State of the Economy vs Spending Habits...

[blah2u]

out of curiosity, is the decline in the state of the economy (housing depreciation, slowed growth, credit crunch, increase in unemployment, etc.) having any impact on your spending habits for art?

i haven't been following the art market for too long, but it would seem that galleries aren't too shy about increasing prices for OGs (at least for hot artists) and prints are slowing creeping up as well (although i suppose prints are generally 5%-10% of an OG).

any thoughts? are you becoming any more conservative in what you buy and/or how much you spend?

[drunkmunky02]

interesting topic..

my spending habits on art/prints/toys/etc. has definitely slowed down. but it's not a direct result of the state of the economy. i thankfully have a job and have a nice home to live in.. but future planning means shifting my financial resources. i plan on going for my MBA soon.. so that's going to cost a pretty penny. i'd also like to travel more and spend money on frivolous material things other than art plus, wall space is getting quite limited.. so i'm being much more picky about what i buy these days. that mad rush to buy everything i laid my eyes on when i first started collecting has definitely subsided.

[rhinomilk]

i think inflation (the falling U.S. dollar) plays a big role in pricing in general. what do you think?

[kidrobotct]

it definitely has had an impact on my thought process. How much do I really want that piece? Also in terms of the gallery pricing for hot artists I wouldn't assume prices would go down until the demand slows. At this point though I do think more about which pieces i will enjoy for longer amounts of time whereas before I may have just got a piece I liked for the moment and then moved it to a new home once I saw something else.

The inflation and weakness of the dollar has also stopped me from getting commissions or art from European artists or galleries.

[commandax]

I'm going to keep buying, with the caveat that I never buy a piece that I can't pay for that month with cash on hand (no credit card debt, no dipping into savings). I have a stable, lucrative job and modest expenses, so I wind up stashing about 30% of my income into some sort of investment instrument. I figure about a third of that can be invested in art. The way I look at it, once my dollar is spent on a piece of art, at least it isn't depreciating anymore. With some luck, the art may gain some value over time, and in the meantime, owning it will give me pleasure. I could put the money into gold or Swiss francs, but it just wouldn't be as much fun.

[sleepboy]

Yes, I think even though the state of the economy does not affect my job much per say, I still feel more cautious overall. I think that artists have to be careful in the coming months not to raise their prices too much or just keep them level because I feel some people will stop buying art. I think the high demand artists won't be affected as much. I can point to the recent Stella show where things did not sell as quickly even though her prices were stable and also the G1998 "Toys" show last night where I saw many great pieces that I was surprised were not sold yet even though I got there late. But yes, like Angie said, the mad rush to buy everything I like has subsided a bit as well. This year I'm more selective in what I buy...

And definitely overseas buys have become less and less attractive for me. I guess perhaps you can balance this by attempting to sell your prints or OG's on UK ebay etc... as perhaps our stuff looks more tempting to non US people.

[marcusslo]

for me, i don't think it's so much the state of the economy that will affect my spending habits... but more that things such as a new house will need to be my primary focus... my spending habits have sent me into recession

[ritedere]

I haven't altered my spending habits one bit. I still pretty much buy anything I want (well, that costs less than $1000 maybe). Probably not wise on my part, but I'm an optimist at heart.

[comiconart]

marcusslo said:

... my spending habits have sent me into recession

Ditto. And I PROMISED myself I would STOP BUYING for at least a few months. And then another piece came my way. And I bought it. Once again it's time to play, "What do I sell THIS time?!?". I'm getting very good at that game. And as with all games, the longer you play it, the higher the difficulty level gets as the viable options decrease.

[blah2u]

Interesting Read from 4/14/08 Wall Street Journal
=====================
Is Street Turmoil
Coloring Art Market?
Sotheby's Receivables
Are Up as Buyers Delay;
The Price of 'Wall Power'
By ROBERT FRANK
April 14, 2008; Page C1

Wealthy clients of Sotheby's appear to be falling behind on their bills -- and that could signal trouble for the auction house and the art market.

Sotheby's accounts receivable -- the money owed by buyers who purchased art at auction -- more than doubled to $835 million in 2007, according to Sotheby's annual report. That is the largest total in Sotheby's history, and points to possible stress in an art world where Warhol and Rothko have become the ultimate luxury brands and the newly rich have been paying record prices for "wall power."


