Has the Art Markets Morphed into a Pyramid Scheme?

I recently wrote 

there hardly has been a natural or market based “price discovery” because market signals have been severely distorted.

This is very important because this also shows that aside from financial markets, a vast segment of economic activities have also been influenced or affected by the monetary policy induced manipulation of price signals.

It appears that we are seeing the same dynamic unfold even in the art markets. 

Godfrey Barker, a British journalist and author specializing in arts seems bewildered by the ongoing developments in the art markets.

At the Financial Times Mr. Barker writes:  (bold mine)

According to Art Market Research, prices are up by 121 per cent in four years and by 634 per cent since 2000. This market shows enduring powers; it has survived plunges such as a 49 per cent crash in the year from May 2009, and leaps such as its 94 per cent recovery in 2010-12.

Mr. Barker doesn't realize that the so-called "enduring powers" by the global art markets has been due to the intensifying interventions of central banks in the economy and financial markets.

And the reason art markets are being chased at by the elite…

The art market has long served the private purposes of the wealthy, from helping them park large sums of money to achieving quick resales of leading pictures, often at twice the original price. Art also offers secrecy and tax rebates when it is displayed to the public. It can be carried in yachts and private jets from one jurisdiction to another. And it is an alternative to cash when settling debts. Interest is strongest in China, Japan, Russia and the Middle East.

One may add status symbol to that

Yet massive price distortions which Mr. Barker says looks like “pyramid schemes”

But funny numbers imply, at some level, false prices. If Alice in Wonderland were involved she might say: “When I go down to the car saleroom I hope my BMW will be as cheap as possible. When I buy a Warhol, I hope it will be as dear as possible.”

Contemporary art is, beyond doubt, an irrational market and its prices, both top and middle, are not always the result of unfettered competition.

The game played by sellers, buyers, auctioneers, dealers and, increasingly, artists is to start with sky-high values and lift them gradually until “the greater fool” joins in, upon which everyone collects their profits. To attract new buyers, publicity is essential, so Christie’s and Sotheby’s bombard the world with news of the record prices their auctions set, and details of private sales also leak out – $137.5m for Willem de Kooning’s “Woman V”, $140m for Jackson Pollock’s “No. 5, 1948”. All sides aspire to lift prices – most notably, auction houses that consult with sellers and guarantee them a tempting outcome.

This financial sport purports to have no victims; even today’s fool, it is supposed, will be tomorrow’s winner.

Yet we should be uneasy. Something about contemporary art echoes pyramid schemes – clubs that make money by recruiting evermore members. The members believe that the artwork they buy is a solid investment, but it is essentially worthless; art is an empty vessel, its value, like that of a $70m shark, solely the confidence that buyers repose in it.

Profits flow, however, so long as new buyers arrive. If one day they do not, and existing buyers take fright and leave, all remaining players will become losers.

Even a casual 'art' (non economic non bubble) observer can notice of deepening accounts of price anomalies and intensifying irrational behavior developing in specific markets

Again from my last Sunday’s outlook

If the cost of unscrupulous behavior have been substantially lowered (which means such actions have even been rewarded), then the natural consequence would be to see these activities multiply.

And they like Gremlins, have been multiplying fast.

Charts: Yellen’s No Build Up in Leverage and No Price Misalignments

At the confirmation hearing in the halls of the US Congress, incoming US Fed Chairwoman Janet Yellen testified[1]

I don’t see evidence at this point, in major sectors of asset prices, misalignments. Although there is limited evidence of reach for yield, we don’t see a broad buildup in leverage, where the development of risks that I think at this stage poses a risk to financial stability.

The following is a showcase of charts and reports from which Ms. Yellen “don’t see a broad buildup in leverage” and “don’t see evidence at this point, in major sectors of asset prices, misalignments”

“No build up in leverage”

US commercial and Industrial loans are at 2007 highs. Consumer loans have equally been climbing now approaching 2010 levels.

US banking exposure to the commercial real estate sector has been skyrocketing where CRE loans outstanding notes the Institute of International Finance (IIF) now stand at some USD 200 billion above pre-crisis levels.

Also US mortgage REIT assets have more than tripled since the crisis. Yet the IIF warns US REITs are vulnerable to disruptions in repo markets, as repo market funding constitutes 90% of their liabilities[2]

U.S. covenant-lite loan issuance has soared past 2007 levels now at $210 billion year to date—“a multi-year record and almost three times that of last year” according to IIF.

