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Guest Post: The Bubble in Modern Art

Submitted by Pater Tenebrarum of Acting Man blog,

Modern Art Goes Bananas As the Money Supply Inflates

We don't want to discuss the artistic merits of modern art, except to say that we are not averse to it at all. In other words, we personally like quite a bit of modern art, regardless of the field. Paintings, sculptures, literature, music, we find stuff that speaks to us everywhere. Of course we are not completely uncritical, we merely want to point out that art doesn't end sometime in the 19^th century for us. We even like quite a bit of that modern 'classical' scratchy music that is on the receiving end of much contempt elsewhere. As it were, de gustibus non est disputandum.

$58.4million

Jeff Koons – 'Balloon Dog (Orange)'

However, we differ with many supporters of such art insofar that we do not believe it should be in any way subsidized by the State. We also believe the habit of sometimes forcing concert goers to listen to, say, Helmut Lachenmann's works by sandwiching them between pieces by Mozart and Beethoven is a slightly questionable practice – even though we like it personally. We are well aware though that most Mozart fans are probably only clapping perfunctorily when confronted with something like this.

However, our focus here is actually on how the money supply inflation of recent years has been mirrored in the prices paid for modern art, which are becoming ever more absurd. A first wave of record prices was paid in the 2003-2008 bubble, but these records have been shattered over the past few years, especially in sculpture. A few examples are shown below.

The First Bubble Wave (2005-2008)

If you are a sculptor, you're a real winner if your name is Alberto Giacometti. Regardless of the phase of the giant bubble we are in, your works will fetch record prices.

grande femme debout 2

'Grande femme debout II', by Alberto Giacometti – sold for $27.4 million in 2008

Tete_de_femme_(Dora_Maar)

'Tête de femme (Dora Maar)' by Pablo Picasso, sold for $29.1 million in 2007

Prices for sculptures really only went 'off the charts' in the 2009-2013 phase of the great bubble. Paintings are generally fetching even higher prices, and in the early bubble phase they beat the prices for sculptures noticeably.

pollock

Jackson Pollock's 'Nr. 5, 1948' – sold for $140 million in 2006

de Kooning-Woman3

Willem de Kooning's 'Woman 3' – sold for $137 million in 2006

Dora_Maar_Au_Chat

Pablo Picasso's 'Dora Maar au chat', sold for $95 million in 2006. Several other works by Picasso also sold at very high prices in this stage of the bubble, the first one was 'Garçon à la pipe', which sold for $104 million in 2004.

720px-Suprematist_Composition_-_Kazimir_Malevich

Kazimir Malevich's 'Suprematist Composition', sold for $60 million in 2008

Gustav_Klimt_046

Gustav Klimt's 'Portrait of Adele Bloch-Bauer I' sold for $135 million in 2006, making it the highest priced modern painting sold in this phase of the bubble ('Adele Bloch-Bauer II' incidentally sold for roughly $88 million the same year).

The Second Bubble Wave (2009-2013)

Things became even more interesting in the second wave of the bubble, especially in the field of modern sculpture, where an enormous jump in prices was recorded. Numerous paintings were also sold at jaw-dropping prices, but the differences to the first bubble phase were not that great (with one notable exception, see further below). This time, Giacometti really became the center of attention.

The most expensive sculpture ever sold was a version of his 'L'homme qui marche' (there exist several versions of most of his sculptures). Several other Giacometti sculptures also fetched record prices, including two versions of the same work ('Grande Tête Mince') selling in 2010 and 2013 at very similar prices.

$104 million

Alberto Giacometti's 'L'homme qui marche I', sold for $104 million in 2010

01-9035-Giacometti_ar

Giacometti's 'Grande Tête Mince' – sold in 2010 for $53 million, while another version of the same work sold in 2013 for $50 million (it actually looks exactly the same, so there is no point in depicting both)

Amedeo Modigliani's 'Tête' sold in 2010 for $52.6 million

$58.4million

'Balloon Dog (Orange)' by Jeff Koons, sold for $58.4 million in November 2013

With regards to Jeff Koons' 'Balloon Dog' selling for more than $58 million, we can only repeat, 'de gustibus non est disputandum'.

Next come a few paintings that were sold at very high prices fairly recently. We already mentioned the Lucian Freud triptych by Francis Bacon on another occasion. Edvard Munch's 'The Scream' is a well known painting – what is perhaps not so well known is that countless versions of it exist. One of the 'four most important versions' was auctioned for almost $120 million in 2012.

