Felix Salmon

S&P downgrades Europe

Felix Salmon
Jan 14, 2012 03:27 UTC

S&P brought its hammer down on Europe today, with nine — count ‘em — downgrades of euro zone countries. The removal of France’s triple-A has been getting most of the headlines, but for me the bigger news is the fact that Portugal has now been downgraded to junk status.

Both of those moves, however, are pretty standard for ratings agencies in general and for S&P in particular: a slightly belated recognition of what has long been obvious to the rest of us. If anybody really thought that French sovereign debt was risk-free, or that Portugal, with its ten-year bond yielding somewhere north of 1,000bp north of Bunds, was investment grade, then they have surely been living under a rock for the past couple of years.

There’s one area, however, where S&P’s actions are going to have a significant and far from positive effect — and that’s the European Financial Stability Facility, or EFSF. The way that the EFSF is structured, its credit rating is particularly reliant on the ratings of the euro zone’s biggest sovereigns. Here’s how S&P put it back on December 6:

Based on EFSF’s current structure, were we to lower one or more of the current ’AAA’ ratings on EFSF’s guarantor members, all else being equal, we would lower the issuer and issue ratings on EFSF to the lowest sovereign rating on members currently rated ‘AAA’.

What this means is that Europe now faces a choice. On the one hand, it can restructure the EFSF so that it retains its triple-A credit rating. That would almost certainly involve shrinking the EFSF in size. Or, it can be sanguine about the EFSF downgrade and just let it happen. But that’s not a pleasant outcome either, given that everybody’s bright idea, when it comes to Europe’s sovereign bailouts, is to leverage the EFSF to some multiple of its present size. Leveraging a triple-A EFSF is hard enough; leveraging a double-A EFSF is pretty much impossible.

My guess is that the EFSF is going to get downgraded very soon — quite possibly on Monday. There’s actually not much point in Europe restructuring it so that it retains its triple-A: the political cost would be huge, and the benefit would be entirely hypothetical. (In theory, the financial markets are happy to lever up triple-A-rated assets. In practice, if those assets are European sovereign debt, not so much.)

Some small part of me thinks it’s a jolly good thing that the world is losing its store of triple-A assets. They’re dangerous things, precisely because we’re given to understand that they’re risk-free. But in this particular context, there are very few ways that today’s news can help Europe, and there are many, many ways that it can hurt. Not least when it comes to the amount of capital that Europe’s banks need to squirrel away against their stocks of sovereign debt.

Europe’s a risky continent; S&P is simply making that fact a little more obvious. In an ideal world, S&P’s opinions wouldn’t carry any more weight or importance than anybody else’s. But this isn’t an ideal world, and they do. And countries like France, which don’t control their own money supply, aren’t as immune to ratings-agency actions as the US turns out to have been.

The immediate ramifications of this announcement, in terms of global stock market reactions, aren’t important. And it’s even possible that if it accelerates the move away from the EFSF and towards the ESM, we could find a little bit of silver lining here. But the fact is that Europe is more fragile, now — more susceptible to changes in sentiment or genuine exogenous shocks — than it was yesterday. And that cannot be a good thing.


You have to wonder what people like ‘theyenguy’ did for an outlet before blog commenting came into widespread use. Were they the guys who liked to wonder around downtown with a sign reading “The End is at hand” and talking loudly to themselves like a paranoid schizophrenic?

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Nine posts in one

Felix Salmon
Jan 13, 2012 21:18 UTC

As my posts have been getting longer of late, I’ve ended up with a vast number of items that I meant to write but, well, haven’t. Since I’m not going to get to all of them, I’ll do some quick hits here.

Dave Crisanti, a high-frequency trader himself, makes a good case that at some point, “trading volumes begin to have zero marginal value”. All too often we treat stock-market liquidity as an obviously good thing, when in fact that isn’t the case at all. As a result, he’s in favor of a 0.25% financial-transactions tax, despite the fact that such a thing “would drive me out of business”.