Singer Bono addresses the crowd at the beginning of Sotheby's 'Red' auction in New York to raise funds for HIV/AIDS treatment in Africa.
More than $520 million of Sotheby's increase in receivables was in the fourth quarter, following the summer's financial turmoil. The accounts-receivable number doesn't include $6 million in "doubtful accounts," or money that Sotheby's said probably won't be repaid.

Sotheby's last year also promised more sellers that it would guarantee a minimum payment for their artwork, no matter what it fetches at auction, effectively betting art prices will keep rising in a weak economy. Sotheby's issued $902 million in guarantees last year, double the amount in 2006 and up from $131 million in 2005, according to its annual report. Dealers said Sotheby's has continued to pledge guarantees to buyers for its May auctions.

These issues come at a critical time for the art market. Prices have soared in recent years as a new wave of wealthy collectors -- many from Wall Street and the real-estate industry -- poured into the market to fill their mansion walls and diversify their investment portfolios. Sotheby's and rival Christie's International PLC's fall and spring auctions have become competitions of conspicuous consumption, filled with celebrities, hedge-fund managers and mystery billionaire bidders from Russia and China. A ticket to Sotheby's May auction has become one of the most coveted in New York since the company reduced the number of invitees last year.


Art prices globally jumped 18% in 2007, according to Artprice.com, and Sotheby's has been a big beneficiary. Its auction revenue hit a record $833 million last year, up from $631 million in 2006. Its stock price hit a 52-week high of $57.64 in October. In 4 p.m. New York Stock Exchange composite trading Friday, Sotheby's shares were at $24.52, down $1.32, or 5.1%, for the day and off 57% from their October high.

Sotheby's stock tumbled in November after a pricey Van Gogh, estimated to go for more than $28 million, failed to sell, and its shares have continued to slide.

Bill Sheridan, Sotheby's chief financial officer, said the accounts receivables and guarantees aren't a problem. Receivables rose largely because the firm's sales increased, he said. Its consolidated sales -- a combination of auction, private and dealer sales -- rose 51% in 2007, while auction sales were up 44%.

He said $243.2 million of the increase is due to the timing of its auction sales and private sales. Its main auctions were in early November, and because clients have 30 days or more to pay their bills, the payments might not be due until sometime in 2008. Sotheby's also said it extended its standard payment deadlines for its November 2007 auctions, and that the practice isn't unusual.

Mr. Sheridan said payment periods for certain major sales are extended "to help support and market sales." He said the firm generally doesn't pay its consignors, or sellers, until it collects from the buyers.

"Frankly," he said, "collections and bad debts haven't been an issue."

Art dealers said privately, however, that Sotheby's is letting buyers wait as long as three or four months before paying -- a much longer period than normal. "You can get a free painting for four months," one dealer said. "I can't remember that happening before."

Art dealers said the art market remains relatively strong, and they aren't seeing any signs that wealthy collectors are falling behind on their bills. Sotheby's said auction sales were up 3% in the first quarter.

Still, some remain cautious. "There seems to be a feeling that the market will certainly be affected by events in the real world, but for now it is acting like it won't be," said Andrew Fabricant, a director of the Richard Gray Gallery in New York. "Something's going to happen, but it hasn't happened yet."

Sotheby's also faces risk from guarantees. Because of the dearth of masterpieces for sale and the rising number of collectors, auctioneers have had trouble getting supply for their big sales. To secure pieces, Sotheby's and Christie's are paying higher guarantees. If Sotheby's pays a guarantee of $20 million for a piece, but sells it for only $15 million, it could take a loss. If the piece doesn't sell, Sotheby's keeps it in hopes of selling it later for a higher price.

Mr. Sheridan said, "We take a conservative approach to risk, and over the many years we have offered guarantees, we have made money each year on our portfolio of auction guarantees." He said the firm makes a commission even on works that it sells for below the guarantee price, mitigating or wiping out any potential loss.

The fear, said art dealers, is if Sotheby's issues hundreds of millions of dollars in guarantees -- which it is required to pay out -- but can't sell the works or can't collect from buyers.

"The danger is that a company with a weak balance sheet is going to have a problem if demand suddenly subsides," said Richard L. Feigen, a New York dealer. "These guarantees are so large, the risk is that one of these days they'll get caught."