US companies have reportedly been selling bonds at the fastest rate ever or on record as companies try to beat potential rate increases.

According to the Wall Street Journal[3],

The $1 trillion mark was passed in the 46th week this year, according to Dealogic. In 2012, the mark was passed in the 48th week, and in 2009, the mark was passed in the 50th week. Despite the record issuance, investment-grade corporate bonds haven't had a stellar year. They have posted a 1% negative return this month and a 2.16% negative return so far this year, according to Barclays

“No misalignment of prices”

The Wilshire US REIT Trust Total Market has passed the 2007 highs.

US Farmland prices has exploded vertically. The chart represents Iowa’s farmland prices based on the first semester of the year[4].

Although declining prices of commodities has been expected to slow simmering prices farmlands

From the Wall Street Journal[5]

A multiyear run-up in the value of farmland in the U.S. Midwest may be running out of steam.

Average cropland prices declined in parts of the Farm Belt in the third quarter from the previous quarter while rising at a low rate in other areas, according to separate reports this past week by regional Federal Reserve banks in Chicago, St. Louis and Kansas City.

The surveys also found that some agricultural bankers expect cropland prices to decline across the Farm Belt as 2014 approaches because big harvests this fall have driven grain and soybean prices sharply lower. Corn prices also are expected to weaken after the U.S. Environmental Protection Agency on Friday proposed for the first time lowering an annual requirement for how much ethanol should be blended into gasoline.

Talk about record prices. Last week’s art auction $380.6 million at the Sotheby’s nearly hit a record high previously set at $394.1 million. Nonetheless record auctions, according to a Bloomberg report[6] were set for seven artist including Andy Warhol, Cy Twombly, Agnes Martin and Martin Kippenberger.

Francis Bacon’s ‘Three Studies of Lucian Freud’ reportedly sold for $142.4 million at Christie’s to Acquavella Galleries which bested bested Edvard Munch’s ‘The Scream’. Meanwhile Jeff Koons sold his sculpture “Balloon Dog (Orange)” for $58.4 million, an auction record for a living artist, according to another Bloomberg report[7].

Soaring stock market prices, REITs at over 2007 highs, parabolic farmland prices and record art prices have been seen as no misalignment of prices. This time is different.

Frenzied Global Bonds

 

 

Around the world, global issuance of leveraged loans has vastly surpassed 2007 highs. Global corporate bond issuance particularly on High yield bonds has also reached records.

An update on this from the Financial Times[8] (bold mine)

Global borrowers with weaker credit quality are taking advantage of investors’ relentless search for higher yields to sell a record amount of bonds so far in 2013.

Intelsat, the world’s largest satellite-services company, the US casino owner Caesars Entertainment and the luxury chain Neiman Marcus have been among the low-rated borrowers to have sold a combined $38.1bn debt this year, according to Dealogic. That amount surpassed the previous record of $37bn for the whole of 2012.

Bonds with the lowest possible credit ratings have soared in popularity with investors, who have been diverted from top tier government and corporate debt where central banks are suppressing interest rates.

In today’s world, there is no such thing as default risks. Everybody has been piling up on one another to bid for companies even with the worst credit rating. That’s because zero bound rates and QEs has been seen to last forever.

Same record high story with global catastrophe bonds and non record but rapidly rising Global Payment in Kind Bonds

See NO bubble. Move along, nothing to see here.

---

[1] Bloomberg.com Yellen Signals Continued QE Undeterred by Bubble Risk November 15, 2013

[2] Institute of International Finance November 2013 Capital Markets Monitor and Teleconference

[3] Wall Street Journal Companies Sell Bonds at Fastest Pace on Record November 14, 2013

[4] Irreplaceable Capital The Butterfly Effect June 15, 2013

[5] Wall Street Journal Midwest Farmland Values: Past Peak Season? November 15, 2013

[6] Bloomberg.com Warhol ‘Crash,’ Steve Cohen’s Richter Lift Sotheby’s Sale November 14, 2013

[7] Bloomberg.com Bacon, Koons Set Major Records in New York at Christie’s November 13, 2013

[8] Financial Times Record sales of lowest rated bonds November 14, 2013

Horse Racing Inflation

For the mainstream, price inflation has been seen as inexistent because the CPI indices tells them so.  Government data for them is seen as inviolable or sacrosanct even when real world experience suggest otherwise.  

