to hold off, however as I said it is a matter of net effects. The directions of some effects are both clear and contrary to one another, it is the empirical weight that matters, and for that it is anyone's guess. The current unanticipated uncertainty might provide a good buying time for some, but it might not. That is not circular, just an expression of unknowns.

A standard introductory economic question is to ask students if a boycott of a high priced product, suppose it is beef, would fall if a consumer boycott is organized. Most say "yes",

however the more thoughtful ones might say, correctly, that some folks will violate the boycott and buy the temporarily cheaper beef and substitute it for, say, pork. The strength of that effect will leave beef prices unchanged, not be enough to counter the downward trend in price, or raise it. From argument alone, one can't say. As for Bonham's I think I would rather be a selective buyer than a seller.

Curran, again I don't think you addressed the black swann. As for holding non-USD denominated assets, are you kidding? The risk free US borrowing ability is literally the foundation upon which every other priced asset, government bonds, foreign currency, equities, hard durables like houses, etc. in the world is priced to a greater or lesser degree. There is no where to hid should the US default. That is not a scare scenario. The politicians haven't got it yet because of all the distracting political noise, but I think there is a good chance that they will.

Arnold F.

[Curran]

Curran, again I don't think you addressed the black swann. As for holding non-USD denominated assets, are you kidding? The risk free US borrowing ability is literally the foundation upon which every other priced asset, government bonds, foreign currency, equities, hard durables like houses, etc. in the world is priced to a greater or lesser degree. There is no where to hid should the US default. That is not a scare scenario. The politicians haven't got it yet because of all the distracting political noise, but I think there is a good chance that they will.

Arnold F.

 