[entropy]

Apr 15, 2008 11:47:52 GMT -8 blah2u said:

Interesting Read from 4/14/08 Wall Street Journal
=====================
Is Street Turmoil
Coloring Art Market?
Sotheby's Receivables
Are Up as Buyers Delay;
The Price of 'Wall Power'
By ROBERT FRANK
April 14, 2008; Page C1

Thanks for posting this article! I think this is a very important topic and believe it or not, I drafted a LENGTHY reply (longer than the WSJ article!) to your initial post a week or so ago, but I decided to scrap it. It was thoughtfully written, I thought, but I sense people don't really want to read or hear about this... at least not from me : )

[blah2u]

you're welcome. if you saved your original reply, i'd be interested... feel free to post or pm.

what caught my eye to the article was the pic of bono auctioning off a huge murakami piece. geez, if the ultra-rich are having difficulties paying their art bills, gotta wonder what the economy will do to the rest of us.

[sleepboy]

Apr 15, 2008 15:12:56 GMT -8 entropy said:

Apr 15, 2008 11:47:52 GMT -8 blah2u said:

Interesting Read from 4/14/08 Wall Street Journal
=====================
Is Street Turmoil
Coloring Art Market?
Sotheby's Receivables
Are Up as Buyers Delay;
The Price of 'Wall Power'
By ROBERT FRANK
April 14, 2008; Page C1

I think this is a very important topic and believe it or not, I drafted a LENGTHY reply (longer than the WSJ article!) to your initial post a week or so ago, but I decided to scrap it. It was thoughtfully written, I thought, but I sense people don't really want to read or hear about this... at least not from me : )

I too would like to read it if you still have it...

[mute]

I think it's starting to impact my spending habits and I've only been collecting for a year. I'm not sure if I'm going to be adding much more to my collection until I get my finances in order. I'm now thinking about buying a new car and that's a purchase I hadn't planned for this year. I'm only getting about 13 mpg in what I'm driving now and it's really bothering me. I had figured in picking up a couple more original pieces to help finish decorating my house but I might just get prints instead. I know, I'm wussing out. I had money set aside for art but it might be going toward the new car.

Don't hold me to this, I'm very weak when it comes to beautiful art.

[entropy]

I hate to say it, but me too. I just arranged a payment schedule with a gallery on a $2000 purchase. And that will be the LAST of it for a long long while. The cost of my purchase will be offset by a few prints I'll place on eBay.

PLUS I need a new car too! Luckily my new job is mostly working from home. And when I need to head out to a client site, they pay all costs - shuttle to airport, airfare, etc. So I'm hoping to delay the new car purchase till 2009.

I think I have enough art to cover all the walls anyway.

BTW, thanks to blah2u and sleepboy for your interest! Sorry I didn't reply. I saved a part of my initial "essay" but don't have the last half... But I promise I'll finish it sometime later - when I'm in the mood, ha ha. Sometimes my brain needs to be placed in the fridge - sort of like a forced hibernation. I'm in dumb mode right now and don't want to think too much about things. I think it's the recent sweltering heat that turns me into a zombie. But this topic is not going to die out anytime soon. I promise I'll post something eventually (and even if not, at the very least I will PM it to you). It will be long - I can't help that - but hopefully not boring.

I'm still monitoring the pricing of artwork at various galleries... I'm amused at the audacity of some, but just trying to gauge the psychology of the art collector, the ignorance of some sellers, etc.

[highbrow]

Entropy, out of curiousity what was the purchase that made you have to slump further in debt ( I say this I am about to send out a paypal payment that I could use to make two extra mortage payments ) just curious what the piece was

[entropy]

May 1, 2008 19:00:09 GMT -8 highbrow said:

Entropy, out of curiousity what was the purchase that made you have to slump further in debt ( I say this I am about to send out a paypal payment that I could use to make two extra mortage payments ) just curious what the piece was

hi there, highbrow! Thank you for your interest in my art collecting! Once it is paid off (probably in late June or mid July), I will PM you a picture of my latest acquisition. I will NOT forget! Not sure if you've seen many of my posts, but you might be able to discern that I'm kind of private... Need to keep my anonymity (sort of - a couple of lurkers know me) if I want to keep up my occasionally (and unintentionally) entertaining molotov c0cktail (aka killjoy) posts

That's not to say I won't place a part of my collection up here one day. In due time...