They ignore the fact that money flows into the economy have been in a relative manner: different stages, different industries at distinct levels, speed and degree, such that the consequence of monetary policies has been a relative price inflation (chart courtesy of Doug Short).

Never mind too that record high stock markets and surging property prices have been emblematic of price inflation on the asset markets.

And that money flowing into asset markets have likewise led to bubbles in art and to other collectible markets.

Well add to this collection of bubbles, the thoroughbred racehorses. From CNBC

The market for racehorses took a big spill during the recession and didn't look ready for a comeback anytime soon. But suddenly, Thoroughbred prices are charging ahead.

The Keeneland September Yearling Sale—the nation's premiere Thoroughbred auction—is just winding down, and the numbers resemble those from precrisis boom times.

Keeneland said 18 yearlings sold for $1 million or more. That's the highest total since 2008 and more than twice last year's total. The most expensive sale was $2.5 million. Though that's below the top-horse price in 2006, which topped $11 million, it's more than double last year's.

Sales this year total over $264 million, up 23 percent from last year and the highest since 2008. The average price of $130,780 is up 31 percent from 2012.

The ballooning prices of "toys for the big boys", amidst tepid economic growth (chart from Zero Hedge)  are signs of the inequitable distribution of wealth—a subsidy to rich at the expense of society—brought about by central bank’s current zero bound rates and QE policies.

More Bubble Signs: Jay Z raps the Warhol, Korea’s Invisible Tower

When the art markets become mainstream and appear priced to perfection then they could be indications of escalating overconfidence and or a culmination of a mania phase of the bubble cycle

Could rapper Jay Z rapping about Warhol, Basquiat and Art Basel signal an art bubble? Market guru James Grant thinks so.

From the CNBC:

Market guru James Grant quotes Jay Z's "Picasso Baby" in his latest Grant's Interest Rate Observer, arguing that prices in the contemporary art market may not be justified by long-term value. While well-hyped artists like Jeff Koons, Damien Hirst and Jean-Michel Basquiat are fetching eight-digit prices, it's unclear whether their work will withstand the test of time, art critics and museums.

It's hard to tell, for instance, whether one of Koons' famous pieces, "New Hoover"—four vacuum cleaners in an acrylic case —will be valued as a work of genius or "just another vacuum cleaner," Grant said.

"Modern art is valued in terms of modern money," he wrote. The Fed's low-interest-rate policies have driven the wealthy increasingly to collectibles of all kinds, including art, cars and jewels. "Miniature interest rates have reduced the opportunity cost of investing in any kind of nonyielding asset."

And while Koons and Basquiat are hot now, they might end up like the English portraits of the early 19th century, whose frenzied boom was followed by a spectacular bust. Prices never recovered.

The zero bound rates or free money chasing of asset markets has apparently percolated into the art markets. 

But the property sector has been ground zero for asset bubbles (aside from the stock markets).

 

Mushrooming signature skyscrapers almost everywhere (see previous post here here and here) appear as intensifying signs of an inflating bubble. One symptom: the skyscraper curse or monuments of grandeurs

From the Business Insider

The world will soon have its first "invisible" skyscraper.

There's no construction date yet for the planned 1,476-foot tower, called Tower Infinity. But its architects have just been granted a construction permit to begin building outside of Seoul, South Korea near Incheon International Airport.

The visionaries behind the project, GDS Architects, will make the tower appear "invisible" using an LED facade system with optical cameras to display what's directly behind the building. When turned on, the "reflective skin" of the building will give the illusion that Tower Infinity is blending in with the skyline.

The building's projections may also be used for broadcasting special events, or for advertising purposes, according to GDS Architects.

The tower itself has an impressive profile, with a main spire flanked on either side by two separate building wings. Tower Infinity will be used primarily for entertainment and leisure purposes, and is set to include a 4D theater, restaurants, a water park, landscaped gardens, and the third-highest observation deck in the world.

The actions of the bond vigilantes will determine whether these markets are bubbles or not.  My guess is on the affirmative

How Collectible Markets Performed

Since the US Federal Reserve went into an expansionary mode in order to supposedly "reflate" the US economy following the dot.com bust, the collectible markets seems to have been one of the major beneficiaries of such policies
 

According to CNBC’s Robert Frank

According Knight Frank's Wealth Report, an index of the nine main collectibles markets grew by 175 percent over the past 10 years – a far better record than U.S. stocks. All nine categories tracked by Knight Frank increased in value except collectible furniture.