Jessica Silver-Greenberg has the story of people who are being told that they qualify for a new credit card — but only if they use a large chunk of their new credit to start paying down written-off debt. Once a debt is more than seven years old, you’re no longer legally responsible to pay it, and in most cases the debt is past the statute of limitations. But, nastily, if you start paying one of those old debts again, then it becomes “re-aged”, and you are, again, legally responsible for it. So these credit cards are invidious things.

I asked FICO about this, too, to see whether paying off an expired debt might at least help your credit score a bit. The answer? No. “Assuming the expired debt is no longer appearing on someone’s credit report,” said FICO spokesman Anthony Sprauve, “it is not impacting their FICO credit score”. If you want to get a new credit card, make sure you’re only paying new debt when you do so, not old and expired debt as well.

Landon Thomas says that the French and German banks which held a lot of Greek debt have now sold it to “hedge funds and other independent investors” who aren’t as amenable to arm-twisting. Which means that the Greek restructuring is looking more and more likely to be coercive and non-voluntary, even if that means triggering credit default swaps. Thomas says that triggering CDS is “a move that Europe and Greece are desperately seeking to avoid”, but he doesn’t explain why.

In a related story, IFR reports that hedge funds have been trying to buy up “blocking stakes” in certain bonds, which would allow them to veto any “voluntary” restructuring. As Anna Gelpern says, the most likely outcome is that nobody wins.

Josh Brown has let the cat out of the bag: Druce Vertes’s Street Eye is a fantastic one-stop shop if you want to see what finance’s top tweeps are linking to. It’s a bit like an automated Counterparties, and I’m a huge fan. Because it’s automated, it can’t range too wide: it’s heavy on the mainstream-media stories. But it’s none the worse for that.

Cathy O’Neil has a great post on one of the central problems of quantitative finance: because the models being used aren’t public (indeed, they’re jealously guarded and highly secret), the results being thrown out by those models are almost certainly false. The problem applies to science more generally, too — scientists don’t like sharing their models, and science suffers as a result. The fight over public access to taxpayer-funded research is an important story, but published science nearly always omits a lot of important information which would allow the results to be replicated. We’ve got to fix this somehow.

¶ Is hunger becoming a middle-class problem? According to a new report, 32% of New York households earning between $50,000 and $75,000 a year are having difficulty affording food. For households earning more than $75,000 per year, the percentage has rose from 4% to 24% between 2003 and 2008; it has since fallen back a little bit to 16%. Similarly, 30% of New Yorkers with a college degree, and 21% of New Yorkers with a graduate degree, have difficulty affording food.

¶ At the same time, if food is getting more expensive, that’s not necessarily a bad thing. As Mark Bittman reports, America’s meat consumption has been falling quite dramatically, which is probably good for the nation’s health. And a large part of that is a function of it getting more expensive.

¶ And Matthew Wald has an intriguing story: motor fuel companies in the US will have to pay about $6.8 million in fines for not adding cellulosic biofuel to their product in 2011. Which isn’t really their fault: it simply doesn’t exist, outside a few labs. Wald seems to think this is very silly. But I don’t. These fines will help speed development of a commercially-viable cellulosic biofuel product. Science evolves in response to incentives: look at the way we abolished CFCs only after the government forced the matter.

¶ Finally, here’s a chart of Goldman Sachs’s popularity over the past two years. It seems to be pretty steady, around the -20 range — that’s very negative. It means that if you take the percentage of people who heard something good about the company lately, and subtract the percentage of people who have heard something bad, you’ll end up far underwater. But the good news, for Goldman, is that it has recovered from its all-time lows circa Abacus.


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Art market datapoints of the day, China edition

Felix Salmon
Jan 13, 2012 14:20 UTC

I suspect we’re still only in its early days, but there’s no doubt that we’re in a massive Chinese-art bubble right now. And for proof, all you need to do is look at the league table of the highest-grossing artists of 2011.