About the piece I just bought: Actually, I could pay it off in full with a credit card right now, but I hate making purchases that way because of the interest rate. If the gallery is willing to accomodate a stretched out plan, then that allows me some flexibility... I'm more willing to pull the trigger on a painting that way. I just feel better that I'm not financing the purchase.

And besides it forces me to get off my arse and put some of those prints up for auction to offset the cost of an original painting...

My purchase was from outside the state.

Factors in my recent purchase: I love the artist's work! No California sales tax (save $200), no need to reframe because I really like the frame on the piece (save $500), free shipping (save $25).


The things we tell ourselves in order to rationalize our irrational behavior...

So my tax refund money is all spent now! Paid off my credit cards (at least 80% of the balances), and paid off the overdue property taxes... and leftover $ was used to buy fun stuff. Art budget for 2008 is all but depleted now. Sure, I'll purchase a print here or there, but the fun is momentarily over ; )

[blah2u]

Another WSJ article...

Nervous in New York
After a Five-Year Boom, Auction Houses Brace for a Potential Slowdown
By KELLY CROW
May 2, 2008; Page W10

With a weak American economy and global fears over rising fuel and food costs, New York's chief auction houses are bracing for a potential art-market slowdown.

When the flagship New York spring auctions start Tuesday, art collectors and speculators are expected to show a measure of restraint after five years of runaway spending. Overall sales could still grow slightly as newly wealthy collectors from Europe and Asia compete for the priciest Impressionist, modern and contemporary artworks. But experts expect more of the midrange art to sell for lackluster prices or go unsold.

The major houses -- Sotheby's, Christie's International and Phillips de Pury & Co. -- say they're fortifying against a possible market correction, not a crash. They still expect the two weeks of auctions to bring in combined sales of between $1.3 billion and $1.8 billion, compared with $1.6 billion in November and $1.4 billion last May.

Sellers this season include actor Sean Connery, newsprint magnate Peter Brant, television producer Douglas Cramer, and German collectors Helga and Walther Lauffs, who have divided up their holdings in 1960s-era art between Sotheby's and New York dealer David Zwirner, possibly reducing their risk.

Sale highlights at Sotheby's include a mint-green triptych of a man being eaten by birds by Francis Bacon estimated at $70 million and a Cubist portrait of a woman in a blue dress by Fernand Léger priced at as much as $45 million. Overall, Sotheby's expects to bring in between $622 million and $818 million, compared with $737 million last November.

Christie's expects to make anywhere from $670 million to $946 million by selling artworks such as a Claude Monet landscape of a bridge for up to $40 million and a Lucian Freud portrait of rotund nude woman sleeping on a sofa for up to $35 million. Phillips, meanwhile, hopes to sell up to $88 million in contemporary art including a Jeff Koons marble bust for up to $8 million.

These sales come at a crucial time for the art market. After several years of soaring global demand, art prices have fallen 7.5% during the first quarter of the year, according to Artprice.com, a Paris-based database that tracks global auction results. Buyers' confidence in the contemporary art market has also dropped 40% from two years ago, says ArtTactic, a London-based research firm. Several New York galleries have closed lately because of financial shortfalls, from the smaller Clementine to the once-major Salander O'Reilly.


To offset presale jitters, the auction houses have gone into marketing overdrive. For the first time, Sotheby's placed its Impressionist catalogs in each of the 117 rooms of Brown's Hotel in London last week as the city hosted the Russian Economic Forum. While artists typically don't help auction houses sell their own work, Sotheby's got Lucian Freud to attend a dinner promoting its Bacon triptych. Christie's wrangled Mr. Koons and several art scholars to give interviews for its booklet produced to showcase 1980s artworks being sold by New York collectors Michael and B.Z. Schwartz.

Amy Cappellazzo, Christie's international co-head of postwar and contemporary art, says such efforts aim to give the sales a "curated" tone that could reassure potential bidders. Both she and Simon Shaw, head of Sotheby's Impressionist and modern art department in New York, also cut their important evening-sale offerings by as much as 25% because of worries that what Mr. Shaw calls "a big, flabby sale" featuring works of lesser quality might not fare well. Phillips cut its evening sale down by 15 lots for similar reasons.