Over a ten year period, classic cars, coins, stamps and fine arts returned about 200% and above.

However, popular themes lagged. Again from the CNBC,

As Knight Frank says, however, "performance doesn't go hand in hand with popularity." Sometimes the most beloved collectibles are dogs as investments.

Art remains far and away the most widely collected collectible among the world's wealthy and affluent. The world's millionaires plan to increase their spending by 13 percent on art this year. 

The second most popular collectible is watches – led by Asian collectors. That was followed by fine wine, jewelry and then cars.

Bottom line: The impact of central bank policies on asset prices are different. Also, popular themes may not be the best choice.

Millionaire’s Portfolio: Collectibles are the Rage

From the CNBC

Collectibles are all the rage. From the $120 million hammer price for the pastel of Edvard Munch's "The Scream" to the run-up in prices for diamonds, wine and antique cars, the collectibles market (or “passion investments” or “treasure assets”) is booming on the back of demand from wealthy investors.

For the rich, Burgundy and sapphire are the new black.

But financial expectations for collectibles may be surpassing reality.

A new report from Barclays Wealth shows that among global investors with more than $1.5 million in investible assets, collectibles and precious metals now account for 9.6 percent of their total wealth. The numbers are even higher in the United Arab Emirates (18 percent) and China (17 percent).

As Barclays points out, wealthy investors like collectibles because they want “tangible, scarce and non-fungible investments" that “could provide a stable store of value in uncertain times.”

Yet Barclays says that “the world of collectibles thrives on fairy tales” like "The Scream" sale, calling collectibles markets “riddled with inefficiencies, "frequently opaque and illiquid," and "extremely volatile and risky.”

Reasons for the growth of collectibles as a share of the portfolio of the millionaires, according to Barclay: Emotions, Hidden Cost, Opaque Markets, Correlation and illiquid.

Yet it would seem misguided to lump arts, wines, precious metals and jewelries as a single asset ‘collectible’ class, as the utility and reservation demand functions of these items are different.

Some of the wealthy people will buy because of aesthetics, enjoyment and or for social status.

But it isn’t a ‘fairy tale’ when wealthy investors say that they had opted for ‘collectibles’ out of “tangible, scarce and non-fungible investments" that “could provide a stable store of value in uncertain times.”

Bluntly put, 'collectibles' represents as insurance against counterparty risks and are ‘real’ assets for the millionaires.

What truly will be exposed as fairy tale are the colossal financial claims at the fractional reserve banking system. The euro debt crisis signifies an ongoing manifestation of such a process.

Thus, the increased exposures by millionaires on 'collectibles' reflect on the present economic and financial realities.

Art Markets: Record $120 Million for “The Scream”

Image from Wikipedia.org

From Yahoo

Edvard Munch's painting "The Scream," one of the world's most recognizable works of art, sold for $120 million at Sotheby's on Wednesday, setting a new record as the most expensive piece of art ever sold at auction.

The sale at Sotheby's Impressionist and Modern Art auction featured other works by Pablo Picasso, Salvador Dali and Joan Miro, but Munch's vibrant piece was the centerpiece of the auction in a salesroom packed with collectors, bidders and the media.

The vibrant pastel from 1895 was conservatively estimated to sell for about $80 million at Sotheby's, but two determined bidders drove the final price to $107 million, or $119,922,500 including commission, during a 15-minute bidding war.

One of four versions by the Scandinavian painter, which was being sold by Norwegian businessman Petter Olsen, "The Scream" easily eclipsed the old auction record held by Picasso's "Nude, Green Leaves and Bust," which went for $106.5 million at Christie's two years ago.

I have been pointing out that symptoms of bubbles have not been limited to towering skycrapers, but also to art and wine prices.

The record sale of “The Scream” which coincides with today’s easy money (zero interest rate) environment and central bank QEs, I believe has been highlighting this.

Nevertheless “The Scream” whose artist Edvard Munch described as…

I was walking along a path with two friends – the sun was setting – suddenly the sky turned blood red – I paused, feeling exhausted, and leaned on the fence – there was blood and tongues of fire above the blue-black fjord and the city – my friends walked on, and I stood there trembling with anxiety – and I sensed an infinite scream passing through nature.