$142 million

Francis Bacon's 'Three Studies of Lucian Freud' – sold for $142 million in 2013

$119 million

The version of Edvard Munch's 'The Scream' that was sold for $119.9 million in 2012

Pablo Picasso also struck gold again in the current bubble phase, by setting a fresh record of his own earlier this year.

Picassos-The-Dream-Le-R+¬ve-Steven-Cohen-Steve-Wynn-155Million

Pablo Picasso's 'Le Rêve', which sold for the princely sum of $155 million in March of 2013.

And finally, Andy Warhol continues to attract big money as well. His painting 'Silver Car Crash' fetched $105 million this year.

Warhol, $105 million

Andy Warhol's 'Silver Car Crash (Double Disaster)' sold for $105 million in 2013.

Conclusion:

The effects of the massive monetary inflation of recent years are so far mainly reflected in asset prices. Modern art has become a major magnet for investors, whereby one gets the impression that this is truly a gargantuan bubble by now. Works of art are unique (well, modern works are only 'sort of' unique, since in many cases the works exist in more than one version as
noted above), so there is really no yardstick by which one could make sensible comparisons regarding their valuations, except to note that prices today are at multiples of the prices paid in the not-too-distant past. When a Japanese insurance company bought van Gogh's 'Vase with Fifteen Sunflowers' for $39.7 million in 1987, the world was shocked that anyone would shell out so much money for a single painting. It was rightly seen as an outgrowth of Japan's bubble excesses of the 1980s at the time. Today it actually looks like they made a great investment. No-one bats an eyebrow anymore at anything that is not sold for more than $100 million.

So if you ever wonder whether there is really an inflationary bubble underway, the answer is clearly, yes, there is. As an aside, we have not mentioned Cezanne's 'Card Players' (it fell just outside our range of 'modern' art, as it was painted in the late 19^th century and we only wanted to include 20^th and 21^st century art). The painting was sold for over $259 million in 2011, making it the most expensive painting ever – so far, that is. It is undoubtedly a great painting, although we could think of a number of paintings we personally like better. But $259 million? Really? That does strike us as somewhat excessive.

Card_Players-Paul_Cezanne

Cezanne's 'Card Players' – sold for $259 million in 2011. Sure, it looks nice, but $259 million?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/OYzptC9bjdg/story01.htm Tyler Durden

What The Government Got You This Christmas!

Presented with “no comment”…

Source: Heritage.org

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Nope, Definitely No Inflation Here

Despite yesterday's governmental reassurance (a la Venezuela and Argentina) that there is no inflation in the US, the reality for the average man in the street is a little different. We have previously noted that gas prices are 25% above their average price of the last decade but it is another staple that is more worrisome for many in America. As CNSNews reports, the average price of ground beef hit an all-time high this week at $3.61 per pound (up from just $1.82 per pound in 1980). As both a home-cooked and fast-food staple, the price of ground chuck alone has risen 45% in the last 10 years. Nope, no inflation here…

Gas prices may be down but seasonally they are as high as they have ever been…

But it's food that takes the biscuit… as ground beef prices reach record highs…

Nope, definitely no inflation here at all…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/B5Jm0J3nGfw/story01.htm Tyler Durden

Do Stocks Offer Protection From Rising Rates?

Submitted by Lance Roberts of STA Wealth Management,

There is a rising belief that when the Federal Reserve begins to taper that interest rates are set to rise. It is believed that as rates rise due to stronger economic strength that the stock market will act as a hedge against falling bond prices. Recently, Blackrock attempted to answer this question by stating:

"Most investors fear rising interest rates. But perhaps more than the others, bond investors fear the loss of portfolio value that may occur when interest rates rise. Which begs the question – are there alternatives to bonds that might offer income and behave better in a rising rate environment? Indeed, global dividend stocks offer a compelling potential of income and outperformance in rising rate environments."

It is important to understand the underlying dynamic at play here which is that as interest rates rise – stocks will rise in price offsetting the decline in bond prices. The chart below from Blackrock attempts to prove their case by showing a comparison between stocks and bonds.

However, is that really the story? The problem with the data is that it is very selective in its construction. What the chart doesn't discuss is what happened next.

The chart below shows the 10-treasury rate from 1957 to present versus the S&P 500. I have also noted with vertical dashed lines, the peaks in interest rate increases along with major economic events and recessions. (Note: I have also noted the two relative market patterns of the current and previous secular bear markets.)