The catalogs are also thinner because fewer collectors wanted to sell this time around. The pullback is most noticeable in the daylong sales of midmarket work, where works are priced from about $5,000 to $1 million. These day sales are closely followed by industry experts because they offer the broadest gauge of the health of the overall art market. (Art-title insurer Aris says 96% of the art sold today is priced at under $5 million apiece.) This season, the tally of artworks offered in the day sales has dropped by at least a third from two years ago.

New York art adviser Thea Westreich says that in the early days of a down market, collectors and speculators don't buy in the middle market because such works -- say, a $300,000 still life by a third-tier Impressionist -- typically cost more than new pieces hanging in galleries yet aren't as coveted as blue-chip masterworks. Ms. Westreich says, "The middle is a difficult place to reach because it's a level where you're dealing with buyers who need to get their money's worth. But works of middling quality don't hold their values as well."

Sellers are protecting their assets by insisting on risk-free deals. At least 115 artworks on offer during the sales have either been bought outright or given a guarantee by the auction houses, up from 91 at a similar sale two years ago. (With a guarantee, the auction house pledges to buy the work if it goes unsold in exchange for a greater cut of any profits.) Monte Carlo dealer David Nahmad paid around $14 million for a Monet landscape two decades ago; Christie's is now guaranteeing to sell the work for at least $35 million. Mr. Nahmad says Christie's persuaded him to sell the painting, but he says, "The timing is always wrong to sell, but sometimes you just have to because you want to buy something else."

Bidders hoping to find a lot of work by Chinese contemporary artists will have to wait for Christie's May 24-25 sales in Hong Kong. To avoid overexposure here, the auction houses have cut back sharply on their offerings of painters like Zhang Xiaogang and Fang Lijun. The evening sales are also light on works by Damien Hirst, whose prices have multiplied during the art boom. Tobias Meyer, Sotheby's world-wide head of contemporary art, says, "We didn't want to keep bringing it all out. These are important artists, and we wanted to be a little careful."

Dealers still expect some artworks to fetch record prices. Demand has surged in the past year for sculptor Alberto Giacometti. Christie's sold his "Falling Man" sculpture for $18.5 million last May, and now there are 11 other works between the two major evening sales. Mr. Bacon is represented by the triptych at Sotheby's as well as by a trio of self-portraits at Christie's priced at up to $35 million. And then there's Andy Warhol, who is highlighted by "Double Marlon," his 1966 linen silkscreen view of Marlon Brando astride his motorcycle in "The Wild One." Christie's has priced it at $30 million.

Some insiders are betting that the auction houses's sober approach may even fuel buyers. In Moscow, financier Sergey Skaterschikov says the scarcity and global appeal of certain artists like Edvard Munch and Clyfford Still will likely push up prices for their work this season.

In New York, Carlo Bronzini, an investment banker, says he has grown used to getting outbid at auction but thinks his luck may be turning. "There was so much over-demand before," he says. "Now maybe we'll get more of a balance."

[sleepboy]

Wow, sound scary but hopefully this downturn only affect the super expensive stuff and not the cheaper stuff we collect. I think that I will slow down my buying for a while (although I always say this). Putting in wood floors for less than the price of one of my paintings has put how much I have been spending into perspective...

[blah2u]

the two wsj articles i posted weren't necessarily directly related to "lowbrow" art (for lack of a better descriptor) but i think they speak volumes to the impact the economy is having on elastic goods in general. my intent isn't to be the bearer of bad news (trust me, i have no clue where the economy is headed), but just to evoke some reaction from folks. what is "expensive" is all relative; it seems as if the ultra-high net worth down through the working class are all experiencing a tightening of the belts due to the uncertainty of the economy/capital markets, loss jobs, gas prices, foreign competition, payment shock from the adjustments on their ARMs, etc. similarly, multi-million $$$ homes as well as ones below the median are all experiencing price declines and/or a drying up of demand. my impression is that we'll be seeing a similar trend across the art market -- and it may be more pronounced given that housing is rather inelastic. that said, there will always be room for prices to keep increasing for some (ie., audrey, etc.) and it may take a while for this to trickle down into this space in general.

hopefully, this period will produce subdued pricing appreciation and allow folks to finally get works from artists they have followed for a while, but thought they could never afford...

[kidrobotct]

I know I am more conscious of what I am buying more so than ever now. Do I want this one more than that one? Looking at the intrinsic value of the art to me vs oh that's cool i'll get it.