…seems to be a propitious theme in today’s sharply volatile politically influenced markets, as driven by serial bubble policies, unwieldy debt, politically desperate actions manifested through rampant inflationism and financial repression.

Anxiety channeled through the "sense of an infinite scream passing through nature" seem to be part of the world we are living in.

Wine Market as Bubble Meter

I previously pointed out that the Art Markets can signal the phases of a bubble cycle here and here

The wine markets appear to be manifesting some signs too. That’s according to this report from Bloomberg,

Surging demand for Chateau Lafite and other French trophy labels, especially from Asia, has pushed both prices at auction and wine futures to records. Not all wine dealers are happy.

The prices for some of the most expensive bottles are starting to discourage even billionaire collectors, said dealers -- some of whom had warned in January of a bubble that could burst in 2011. Chinese and other buyers balked as some Bordeaux producers raised prices as much as 80 percent last month for the new vintage offered “en primeur,” when it is still in barrels.

“En primeur sales have halved,” Simon Staples, fine wine and marketing director of the London-based merchants Berry Bros & Rudd, said in an interview. “It’s a combination of high prices and the fact that the chateaux released less than last year.”

Sales growth is also slowing at auctions. Takings at the biggest three wine auction houses in the first six months of 2011 were up by 46 percent on the same period in 2010, according to Bloomberg calculations, down from the 88 percent sales increase in 2010…

Chinese consumers continue to spend millions on older vintages in bottles at specialist auctions. Sotheby’s (BID), Christie’s International and Acker, Merrall & Condit took a record $258.3 million in wine sales in 2010, more than double 2009. About two-thirds of the most expensive lots were selling to Asian bidders, according to both Christie’s and Acker.

Wealth from globalization is one thing. Conspicuous consumption from boom bust cycle is another. One would know the difference ex-post or after the bust.

(hat tip: Dr. Antony Mueller)

Alternative Investments

In an inflationary boom, the tendency is for asset inflation to become broadbased and not limited to the traditional classes such as equities and commodities, but to a wider range of non conventional assets or otherwise known as “alternative investments”.

Minyaville presents 10 possible alternative investments:

1. Vintage Apple Computers and Other PCs

2. Fine Art

3. Gemstones

4. Litigation Funding

5. Rare Stamps

6. Fine Wine

7. Luxury Food and Tea

8. Baseball Cards

9. Celebrity Autographs

10. Vintage Toys

They write, (bold emphasis mine)

If you're looking to protect at least a portion of your money, one option is to move into uncorrelated investments -- buy some stamps, gemstones, wine or fine art. Risky and not always easy to exit, these markets are tempting to many because they're typically unaffected by the highs and lows of the general economy. They are said to be recession-proof, able to hold their own during downturns, or even grow at astounding rates of 10 to 20%.

If you choose to go this route, however, it's imperative to know your risks. Some experts complain that the hype about market-beating returns is based only on the success stories, not the average transaction. Critics also claim that some seemingly uncorrelated markets have become correlated -- they're now attached to traditional assets -- meaning they're just as vulnerable to larger market crashes as any other investment.

You may read on from this link or go above to the specific alternative asset markets and press on the link accordingly.

I’d like to say that I belong to the latter- the skeptics, whom are not convinced that these are ‘recession proof’ nor are they assets that signify uncorrelated nature useful for portfolio ‘diversification’.

The art markets as previously argued is one the many metrics I use in trying to gauge on the state of the bubble.

I’d also say that liquidity of such markets could also pose as a problem.

Thus returns may be greater but so are the risks.

Bottom line: There are many ways to exploit asset investments in today’s environment, but we should be circumspect or know about the risk profile of the particular asset market we intend to deal with before plunging in. Risk comes from not knowing what we are doing as value investor turned political entrepreneur Warren Buffett used to say.

Update On Global Art Markets As Bubble Meter

The global art market, I think, should be one very important indicator of the state of the bubble [as previously discussed in Global Art Market As Bubble Meter, China's Fast Expanding Role]


This from the Economist,

(bold highlights mine)

``IN 2008 China overtook France to become the third-biggest art market in the world, after America and Britain. France managed to reverse that setback in 2009, helped by an Yves Saint Laurent/Pierre Berge sale. But relief is likely to be temporary. The value of sales at art auctions in China reached €2.3 billion ($3.3 billion), up by 24% on the previous year. China's share of the world auction market climbed from 10% to 18%, largely at the expense of Britain and America. Chinese art has grown in popularity. Christie's Chinese sales in New York last month were its biggest ever. Sotheby's sales in Hong Kong (April 5th-8th) are also expected to reach record highs. The 20th-century Chinese art sale alone is expected to raise HK$75m ($9.7m) and the ceramics and fine art auctions could fetch more than HK$200m."