If you look at the artists who made the most money at auction in any given year, it’s normally pretty predictable, with Picasso at the top of the list and Warhol increasingly dominating. But here, courtesy of ArtPrice and Bloomberg’s write-up of ArtPrice’s results, is the top of the 2011 league table:

1. Zhang Daqian, $506.7 million

2. Qi Bashi, $445.1 million

3. Andy Warhol, $324.8 million

4. Pablo Picasso, $311.6 million

5. Xu Beihong, $212.9 million

This is in many ways the tip of the art-market iceberg, where most deals — especially in the white-hot contemporary-art scene — are still done privately, rather than at auction. The reason no living artist is on this list is mainly that living artists have gallery representation, and galleries don’t like buying and selling at auction.

But still, the rise of Chinese artists on this league table is nothing short of astonishing. The most expensive artwork sold at auction in 2011 was Qi’s Eagle Standing on Pine Tree; Four-Character Couplet in Seal Script, which sold for $65.5 million in Beijing in May; it beat a major Clyfford Still into second place. (And remember too that this is using a value for the yuan which in many ways is artificially low.)

And the sheer levels here! Picasso has never grossed more than $362.7 million in one year; both Zhang and Qi handily beat that figure in 2011, without anything approaching Picasso’s place in the canon. And the way that these artists came out of nowhere makes Groupon’s growth seem positively sluggish. Here are the Artnet reports for Zhang and Qi:



And lest you think that the growth from 2010 to 2011 isn’t all that impressive, note the little footnote. The 2011 numbers are for the first half of the year only.

Precisely because these artists have almost nothing in the way of a long-term auction history, they’re not going to be showing up in the Mei-Moses art index for a while. That requires paintings to have been sold twice. But when that happens, we’re going to have some very crazy results. Either the index will soar, due to the bubble, or else the first datapoints will come when the paintings being bought today are eventually sold. And that might well be for prices much lower than we’re seeing right now.

Update: Marion Maneker doesn’t believe these numbers. “The tables mysteriously omit Gerhard Richter—a very important living artist—whose auction sales in 2011 were massive,” he writes. “So Artprice may have excluded living artists or have a faulty method for assembling the rankings.”

But the fact is that the tables don’t mysteriously omit Gerhard Richter. According to Artnet — which agrees with Artprice here — Richter sales at auction in 2011 came to a total of $199,897,823 — not enough to crack the top five. that’s a record for the artist, but you can see how it’s much more in line with previous totals than we’re seeing with the Chinese artists. This graph, of Richter’s auction sales, includes all of 2011:

Update 2: Thanks to commenter TWAndrews/Alex Tabarrok/Daniel Lippman for pointing to another possibility here:

There are rigged auction houses all over China and they become the most suitable places for elegant corruption. The briber, first of all, gets a fake painting either from a gallery or a fake painting factory. Then, s/he provides relevant document proof of scholars and experts to take care of the problem of authenticity. These scholars and experts are paid to confirm the authenticity of this fake painting. They falsify every historical detail, evidence of painting style and scientific verification of the materials used. The forged painting is then given to the official as a gift and is auctioned at a very high price. Eventually, there is always someone coming from nowhere who wins the bid. Again, the bidder is a trusted person of the briber. These auction houses get hush money before the whole corruption process is completed.


Isn’t the purchase of expensive art a scheme for managed bribery in China. Alex Taberrok had something on this here: http://marginalrevolution.com/marginalre volution/2011/07/the-art-of-bribery.html

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Felix Salmon
Jan 13, 2012 05:05 UTC

Geithner to Greenspan in ’06: “I’d like the record to show that I think you’re pretty terrific, too” — Alphaville

Amazon is rife with fake authors selling plagiarized erotica — Fast Company

The fallacy of “inefficient” markets — WSJ

Dominique Strauss-Kahn did not know he was sleeping with prostitutes ‘because they were all naked’ — Telegraph

Will US courts take aim at credit-card interchange?