On a side note, I noticed the article posted above as well and here's one that may dispel that. If this is true than what would this piece have gone for before. I really wish I had Euros because then everything is pretty much 50% off right now

nymag.com/daily/entertainment/2008/05/takashi_murakami_watches_from.html

I also can't believe the Rothko didn't fetch one single bid. I love his work!

[sleepboy]

Yah, read that article. All i could think was that damn, it pays to be a pervert...

Don't know if it's the state of the economy but I'm more and more conscious of the amount money that I have spent in art. Still love most what I bought but once you have enough for the walls in your house, buying more just seems like an excess. Unfortunately, I can't bring myself to sell anything so I'm kinda stuck for now...

[sleepboy]

Checked out the Murakami exhibit at the Brooklyn Museum yesterday. I think that "lonesome cowboy" sculpture that sold for 15 million is an edition of 3! LOL, so the gravy train doesn't end with one sale...

[entropy]

My favorite magazine is The Week. I love The Economist, but that's $100 for an annual, discounted subscription. The Week is a distilled 40 page version of The Economist and that's probably key if you're pressed for reading time

My 5 year archive of The Week is a better chronicle of the world's history over that span of time than any single book or site you'll find on the web. In my honest opinion.

Anyway, last week's issue covered "The art market" in its Briefing page. I immediately knew I'd be remiss if not sharing it with everyone who has contributed to this thread.

It's only one page but as with everything in this magazine, it's well written and densely packed with multiple view points.

Article: "The art market: A bubble about to burst?"
Key quotes:
"Each piece is simply worth what you can persuade someone else to pay for it"

"...their value is dictated by the "mafia" of the art world - dealers and curators - who lead the gullible rich into paying absurd prices"

"Conventional wisdom says that the art market goes flat six months to two years after the broader economy slows down"

These select quotes are out of context somewhat, so please read for yourself. The briefing actually leans to a market that will remain insulated from any downturn. That's great news for galleries and artists. For me, it's just going to chase me away. I am content with my art collection, and I'm already refocusing on furniture, my extensive book collection, movies (DVDs), maybe start assembling that long planned for electronic music studio, a new car, etc. There are other ways to maximize my art money. Paying over $100 for a paper print now seems to me a bit absurd. Especially in a future of $10/gallon gasoline, the continued decline of the U.S. dollar and our standard of living, stumbling from #1 to possibly #3 (behind India, China, the EU). On and on. I know I'll continue to buy and add to my collection, but I'd like to think I'll be extremely selective from here on out.

Anyway here's the article:

Briefing: The art market: A bubble about to burst?


The housing market and Wall Street may be in trouble, but the contemporary art market has stayed remarkably strong. Is art really immune from the economic downturn?

How well has art been selling?
The past decade has seen an unprecedented boom in the international art market, reaching a climax in the last two years. Sotheby’s and Christie’s, the two main auction houses, together sold an eye-popping $12.5 billion in artwork last year—an annual increase of more than 40 percent. All sorts of records have been smashed: Mark Rothko’s White Center sold for $72.8 million, doubling the top price for a postwar work; and the world auction record for a work by a living artist was set by Jeff Koons’ Hanging Heart, at $23.5 million. Even this year, despite repeated predictions of imminent collapse, bidding has remained frantic: Francis Bacon’s Triptych 1974–1977 sold for $46.1 million in February, the highest price ever paid for a postwar work in Europe. Then, two weeks ago, Lucian Freud broke Koons’ record for a living artist when his nude portrait Benefits Supervisor Sleeping sold in New York for $33.6 million.

So are all art prices surging?
No. From June 2006 to June 2007, old masters increased in value by just 7.6 percent, according to an industry report, while British 17th- to 19th-century portraits and watercolors actually declined in value, by 7.5 percent and 27.5 percent, respectively. The big boom is in the prices of modern art (defined as art produced from the late 19th century to the 1970s), which jumped 44 percent, and of contemporary art, which soared 55 percent. The enthusiasm for contemporary works is so fevered that it affects not just the Lucian Freuds and Francis Bacons but also less proven artists. And the Chinese and Russian markets are really going crazy. Between 2005 and 2006 the value of contemporary art sales in China increased by 983 percent.