The art market simply serves as another outlet for the massive expansion in circulation credit around the world, with special emphasis on China.

The Chinese government's attempt to control the real estate bubbles only diverts them to the art markets.

According to Artzine, ``While buyers of Chinese contemporary art are still predominantly foreigners, wealthy locals are window-shopping, especially since the government has clamped down on real estate speculation. Suddenly, Chinese art seems a fail-safe investment alternative."

And it won't be long that these will also be manifested in the stock markets, as excess money will only find outlets.

Remember, trophy assets, including the art markets or colossal skyscrapers and or other mammoth projects had been major symptoms of the bubble malady, as people who benefit from these bubbles get overwhelmed by overconfidence and engage in 'braggadocio' projects. [see China's Bubble And The Austrian Business Cycle]

So perhaps until we see more instances of mass delusions of grandeur only then we can say that China's bubble cycle may have crested. Of course, we shouldn't be limited to looking at China for bubbles.

For now, enjoy it while it last.

China's Bubble And The Austrian Business Cycle

Is China in a bubble?

That's THE current debate between China optimists and pessimists.

And this has been accentuated by reports that China will surpass Japan, by next year, as second in the order of ranking among the world's economic heavyweights.

The Economist underscores the mainstream polemic, (bold emphasis mine)

``NEXT year China will overtake Japan to become the world’s second-largest economy. Its rapid ascent has led some to question whether China will follow in Japan’s footsteps, with the bursting of a massive bubble followed by years of decline. But China is still far poorer than Japan was at its peak, and thus has more room to improve productivity. A transition of surplus labour from agriculture to industry and services would increase efficiency and bring its economy more in line with the developed world. And China’s stimulus package has produced much needed infrastructure that will reinforce future growth. But in the long run, a shift away from investment and exports towards domestic consumption would make China’s output more sustainable, and help it to avoid experiencing a bubble like Japan's."

I do not share the mainstream economic gobbledygook.

Although establishing China's current conditions would likely be tricky and complicated.

First, we share with the bears that China could be in a bubble if they continue to pursue current interventionist policies on their banking, finance and the real economy.

For instance, easy monetary policies and a massive jump in money supply are suspected to have buoyed prices of real estate and the stock market as bank credit (circulation credit) have been presumed to have channeled into speculative activities.

Empirical evidence of this would be the emergence of several uninhabited or ghost cities [see China's Ghost Cities].

In the Austrian Business Trade Cycle, the manipulation of interest rates essentially leads to massive clustering errors or huge malinvestments that will eventually unravel-hence the boom bust cycle.

To quote Dr. Richard M. Ebeling, (bold emphasis mine)

``Unfortunately, as long as there are central banks, we will be the victims of the monetary central planners who have the monopoly power to control the amount of money and credit in the economy; manipulate interest rates by expanding or contracting bank reserves used for lending purposes; threaten the rollercoaster of business cycle booms and busts; and undermine the soundness of the monetary system through debasement of the currency and price inflation.

``Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from their interventions, regulations and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way."

Nonetheless, Chines corporations have remained cash liquid and may not have reached the state of wild orgy of misdirected investments.

According to the US Global Investors, ``Despite government infrastructure spending boom in China this year, Chinese companies have not aggressively deployed cash so far and corporate bank deposits kept soaring and reached around $3 trillion as of October. There exists a remote risk of “herd spending” down the road when domestic demand picks up strongly and profit cycle restarts, eventually resulting in economic overheating." (see Chart upper right window)

Moreover, private spending has taken over public spending since September; see chart above from US Global Funds

In other words, for the meantime it would seem like some semblance of economic recovery, however as earlier cited, the persistence of present policies are likely to foster massive economic and financial imbalances.

Moreover, China's stock market as signified by the Shanghai (topmost chart below) and the Shenzhen (bottom) benchmarks are quite distant yet from ALL time highs. [chart courtesy of Bloomberg]


Like in most bubbles, both real estate and the stock market benchmarks would likely reach new highs before inflecting as in the case of the Japan (1990) and the Asian Crisis (1997) with the exception of the US mortgage crisis (2007-8) [see previous post The Lost Decade: US Edition].