If you look at the chart closely a much different picture emerges from Blackrock's analysis. As you will notice in almost all cases when interest rates rose sharply there was either a subsequent economic shock, recession and/or fairly significant market decline.

In order to more clearly show the analysis I constructed the following table which lists the start and end date of significant interest rate increases and the subsequent market selloffs.

Importantly, historically speaking the market has tended to have corrections in conjunction with rising rates as the economy was negatively impacted. However, during the most recent history the negative impact was delayed by market momentum and liquidity driven booms. Eventually, the market and economy, in all previous cases, has given way to the impact of higher rates.

The current rise in rates is the second largest in history on a percentage basis at 83.66% versus 85.59% during the 1976-80 period. That previous spike in rates led to a 15% decline in the market in the middle of that spike.

The recent rise in rates has already started to negatively impact the housing market and most likely the economy as we see deflationary pressures rising. However, as I have recently discussed in "3 Myths About Rising Interest Rates:"

"The first misconception is that when the Fed tapers its ongoing liquidity program; interest rates will begin to rise. However, there is no anecdotal evidence that would be the case as shown in the chart below."

"In fact, the recent rise in interest rates should have been anticipated as that has been the case during both previous programs. It was not until the programs began to 'taper,' and eventually end, that rates fell as money flowed out of risk assets in search of safety in the bond market. This fall in rates also corresponded to economic weakness and expectations of an increase in deflationary pressures.

When the Fed once again begins to remove its accommodative support from the financial markets it will likely lead to a further decline in interest rates as 'safety' is once again sought over 'risk.'"

Will stocks offer protection from rising interest rates? Historically speaking rotating from bonds to stocks AFTER the spike in rates has occurred was akin to jumping from the "frying pan into the fire."

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Bonds Shrug As Taper Smashes Stocks To Record Highs

The S&P 500 rallied well over 40 points (and the Dow up over 350 points) off the FOMC knee-jerk lows but bonds were largely unimpressed. USDJPY surged to new 5-year highs over 104. Bonds weakened, rallied,a nd then leaked back higher in yield to close almost unchanged from the FOMC announcement. VIX was smahsed back under 14% – its biggest drop in over 2 months.

*S&P 500 RISES 1.7% TO RECORD 1,810.79 AT CLOSE
DOW AVERAGE INCREASES 1.9% TO RECORD 16,171.12 AT CLOSE

We can only imagine what would have happened if he'd tapered $20 billion?

USDJPY hit 5 year highs…

Stocks surged on the carry exuberance…

but bonds reverted back to almost unchanged (as Gold tumbled and the USD surged)…

Charts: Bloomberg

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Goldman FOMC Post-Mortem: "Slightly More Hawkish Then Expectations"

Via Goldman Sachs,

The FOMC decided to cut the pace of its asset purchases to $75bn/mo, but offset this with a qualitative enhancement to the forward guidance. The Committee’s assessment of the economic outlook was somewhat more upbeat. We see today’s statement as slightly hawkish relative to expectations. The fact that President Rosengren dissented and President George did not is consistent with that.

MAIN POINTS:

1. The Committee reduced the monthly pace of its asset purchases to $75bn, trimming both Treasury and MBS purchases by $5bn. Regarding the forward-looking outlook for further cuts to purchases, the statement indicated that “the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.” The reduced pace of purchases will take effect in January and the allocation of Treasury purchases across maturities will remain unchanged. The Committee likely expects to conclude the asset purchase program in the second half of 2014.

2. Additional qualitative forward guidance was provided. Specifically, “the Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.” We see “well past” as potentially representing as much as one-half percentage point. In this sense it is similar to a reduction in the unemployment threshold to 6.0%, although without the degree of commitment that such a reduction would entail.

3. The economic assessment was somewhat brighter. In particular, “labor market conditions have shown some further improvement” was upgraded to “labor market conditions have shown further improvement.” In addition, the assessment of the drag on growth due to fiscal policy was slightly more upbeat, noting that “the extent of restraint may be diminishing.” The description of inflation was unchanged in the first paragraph, although the Committee added that it is “monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term,” indicating slightly higher concern about the inflation outlook.

4. Boston Fed President Rosengren dissented to the decision to taper asset purchases, while Kansas City Fed President George?who had previously been a hawkish dissenter?voted with the Committee.

