What China's Foray into Fine Art Means for the World Economy

As we go to the presses this afternoon, gold is rallying (again), silver is rocketing (again), wheat is soaring (again) and just about every other asset on the planet that isn’t a US dollar is moving up in price (again).

The beleaguered greenback keeps trying to find a place to stand, but only seems to find places to fall. Already this year, the dollar index has dropped 6.3% – wiping out all of the S&P 500’s gains for the year to date. Another 6% drop would take the dollar index to an all-time low. Little wonder that investors are flocking to gold, silver and every other asset that seems a plausible alternative to dollars. Even fine art is catching a bid…but maybe too much of a bid.

Derek Thompson, writing for The Atlantic, suggests that record-setting auction prices for fine art may be “a leading indicator of economic collapse.” In his column, entitled, “The Art of Bubbles: How Sotheby’s Predicts the World Economy,” Thompson highlights China’s conspicuously large role in the red-hot market for fine art. “[China’s] blaze of auction records,” he explains, “is looking eerily reminiscent of 1987 Japan and 2007 America… In four years, China has zoomed past [the US] from the world’s fourth-biggest fine art scene to the world’s largest auction market for art.

“In May 2010, an anonymous bidder believed to be Chinese forked over $106 million for ‘Nude, Green Leaves, and Bust’, the most ever paid for a Picasso,” Thompson notes. “Five months later, three bottles of Chateau Lafite 1869 sold at Sotheby’s for 30-times their pre-auction estimate, at $230,000 per bottle to Chinese bidders. In November, an 18th century vase sold for $70 million. Eight figures for a vase… Then, just last week, Chinese buyers helped Sotheby’s and Christie’s set (yet another) record by bidding up the price of a Chinese vase estimated to fetch $800 all the way to $18 million – a 22,000% mark up!

“That’s the kind of fever pitch The Economist captured when it reported ‘astonishing bidding’ by wealthy Chinese across the globe as ‘record after record has fallen away as newly wealthy collectors from mainland China have piled into salerooms in London, New York and Hong Kong.’”

China’s record-setting presence in the fine art market is not necessarily a bad thing, but if the recent past is anything close to prologue, the Chinese economy is heading for a hard landing.

Price of Sotheby's Stock Through Various Financial Cycles

“China’s meteoric rise in the global auction world might be a sign of well-earned wealth,” Thompson explains. “But periods of record bidding are scarily accurate bubble predictors, according to Vikram Mansharamani, author of Boombustology. They’re a ‘symptom of overconfidence and hubris’ as a newly rich society spends its easy money with exponential flamboyance.

“China’s appetite for fine art isn’t a stray indicator, Mansharamani says. It’s a telltale clue from a disaster movie we’ve seen play out at least three times before,” Thompson continues. “In the last 20 years, Sotheby’s stock has experienced four sharp peaks. In the late 1980s, Japan had been ‘the center of gravity’ in the international art market. But its economy imploded, sending Sotheby’s stock reeling. Ten years later, the Internet bubble drove another auction boom among Silicon Valley newbies, and the bubble burst again. Ten years later, we watched the same film play out. This year could be deja vu, all over again…all over again.

“Mansharamani makes an eerie supporting argument for a bubble in China: skyscrapers,” Thompson concludes. “In 1929, the world’s three tallest buildings were in New York. In 1997, before the Asian financial crisis, the Petronas Towers took the title from Sears Tower. Thirteen years later, the record-setting Burj Dubai was erected just as the latest financial crisis hit Dubai. It turns out that the world’s ten tallest new buildings are like a worldwide pulse of bubblicious economic activity. In 2015, he notes, Chinese skyscrapers will occupy spots #2, 3, 5, 9 and 10.”

Share Price of Sotheby's vs. Shanghai Composite Index

A final corroborating data point may be the Chinese stock market itself. Despite still-titanic credit growth in China – and despite unrelenting headlines of booming economic growth – the Shanghai Composite Index has failed to make any net progress during the last six months. As such, Chinese stocks are diverging noticeably from Sotheby’s – a stock the index has tracked very closely for most of the last two decades. While Sotheby’s stock is busy challenging its all-time high, the Shanghai Composite remains 50% below its all-time high of October 2007.

Maybe it’s still too early to panic about these various signs of cultural excess and stock market distress. But it’s not too early to worry.

Eric Fry
for The Daily Reckoning