One possible factor that could offset or extend the bubble cycle would be China's thrust to integrate with Taiwan [see Tomorrow’s Investing World According To The Bond King] and with ASEAN [see Asian Regional Integration Deepens With The Advent Of China ASEAN Free Trade Zone].

In addition, while there have been indeed some signs of bubble, usually in the context of grandeur edifices such as China's unveiling of Speeding Bullet Train program, to quote Bloomberg,

Picture from Bloomberg

``Train C2019 covers the 120 kilometers between Beijing and Tianjin in 30 minutes, passing peasants in fields burning corn stalks and warrens of shacks occupied by people who aren’t sharing in China’s economic boom.

``The line is part of China’s 2 trillion yuan ($292.9 billion) investment in a nationwide high-speed passenger-rail network that may be too much train, too fast."

...these may not seem as extravagant yet-relative to other recent bubble afflicted economies or markets as Dubai.

In Why Dubai’s Debt Crisis Isn’t Likely THE Next Lehman, we noted, ``Dubai’s meteoric rise via profligate projects produced many of the world’s landmark projects (boondoggles), such as the only seven star hotel, the Burj Al Arab, the world’s tallest skyscraper, Burj Dubai (uncompleted), biggest indoor ski slope, Ski Dubai, largest shopping mall (in terms of total area and not gross leasable space), the Dubai Mall, the world’s biggest theme park, the Dubailand and the Palm Islands, the Palm Jumeirah, has virtually challenged Abu Dhabi’s role."

You see, 'delusions of grandeur' typically herald bubble climaxes, such as the emergence of towering skycrapers...
or even in the art markets as previously posted see Global Art Market As Bubble Meter, China's Fast Expanding Role

Bottom line: Political policies based on path dependency suggest that China will mostly endure a boom-bust cycle, although it may not necessarily redound to a Japan model or experience. However, these policy based imbalances would likely evolve overtime, and will be manifested in diverse asset markets, before facing her fateful day of reckoning.

Global Art Market As Bubble Meter, China's Fast Expanding Role

Even in the global art markets, the Chinese growth juggernaut appears to be shifting the playing field in her favor.

This from the Economist (bold highlight mine),

"LAST year China overtook France as the world’s third-biggest art market after America and Britain. Thanks to shifts in policy, which once banned owning, inheriting or exchanging pre-communist works, Chinese buyers are now catching up in a big way. More Chinese treasures are now sold at auction in Hong Kong than in New York, London and Paris. At Sotheby's in Hong Kong last month a world record for a piece of Chinese furniture was set when a Qianlong-period throne made of precious zitan wood and carved with dragons fetched just under HK$86m ($11.1m)."

In short, the liberalization of the marketplace and global wealth transfer dynamics have been key forces driving China's race to the top. That's the good news.

But here's the bad news.

This growth market may also reflect on bubble policies.

Since art is a luxury item, a booming art market could be indicative of inflation fueled consumption excesses.

As with Japan's experience in the late 80s, whose buyers "swept the Western art markets", according to wikipedia.org, China's prospective assumption of the dominant role could likewise be ominous of a bubble top.

This hasn't been limited to Japan, in the list of the most expensive paintings ever sold (artwolf.com), here are the top 5:

1. JACKSON POLLOCK: "Number 5, 1948", 1948

$140 million

Private sale, 2006. Seller: David Geffen. Buyer: David Martínez (claimed)

2. WILLEM DE KOONING: "Woman III", 1952-53

$137.5 million

Private sale, 2006. Seller: David Geffen. Buyer: Steven Cohen

3. GUSTAV KLIMT: "Adele Bloch-bauer I", 1907

$135 million

Private sale, 2006. Buyer: Ronald Lauder.

4. PABLO PICASSO: "Garçon a la pipe", 1904

$104.1 million

Sotheby's New York , May 2004. Buyer: anonymous

5. PABLO PICASSO: "Dora Maar au chat", 1941

$95.2 million

Sotheby's New York , May 2006. Buyer: anonymous

It could be observed that four out of the five most expensive paintings were transacted in 2006.

These had incidentally been at the pinnacle of the US housing bubble as shown in the Case Shiller chart above!

Bottom line: The art markets could, most likely, serve as one important bellwether to estimate on the whereabouts of a bubble cycle.