Felix Salmon
Jan 12, 2012 22:03 UTC

Dan Freed has an amazing story today about credit-card interchange fees — the ones that weren’t touched at all by the Durbin amendment in the Dodd-Frank bill. But it turns out that the courts might yet prove even tougher than Congress: various suits working their way through the legal system could end up costing the banks hundreds of billions of dollars in settlement costs — plus a reduction of interchange fees to something approaching international norms.

The threat here is very real: Visa has already put more than $4 billion in a litigation escrow account, and the card companies’ potential liabilities are much smaller than those of the big banks. Deutsche Bank analyst Bryan Keane says that total damages “could total a couple of hundred billion dollars”, and that’s backed up by some back-of-the-envelope math:

JPMorgan’s 10-K gives no specific numbers regarding its exposure, but notes that, “based on publicly available estimates, Visa and MasterCard branded payment cards generated approximately $40 billion of interchange fees industry-wide in 2009.”

Those numbers cited by JPMorgan would appear to point the way to a very large settlement, since the case covers eight years and counting — from 2004 through the present. Eight times $40 billion is $320 billion, and an influential 2005 report on price-fixing by Purdue University economics professor John Connor that looked at 700 cartels going back to the 1600s found a median overcharge rate of 25.5%. But even if one assumes an overcharge of just 10% — the figure used by the Justice Department in its antitrust cases — that would suggest $32 billion of overcharges over eight years. That number, however, would be trebled, as is the rule in antitrust cases, meaning damages could conservatively be estimated at $96 billion. If Bank of America had to pay roughly 10% of that, as per its 10-K, the bank would have to cough up $9.6 billion.

Freed includes this helpful chart, showing just how high US credit-card interchange fees are when compared to the rest of the world.


Note that the smallest bar, over to the right, is for the EU as a whole. If Germany is at 1.5, Spain is at 1.1%, and the UK is at 0.8%, then there have to be a lot of countries at or very close to zero in order to bring the overall average down to 0.3%.

Now that Congress has decided quite clearly that it’s not going to regulate credit-card interchange fees, it stands to reason that merchants are going to take their case to the courts. This one will run and run, I’m sure: there won’t be any checks written for a very long time yet. But it’s a huge contingent liability for the banking sector, just as negotiations over a mortgage settlement come to a head. If I were a bank shareholder, I certainly wouldn’t count on credit-card interchange fee remaining at its current inflated levels indefinitely.


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How capitalism kills companies

Felix Salmon
Jan 12, 2012 19:10 UTC

As Mitt Romney cruises to his inevitable coronation as the Republican presidential candidate, increasing amounts of attention are being focused on his history at Bain Capital, where he made his fortune. Did he create 100,000 jobs, as he claims? Or is he a vulture and asset stripper?

Glenn Kessler has the definitive take on the job-creation claim, which he says is “untenable”; as he says, Romney’s method of counting jobs created when he wasn’t at Bain or when Bain wasn’t managing the companies in question doesn’t even pass the laugh test. Meanwhile, as Mark Maremont documents, Bain-run companies — even the successful ones — have an alarming tendency to end up in bankruptcy. And I think it’s fair to say that bankruptcy never creates jobs, except perhaps among bankruptcy lawyers.

The reality is that Romney would have been in violation of his fiduciary duty to his investors had he concentrated on creating jobs, rather than extracting as much money as he possibly could from the companies he bought. For instance, Worldwide Grinding Systems was a win for Bain, where it made $12 million on its initial $8 million investment, plus another $4.5 million in consulting fees. But the firm ended up in bankruptcy, 750 people lost their jobs, and the US government had to bail out the company’s pension plan to the tune of $44 million. There’s no sense in which that is just.

Romney’s company, Bain Capital, was a “private equity” firm — the friendly, focus-grouped phrase which replaced “leveraged buy-outs” after Mike Milken blew up. But at heart it’s the same thing: you buy companies with an enormous amount of borrowed money, and then dividend as much money out of them as you can. If they still manage to grow, you can make a fortune; if they don’t grow, they’ll likely fail, but even then you might well have made a profit anyway.

