“Prices have reached The Promised Land. I can’t imagine it going much higher though. Can you?”
Those are the words of art collector Eli Broad, who was quoted in a Bloomberg piece about yet another Chinese billionaire’s record-breaking auction purchase.
This one – a 1917 painting called Nu Couche – fetched $170.4 million, the most ever for a piece by Italian painter Amedeo Modigliani.
In the art world, record-breaking auctions are cause for cork popping.
But to financial market investors, art auctions gone wild are bad omens.
World-famous auction houses, like Christies and Sotheby’s (NYSE: BID), have been riding high atop a euphoric wave of new-money Chinese millionaires (and billionaires)… who flourished amidst the country’s state-sponsored build-and-urbanize program. And these cash-rich buyers just couldn’t satiate their appetite for high-priced art.
Really, though, it’s not about the art. It’s about the prestige. It’s about the aura of wealth: a because-I-can mentality. As art dealer Andrew Kahane put it: “Chinese buyers want to be seen [that’s key] spending a lot of money. They want to be seen setting world records.”
Of course, there’s a natural correlation between economic growth, wealth creation, disposable income and art collecting. So it’s not that surprising that China’s uber-wealthy property developers are riding the wave of their country’s economic boom… all the way to its bitter end, where a painting is worth something like $200,000 per square inch.
Yet, it’s the “bravado factor” of China’s art buyers that whiffs of bubble-bust euphoria – the kind that’s typically reserved for the very tip of a toppy market.
Among China’s elite, uber-wealthy, it’s less about fine art. It’s more about fine art at any cost! And, many times, simply for the show of it!
But these Chinese bravado-buyers aren’t really unique, from an historical perspective.
Specifics aside, I can’t help but thinking: “Haven’t we seen this before?”
In fact, there are a number of times when newfound wealth blew bubbles in the fine art market, which thrive on the wealth created during above-average economic boom periods.
One look at Sotheby’s stock price tells the story…
The players are different. Yet, the pattern’s the same.
In 1989, it was the Japanese CEOs and corporate titans riding high on the froth of Japan Inc. But when the music stopped… shares of Sotheby’s dropped from $37 to under $9. That’s a 76% loss in just 13 months.
In 1999, it was Silicon Valley’s dot.com wealth that sent Sotheby’s stock just past its 1989 high, to $47 a share. But again, when the euphoria faded … it dropped under $7 by late 2002. 86% of Sotheby’s value vanished in the blink of an eye!
Then, in 2007, as the U.S. property market reached dizzying heights, house-flipping millionaires were pumping air back into Sotheby’s stock, which peaked just above $60 in October 2007. And… once again… the stock plummeted nearly 88% as that bubble burst during the following 12 months!
The point is this: Sotheby’s stock price has acted as a direct link… a finger on the pulse if you will… to the bubbliest pockets of unsustainable wealth creation in the world. And this makes it a great “global collapse” indicator.
I actually began writing about this concept in late 2013. It was featured in our November issue of Boom & Bust. Everything to the right of that red vertical line you see above came after that original publication. And as you can see, Sotheby’s stock never went higher, so we were pretty spot on.
Even so, Chinese collectors have continued buying art. But they’re being more discerning. And that has investors worried.
As such, Sotheby’s stock price has been soft. It’s down nearly 40% since November 2013. And despite the consumer discretionary sector being up 12% year-to-date (the most of any sector), shares of Sotheby’s are down 34% since January 1!
Just days ago, the company announced third-quarter earnings. It wasn’t pretty… with auction revenues falling 9% and a quarterly net loss of $18 million.
This news sent Sotheby’s share price tumbling. It’s down a whopping 16% from last Friday’s close!
More importantly, shares of Sotheby’s now trade under $30. And that means the bearish bet I recommended – against Sotheby’s stock – is beginning to pay out.
Ultimately, though, China’s new-money bubble is still a long way’s away from full deflation. And Sotheby’s stock price, too, has a long way to fall – to as low as $5 a share.
And at that price… my bet against Sotheby’s stock could be worth as much as 400% more than it is today.
Adam O’Dell, CMT
Chief Investment Strategist, Dent Research