Who is buying all this art?
In the 1980s, the principal buyers of contemporary art were private companies that bought it not as an investment but to beautify their offices. The current boom has been driven by new money—hedge-fund managers, CEOs, oil magnates, pop stars, models, and actors. Prices have also been boosted by Middle Eastern buyers, and by newly minted Russian and Chinese tycoons. Buoyed by booming energy prices, the Russian art market rose an incredible 2,365 percent between 2000 and 2005. Sotheby’s now includes Russian rubles in its electronic listing of currency conversions.

Are these works worth these crazy prices?
It’s hard to say. Art isn’t like a stock or bond, with a calculable value. Each piece is simply worth what you can persuade someone else to pay for it. And that depends on fashion, the availability of cash, and how many people turn up at auction. Like a Gucci bag or a professional sports franchise, art is an aspirational “trophy” product—the super-rich compete fiercely for what they call “wall power” for their homes and offices. Many traditionalists, such as veteran New York art dealer Richard Feigen, would argue that works by the likes of Koons and Damien Hirst “have no place in the history of art.” He complains that their value is dictated by the “mafia” of the art world—dealers and curators who lead the gullible rich into paying absurd prices. Even so, contemporary art is often a profitable investment. Advertising mogul Charles Saatchi bought Hirst’s embalmed shark for $98,925 in 1991 and sold it in 2005 for more than $12 million. Still, it’s a risky business: A glance at the catalogues from 10 years ago shows that around half of the contemporary artists in them are no longer sold at top auctions.

So will the bubble burst?
Some insiders say that falling house prices, big bank write-offs, and smaller Wall Street bonuses may indeed burst the bubble. Conventional wisdom says that the art market goes flat six months to two years after the broader economy slows down. “It can’t and won’t go on,” warned The Economist a few months ago. And certainly, art bubbles have burst before. After a decade of massive price inflation came the great art bust of 1990. Prices crashed by 25 percent to 75 percent, and didn’t recover for five years. But the many predictions of imminent doom have so far proved wide of the mark. Indeed, some analysts predict that the current boom will continue for years.

What makes them so confident?
The world has changed since 1990. Back then, many art buyers were from New York and London, and so were greatly affected by the stock market crash. These days, Russian, Asian, and Middle Eastern buyers—who sit atop growing mountains of petro-dollars or manufacturing wealth—are much less rocked by fluctuations in the Western financial sector. Philip Hoffman, who set up the first hedge fund devoted to art investment, says he has clients from all over the world spending huge amounts of money. “They are completely oblivious to the credit crunch,” he said. “In the long term the art market is a one-way street.” For the first time since 1914, claims Tobias Meyer, Sotheby’s world head of contemporary art, “we are in a non-cyclical market.” We may soon find out whether this is wishful thinking.

A market where anything goes
The contemporary art market is not like other markets: Almost totally unregulated, it is largely controlled by the auctioneers and the dealers. The “superstar” dealers who manage many of the hottest artists do not sell their work—they “place” it. Novice collectors have to be patient, presenting their credentials and explaining what they intend to do with the art—dealers don’t want it “flipped at auction” too soon. But dealers will grant discounts in order to place work with an “important” collector. Museums get an even larger discount: “Museum-quality” is the ultimate accolade, greatly boosting an artist’s prices. Prices are carefully managed—some might say manipulated. Charles Saatchi is said to have limited the output of artists he patronizes. When Hirst’s diamond-encrusted skull, For the Love of God, sold last year for $98.9 million in a private sale, it was touted as a record for a work by a living artist, enhancing the value of all Hirst’s work. Closer inspection revealed that Hirst himself retained a 24 percent stake in it; many in the art world think he never sold it at all. The New York Times once accused Hirst of being less an artist than “the manager of the hedge fund of Damien Hirst’s art.” But as Andy Warhol once observed: “Good business is the best art.”

[entropy]

Eric Janszen, founder of iTulip Inc., an independent financial advisor and economic forecasting firm, wrote a piece for Harper's earlier this year about "bubbles" and crashes in the economy throughout the past century. It was an awesome piece. No, it wasn't about the art markets... but his definition of a bubble was awesome...

Let me know if this sounds familiar:

A better, if ungainly, descriptor [for a "bubble"] would be “asset-price hyperinflation”—the huge spike in asset prices that results from a perverse self-reinforcing belief system, a fog that clouds the judgment of all but the most aware participants in the market. Asset hyperinflation starts at a certain stage of market development under just the right conditions. The bubble is the result of that financial madness, seen only when the fog rolls away.