Private equity companies need growth, because they’re built on the idea of buying, restructuring, and then selling. They’re never in any business for the long haul: instead, they want to make as much money as they can as quickly as possible, sell out, and keep all the profits for themselves and their investors. When you sell, you want to maximize the price you can ask — and the way to do that is to show healthy growth. No one will pay top dollar for a company which isn’t growing.

Private equity is by no means unique in this respect: it happens at pretty much every public company, too. John Gapper, today, has a column about the way it destroys values at struggling technology companies:

Most public companies are run by people who hate folding ’em, and instead keep returning to the shareholders and bondholders for more chips…

Few senior executives, when debating options for a technology company in decline, admit defeat and run it modestly. Instead, they cast around for businesses to buy, or try to hurdle the chasm with what they have got. Sometimes they succeed but often they don’t, wasting a lot of money along the way.

It goes against their instincts to concede that the odds are so stacked against them that it is not worth the gamble. Mr Perez would have faced a hostile audience if he’d admitted it to the citizens of Rochester, Kodak’s company town in New York, but its investors would have benefited.

At many companies, then, both public and private, the optimal course of action is a modest one — run the business so that it makes a reasonable profit, and can continue to operate indefinitely. If you chase after growth, you often end up in bankruptcy: that’s one reason why the oldest companies in the world are all family-run. Families, unlike public companies or private-equity shops, don’t need growth: they’re more interested in looking after their business over the very, very long run.

There’s no limit at all to the amount of growth that the public companies will demand: in 2007, for instance, after a year when Citigroup made an astonishing $21.5 billion in net income, Fortune was complaining about its “less-than-stellar earnings”, and saying — quite accurately — that if they didn’t improve, the CEO would soon be out of a job. We now know, of course, that most if not all of those earnings were illusory, a product of the housing bubble which was shortly to burst and bring the bank to the brink of insolvency. But even bubblicious illusory earnings aren’t good enough for the stock market.

If you want to be fair to Mitt Romney, you could make the point that many of the companies he bought were highly risky, and would probably have gone bust anyway; in that sense he can’t be blamed if they eventually did just that. If a company is going to fail, you might as well squeeze the maximum amount of money out of it before it does. But doing that, at the margin, means more job losses, quicker job losses, and — as we saw at that steel company — a willingness to underfund staff pension plans and stiff the government with the bill. Mitt Romney turns out to have a personality which is highly suited to that kind of ruthlessly callous behavior; that’s how he became so incredibly wealthy. It’s an ugly part of capitalism; it might even be a necessary part of capitalism. But the one thing you can’t do is spin it as a great way of creating jobs.


So much truth in one little essay. I have watched the process Mr. Salmon describes, up close. It was an ugly ending for The Little Company That Could. But FifthDecade has a good point. A functioning ecology does not operate by the ethics of Count Dracula. Why not? Because it would not remain a functioning ecology for long if it did. So why are Germany and Japan better at this, FifthDecade? Maybe because you have to start, fight and lose a major war to learn humility in a world overrun by our species.

Oh well, nothing lasts forever! Eight centuries of global human growth have been a great ride.

After us, the deluge.

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Ben Stein Watch, lawsuit edition

Felix Salmon
Jan 12, 2012 17:02 UTC

Many thanks to Yoree Koh (and @Dutch_Book) for bringing Ben Stein’s lawsuit against Kyocera to my attention. You can download the whole thing here, but it’s worth spelling out some of the more hilarious parts.

The whole suit is ludicrous, of course: Stein is claiming breach of a nonexistent contract. (The closest thing the suit comes to saying that there was any contract at all is the part when it says that Stein’s agent ,Marcia Hurwitz, “considered the deal done”. Which, obviously, she was wrong about.

The basic story is simple. Kyocera wanted to hire Stein to do some TV commercials, but the company is very environmentally conscious, and it decided not to use him after learning of his anti-science views on global warming.