5. With regard to participants’ economic projections, the mid-point of the central tendency of the unemployment rate was lowered to 7.05% in 2013Q4, 6.45% in 2014Q4, 5.95% in 2015Q4, and 5.55% in 2016Q4. Real GDP growth was raised by 10bp to 2.25% at end-2013, but the longer-run projection was reduced by 5bp to 2.3%. Participants reduced their end-2013 and end-2014 core PCE projections by 10bp to 1.15% and 1.5% and reduced their end-2015 and end-2016 projections by 5bp to 1.8% and 1.9%.

6. The median participant’s forecasts for the funds rate (the “dots”) remained at 0.13% at end-2013 and end-2014, fell 25bp to 0.75% at end-2015, and fell 25bp to 1.75% at end-2016. The median projection for the longer-run rate remained 4.0%. It is possible that Vice Chair Yellen was one of the participants who reduced their federal funds rate projections.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/NIWkG3jdzHs/story01.htm Tyler Durden

Goldman FOMC Post-Mortem: “Slightly More Hawkish Then Expectations”

Via Goldman Sachs,

MAIN POINTS:

4. Boston Fed President Rosengren dissented to the decision to taper asset purchases, while Kansas City Fed President George?who had previously been a hawkish dissenter?voted with the Committee.

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The Top 10 Highlights Of "Proud" Bernanke Press Conference

While admitting that the Fed “doesn’t fully understand” all the reasons behind the slower pace of growth (though it could be due to “bad luck”), the following 10 statements from Ben Bernanke’s final press conference seemed to sum up perfectly the message he wants everyone to understand (and perhaps some he doesn’t)…

*BERNANKE REPEATS TAPERING DATA-DEPENDENT (we can always come back)

*BERNANKE INFLATION CANNOT BE PICKED UP AND MOVED WHERE WANTED (hhmm)

*BERNANKE SAYS MONETARY POLICY ISN’T A PANACEA (wait what?)

*BERNANKE SAYS ACTION TODAY INTENDED TO MAINTAIN ACCOMMODATION (ok great)

*BERNANKE SEES CONCERNS OF QE IMPACT ON ASSET PRICES (but no bubbles right?)

*BERNANKE REITERATES HE WAS ‘SLOW TO RECOGNIZE THE CRISIS’ (but you got it this time right?)

*BERNANKE SEES FED FUNDS RATE BETTER TOOL THAN QE (not for the equity markets it would seem)

*BERNANKE SAYS BIGGER BALANCE SHEET INCREASES POTENTIAL QE COSTS (indeed)

*BERNANKE FED CAN’T IGNORE FINANCIAL STABILITY IN MAKING POLICY (but chooses to)

And the money shot for success…

“It requires, obviously, some luck and some good policy.”

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/pSP4k-AJZ7M/story01.htm Tyler Durden

The Top 10 Highlights Of “Proud” Bernanke Press Conference

*BERNANKE REPEATS TAPERING DATA-DEPENDENT (we can always come back)

*BERNANKE INFLATION CANNOT BE PICKED UP AND MOVED WHERE WANTED (hhmm)

*BERNANKE SAYS MONETARY POLICY ISN’T A PANACEA (wait what?)

*BERNANKE SAYS ACTION TODAY INTENDED TO MAINTAIN ACCOMMODATION (ok great)

*BERNANKE SEES CONCERNS OF QE IMPACT ON ASSET PRICES (but no bubbles right?)

*BERNANKE REITERATES HE WAS ‘SLOW TO RECOGNIZE THE CRISIS’ (but you got it this time right?)

*BERNANKE SEES FED FUNDS RATE BETTER TOOL THAN QE (not for the equity markets it would seem)

*BERNANKE SAYS BIGGER BALANCE SHEET INCREASES POTENTIAL QE COSTS (indeed)

*BERNANKE FED CAN’T IGNORE FINANCIAL STABILITY IN MAKING POLICY (but chooses to)

And the money shot for success…

“It requires, obviously, some luck and some good policy.”

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Post-FOMC – Bonds, Gold, & Stocks Bid; And 5th Hindenburg Omen Appears

UPDATE: S&P 500 crosses 1,800 (35-point swing off lows – which perfectly hit the 50DMA once again); USD starting to weaken along with bonds

Well that escalated quickly… Stocks cracked lower instantly on the taper news then soared above recent highs ripping through the order book… but are fading back now as we prepare for Bernanke’s last press conference. VIX was smashed lower (from over 16.6% to 14.1%). Gold and stocks spiked up pre-FOMC in an interesting move. Bonds are rallying as rumors of BoJ buying 5Y hit the market and the USD (despite considerable vol) is back to unch.

The initial weakness in stocks and bond and gold has faded