Arnold-

No. Not joking at all. As you said, it is "risk free", yet your basis for this discussion is about it no longer being risk free. Who holds the largest share of our debt, and why are they working so diligently to develop alternative exchanges for everything possible to circumvent the USD? Mind you, QE Infinity is a lovely way to poke them in the eye and leave them smiling at the same time. Bottom buying the Aussie, Loonie, and Swiss Franc have been easy trades. Especially the Swiss if it comes unpegged.

~~~ Can we agree Black Swan = 3.5 to 4 standard deviations? Even if we say just 3 standard deviations, I don't really need to address the black swan for the 99%. Our clients are the top 1-2% and they had a nuclear suntan from Oct 9th, 2008. 5 year anniversary right around the corner. Since then clients have been wanting belt and suspenders protection. We've regularly gone out and bought it. The way to hedge congressional idiocy in terms of US debt is a particularly easy hedge. What % haircut do you think the 20 Year bond would get if Congress screwed the pooch? Multiply that by about 10x, and that is the return our clients would make. That is if I don't add a bit of a VIX trade on top of that. The world might burn, but the rich would suddenly get much richer this time around. Congress couldn't steal from the poor and give to the rich any faster short of just giving over the keys to the printing presses. When something like this is so visible to a greater percent of the population and they load up on protection... it isn't really your 4 standard deviation event anymore. It isn't the Paulson bet, eclipsing the Soros bet breaking the bank of England in 1992. It seems even Boehner understands.

 

Could it happen? Yes.

If it does and you are a US citizen that isn't one of our clients, then burning the appropriate congressmen at the stake might also be a fun Fall activity.

[seattle1]

Hello:

Well Curran I don't think the initial post related to the insights of a business finance course, it was a simple attempt to play on the implications of how auctions, and direct sale markets for that matter, can be affected by the unknown. The funding issue is the main actor in the story, the second, if they join hands, is the debt limit and its entirely unknown impact, beyond of course, chaos. The issue is not the 1% as no major auction house in the world could avoid bankruptcy if that was their entire clientele. The suggestion was that perhaps the uncertainty of the extant and impending might - might - benefit some selective buyers.

By risk free we mean free of the risk of default, the premium over the nominal for the US bond being the lowest, zero I suggest, in the world. It is nothing more than the risk free opportunity cost, the nominal, of the borrowed funds. With default that advantage is lost and prior to revaluation the value of everything else is simply unknown. It is not a currency play issue as I see it.

Yes the Cdn. dollar, the Aussie and the Swiss Franc may attract interest and some other currencies other than the dollar approach or my even have zero default premia, but none are world reserve currencies. The Japanese, the Chinese and others have drunk the Cool Aide on that from time to time, but without takers.

If the US defaults and I don't think it will once the pols take a cold shower, but should it the consequences will far far over shadow anything at all having to do with art auction markets.

Arnold F.

[kusunokimasahige]

To be honest, auctions are as fickle as the room.

 

You never know whether any item will hit the high mark or wither away.

 

It depends on the mood and the people in the sales room.

[Brian]

It's English. And yet it isn't...

 

 

Brian

[Jean]

Brian,

 

I don't know Brian, I don't speak Xhosa

[Curran]

To be honest, auctions are as fickle as the room.

 

You never know whether any item will hit the high mark or wither away.

 

It depends on the mood and the people in the sales room.

 

I must agree with Henk-jan. That seems to be the primary factor. The Shikkake Juyo that sold for 22.5k last year was Pristine. Beautiful. Sold cheap.

Yet a Naotsuna that I would not have guessed to clear the 30k mark cleared over 100k.

 

Sure there is a financial nuclear bomb in the room set to go off later this month. Yes, defusing it is as easy as cutting either the Red or Blue wire (no 'wrong' choice there), but the Red and Blue of Congress are slugging it out over which one is right....keeping each other from that important act. The partisan feuding is such that the bomb might actually go off, though Congress must be officially braindead to allow that to happen. Still, the threat of it might make this auction a bargain hunting one. The post 9/11 Sept 2001 Sotheby's NYC Japan auction was all but absent of international buyers. USA bargain hunters picked it apart, as Sotheby's just gave up and let much of it go at 50 to 60 cents on the USD. Just like this auction, there was a large library break-up of two lots. I believe it went to a smiling New York collector. John Prough dragged me to the preview, and it was bargain central for some of the smart older guys. Several of John's best blades came from that sale.

Is the October 8th sale going to be in the same vein? I don't know. I admit I've always wanted a decent kabuto, but they seem increasingly scarce in the USA. I might bargain bottom buy in that area. Also, there are a few other things I want to see.

[seattle1]

Hello:

I sense we are now on the same page Curran and as I suggested in my first post trying to stir up some interest in the topic, a careful buyer might do well at the forthcoming Bonham's sale.

However, again it is the play of opposite forces that really matter. It will be like the beef boycott ploy mentioned earlier. Will the net effect of the temporarily lower price lead to market entry and increase demand through some sort of cascade effect, hence driving up prices (at Bonham's from this analogy), or will the boycott effect be net stronger? In any event some (helmets?) may go for less than otherwise, even if the gross revenue derived from the sale is depressed. Good luck!

Arnold F.

[Adrian]

 

You will not see a jobless history teacher like myself for instance bidding on such auctions.

 

KM

 

 

You can always invent the next beer can or something like that that would instantly make you a billionaire. :D

 

Is the October 8th sale going to be in the same vein? I don't know.

 

You cannot compare an event like 9.11 with the pathetic bickering that goes on these days in Washington. Both sides are just bluffing and they know it. (as does pretty much everyone else).

If anything, these events will just drag more international buyers to the auction (guys somehow hoping that some American buyers will be a bit more cautious).

[John A Stuart]

No economist here guys, so... but, I have a feeling you are going to see some very high prices realised. For the quality items that is. The Asian art market is strong and some prices the last while atmospheric. Even the secondary auction houses in Portugal, France, England, Spain and the US are reaping the benefits. As well, a destabilised economy can create prices in art to rise from hysteria. Gold does it and look how useless that really is, especially paper gold. At least brokerage fees on the market are nowhere as debilitating as those at the auction houses. I hope I am totally wrong and you all get the deal of a lifetime, but, I am saving my extremely limited funds for the DTI. John

[Curran]

John-

 

Have fun at the DTI. Plans are to attend in 2014 and visit my host family.

 

Perhaps not on swords, but Tokubetsu Hozon quality kodogu (including those with only Hozon) seem to be inflating in price.

This: http://www.tsuruginoya.com/mn1_3/f00208.html

came up a few days ago. It is a particularly fine example of the 5th gen... mind you... the 5th gen. It went off at prices about 2x of what it could have been bought a few years ago before Abe economics kicked in. Papered Nobuiye are also starting to go off at about 2x of a few years ago. Only what was Ichiban during the 1980s seems to be staying soft: Goto and Ko-Mino.

Everything else seems to be ticking up like the long slumbering Las Vegas real estate market. Kinda disturbing to those of us who were hoping the USD would get stronger so we could buy things cheaper, but there was a brief window of opportunity. I capitalized on it a bit with a fine TH Hirata and TH Kanshiro tsuba purchase, but not enough.

 

Curran

 

Ps: I've been trying for a decade now to pick up a good papered gold n shakudo ko-mino tsuba, since I let one get away from me at $3500. It looked like a slightly better version of this one:

http://www.premi.co.jp/ts-komino-kikuha ... 30611.html

This seller has it labeled as ko-mino, but papers say Mino tipping the hat to early Edo. Still, he's asking over $10,000.

If you can find me a better papered "ko-mino" sub $5000-6000 at the DTI, by all means please send me pictures. I may be smoking crack to think I can get one that cheap now that Abeconomics is fueling things.

[John A Stuart]

I surely will, since that is my area of interest this trip. Kodogu prices, up, up, but, I meant Oriental art in general and Japanese art as in our interest. The good stuff is really raking it in in Hong Kong for Chinese porcelain, jade and stearite and some of that is fake. Even porcelain chemo- luminescence tests have been defeated and museums are rife with fakes, they are that good. John

[Curran]

Remember 'Fat Bastard'? He was into the chinese porcelain long before the run up. The ex options trader moved from the Netherlands to Hong Kong and opened up an executive recruiting firm while continuing to deal porcelain. Thus he quit the Japanese forums.

 

I just stuck to paintings. Favorite one is by a lesser known artist named Xie Yuemei "Lotus and Kingfisher" dated 1930. Most were acquired in the 1990s from Taiwanese & Shanghainese friends and connections.

Edit: I hadn't seen the Sotheby's Hong Kong news until today (10/8/2013). It just keeps going.

[Curran]

Armor and the higher end fittings seem to have done acceptably well,

but it looks that Congress and the Stock Market tantrums did successfully scare away the sword buyers.

That Masazane for a fraction.... was there some condition issue other than the lost Juyo papers?

 

Now the after auction bargain hunters get a week or so to go after what didn't hit reserve.

Most of what I was interested in seems to have sold, but now it is time to talk to them about the one that didn't.

[Ray Singer]

That Masazane for a fraction.... was there some condition issue other than the lost Juyo papers?

 

Yes, the Masazane did not have a boshi. A fact that was not described in the auction listing. Col. Hartley loaned the Masazane for display at the 1999 Florida Token Kai 'Meibutsu Room', where it was my favorite sword in a line-up which included an Akihiro tanto and a wonderful Tokubetsu Juyo shizu tachi. Here is the write-up for the Masazane. Unfortunately the kasane is not specified, I remember it was an unusually thick and heathly sword but don't recall the specific dimensions there.

 

- Ray