Stein somehow manages to turn this into a question of religious freedom, claiming that Kyocera’s refusal to let him pitch their products constitutes “wrongful discharge in violation of fundamental public policy”:

Ben Stein said he was by no means certain that global warming was man-made, a position held by many scientists and political conservatives. He also told Hurwitz to inform defendants that as a matter of religious belief, he believed that God, and not man, controlled the weather…

A host of federal laws protects Americans from being discriminated against on the basis of religious belief. Neither employees nor independent contractors already hired may be dismissed on the basis of their religious views.

Ben Stein’s questioning of whether man makes the weather or God makes the weather is a matter of his religious belief. For him to be fired because of his religious belief is a clear case of discrimination against him for religious belief in violation of state and federal law.

A word to the wise, Ben: you weren’t fired for your religious beliefs. Indeed, in a world where it’s hard to get a large group of rabbis to agree on the day of the week, the Jewish religion’s views on the subject of global warming are very clear. Consider this letter, for instance, signed by more than 600 rabbis:

We have established Interfaith Climate and Energy campaigns in 21 states that are educating congregations on the link between energy conservation and renewable energy sources that benefit climate change reduction…

We have longstanding distress about other health and environmental effects of energy policy, including global climate change…

The same energy policies that will help achieve peace for humankind by reducing our dependence on oil will create greater harmony within creation by protecting the environment.

Here’s much more detail on the question of Jewish attitudes to global warming, summed up by saying that

we must take responsibility for maintaining and preserving G-d’s Creation not only for the here and now, but also for the benefit of posterity. This is something that must be taken very seriously, and we are required to follow the guidance of the experts in taking practical measures of conservation and preservation to save the world from irresponsible and destructive consumption.

Needless to say, the idea that the weather is controlled by God, and that therefore it is unaffected by human behavior, appears nowhere in any Jewish teachings I can find. And Stein is quite explicit about being a Jew, having decided to play that card in his execrable documentary about Darwinism.

Stein’s also upset that Kyocera took issue with “statements widely attributed to him that appear on the web”. He replies, in the complaint, that this “means anonymous, unsupported gossip about a famous person”. Which it almost certainly doesn’t. I’m something of an expert on statements widely attributed to Ben Stein: none of that gossip is anonymous, and nearly all of it is very carefully supported. With, for example, video, of Stein himself saying, very clearly, that a big speech by Barack Obama’s was “scarily authoritarian” and “something the Führer would have done”.

But my favorite bit of the complaint is where he complains that the ad which did end up running, featuring Peter Morici, is “an explicit misappropriation of Ben Stein’s likeness and persona, which is an explicit violation of Ben Stein’s rights of privacy and of publicity, barred by California law”.

In other words, this ad, while it might look to all the world as though it features a real economist who’s much more qualified on such matters than Ben Stein, is in fact an illegal violation of Ben Stein’s privacy, which uses the likeness of Ben Stein. Maybe Stein thinks that Morici should wear a long blonde wig, or something, to make him look less Stein-esque?

The irony here is that this man — someone who’s so worried about his privacy that he appears on TV every opportunity he gets — has to give the address of his four-bedroom, 3,821 square-foot Beverly Hills mansion on the final page of his legal complaint. Maybe the main effect of this suit is that he’ll get added, now, to one of those Los Angeles bus tours of the residences of the rich and clueless.


Peter Morici is, in those commercials, clearly supposed to look like the late Paul Samuelson. To judge the resemblance for yourself, his photo is easy enough to find on the web, for instance at this URL:

http://austrianeconomists.typepad.com/we blog/2009/12/paul-samuelson.html

Generations learned economics from the many editions of Samuelson’s textbook, so a visage like that must still have seemed natural for the role. Maybe Stein was originally in the running because with just a little make-up work he could be made to look like Samuelson too.

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Felix Salmon
Jan 12, 2012 07:36 UTC

The number of illegal immigrants in the US is going down, not up — NYT

Peter Eavis makes his debut on DealBook — NYT

Hennesy Youngman on Damien Hirst — YouTube

How Often Should I Charge My Gadget’s Battery to Prolong Its Lifespan? — Lifehacker

2 of the 4 heads of Goldman Sachs trading are leaving — Bloomberg

Carlyle’s 3 founders kept over half of the firm’s performance fees for themselves — WSJ

And if you check out Counterparties.com, you’ll find a cool new widget from The Browser, we love them!

Art is not an investment, part 872

Felix Salmon
Jan 12, 2012 07:20 UTC

I’m not sure what’s more offensive, the SWAG acronym (it stands for Silver, Wine, Art, Gold), or Patrick Mathurin’s lede in Monday’s FT:

The art market defied the economic gloom to return 11 per cent to investors in 2011, outpacing stock market returns for a second consecutive year.

No, Patrick, it didn’t. Art doesn’t have returns, it just sits there, being expensively insured. It pays no dividends, and it can’t be marked to market, since the only way to find out the market price for an artwork is to sell it. Even the auction houses have no real idea what any given artwork is worth: look how many pieces fail to sell at auction, or sell for multiples of their estimate. For instance, Roy Lichtenstein’s I Can See the Whole Room . . . and There’s Nobody in It! sold at Christie’s in 1988 for $2.09 million, double its estimate of $800,000 to $1.2 million.

Besides, who are these “investors” who purportedly saw an 11% return in the art asset class in 2011? It’s not people who own art generally: a lot of people own art, but it’s not generally worth anything — we couldn’t sell it, for cash, if we needed to. A tiny sliver of the art world deals in works which really do have resale value, but it’s not true to say that even they went up in value by 11% in 2011, not with all the survivorship-bias and other problems in the Mei-Moses index Mathurin is citing.

Besides, Mathurin seems to be very bad at calculating returns even when he knows the sale price. That Lichtenstein, for instance, was sold again in 2011:

There were record auctions for paintings such Roy Lichtenstein’s I Can See the Whole Room . . . and There’s Nobody in It! which sold at Christie’s in November, making gains in excess of $40m for its seller, who bought it for $2m in 1988.

Again, no, Patrick, it didn’t. For one thing, the hammer price on the painting was $38.5 million, and it’s really hard to make a gain of more than $40 million when your gross income is no higher than $38.5 million. And then there’s the fact that Christie’s slapped a guarantee on the painting, almost certainly at $35 million. What that means is the seller only got 70% of the excess over that amount.

So the total amount going to the seller — assuming zero seller’s premium — would be $35 million plus 70% of $3.5 million, which comes to a total of $37.45 million. Subtract the $2.09 million purchase price, and you get a total capital gain of $35.36 million. Which is, admittedly, a lot of money, but it’s a good $5 million short of Mathurin’s $40 million.

And incidentally, if $2.09 million becomes $37.45 million over the course of 23 years, that works out at an annualized return of just over 13%. Again, that’s very good, if not spectacular. But that’s your winner. Set it off against your losers — and you’re always going to have more losers than winners — and your total art return is going to be substantially lower. If you bought $2.09 million of Apple stock in 1988, it would be worth more than $80 million today. But you didn’t just buy Apple, you bought lots of other stocks as well (even assuming you were buying stocks at all in 1988), and overall they didn’t do nearly as well. Single datapoints, as a rule, mean very little.

But if Mathurin can wheel out his Lichtenstein, I’ll wheel out my 2008 Lafite:

The greatest loser was Chateau Lafite 2008, which peaked in January 2011 at £14,043 a case and whose last average trade price, this month, was £8,108, a fall of some 45%.

I’m all in favor of buying art and wine, but they’re not investments. There’s never any shortage of wine shills and art shills who will talk about them as asset classes when they go up in value. All those people should be ignored. And there should be an absolute ban on talk of how the art market “returned 11 percent to investors” and the like. We should be getting smarter about this stuff — and, in fact, the art and wine press is quite good on such matters. It’s just the financial press which perennially falls down.


I do not know about art but certainly wine can be marked to market. When we look at statistics such as production and consumption growth (or a lack of) we can establish or at least forecast prices.

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