Scrambling for Cash: Liquidity is Disappearing from the System

On 15 September 2008, Damien Hirst’s complete collection ‘Beautiful Inside My Head Forever’ went to auction in Sotheby’s.

Hirst is an English artist whose works include dead animals preserved in formaldehyde.

This was an unusual move. You see, artists traditionally sell their art at galleries, but Hirst had decided to bypass them and go straight to auction.

It was also a risky bet, but one that could pay off.

At the time, the art market was booming, and art works were constantly smashing sales records. People couldn’t get enough, and they were happy to open their wallets for it.

Back in May 2008, during contemporary art auction week, Sotheby’s had fetched a whopping US$362 mln in only one evening. This included a 1976 triptych by Francis Bacon, which sold for a record high of US$86.3 mln.

Fact is, there was a lot of money around.

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As the then head of Sotheby’s contemporary department told The Guardian in 2007:

People are not just making money these days. They’re making fortunes — of a type that the world simply hasn’t seen before. There’s just more money around than there used to be.

So, plenty of money went behind the ‘Beautiful Inside My Head Forever’ campaign to make sure it was a success.

This included a global marketing tour, a catalogue that cost US$240,000 to make and a huge party.

So, on the day that Lehman Brothers went bankrupt, while markets and the general economy were collapsing, Hirst’s works of art went to auction.

There was plenty of optimism. After all, art is also considered an investment during bad times.

Sotheby’s was hoping for US$120 mln on the auction, US$176 mln tops.

Let me tell you, it was a resounding success.

The lot took way above that: US$200.75 mln in two separate sales. According to Artsy, it was the most a single artist auction sale had ever fetched…

…and then everything collapsed, including the art market.

You can see the dip in art auctions in 2008–09 in the chart below, which shows the top lot prices from evening sales at New York auctions.

The Rum Rebellion 12-11-19

Source: Bloomberg

[Click to open in a new window]

But that was a minor blip. Soon enough, art auction prices picked up again.

Art works have been smashing record after record since.

Now, I’m not an expert in art. In fact, far from it. But, things seem to be changing.

As Bloomberg reported over the weekend:

The bellwether November art auctions next week in New York are poised for the biggest contraction in a decade.

The semi-annual sales of high-end Impressionist, modern, postwar and contemporary art at Sotheby’s, Christie’s and Phillips are targeting sales of $1.2 billion at the low end of the estimate range, down 24% from a year earlier. Not a single work is expected to fetch $50 million or more. The last time that happened at the November auctions was 2009, in the wake of the financial crisis.

It’s a stark reversal after a decade of eye-popping prices, fueled by the swelling ranks of billionaires and low interest rates.

It will be interesting to see what happens this week. According to The New York Times, expectations are low, because of uncertainty:

The week’s various auctions at Christie’s, Phillips and Sotheby’s (which in June returned to private ownership) are estimated to raise at least $1.2 billion. But the world’s wealthy will have to be in a free-spending mood to match the $2 billion raised in May at the equivalent spring sales, when Jeff Koons’s stainless steel “Rabbit” sculpture fetched $91.1 million, an auction high for any work by a living artist. This time around, there are few museum-quality works by the most famous artists to tempt billionaires — no painting or sculpture is estimated to sell for more than $45 million.

“First, there isn’t a major estate — this cycle doesn’t have a Rockefeller,” said Diana Wierbicki, global head of art law at Withers Bergman LLP, referring to Christie’s 2018 record-setting auction of the Peggy and David Rockefeller collection.  Second, she pointed out, sellers and buyers are confronting the global economic uncertainty from a looming Presidential election in the United States, riots in Hong Kong and a Brexit-traumatized Britain.

Is this a sign that liquidity is starting to drain from the system?

We wrote about confidence yesterday and what happens when people turn fearful. When people turn cautious liquidity starts disappearing. People are happy to throw money around when things are on the upside, but will hunker down and hoard money when they turn less confident about the future.

Is the mood turning cautious?

I mean, we have seen a lot of speculative bets in the last few years. Art, property, markets. We have also seen a lot of debt accumulation.

But this is clearly unsustainable, and it may have run its course.

Could we see a different scenario in the next few years? That is, less speculative plays and debt taking and more debt paying and a move to protect assets people already have?

If so, we could see a crisis of liquidity, where people start scrambling for cash.

We have spent years in high liquidity and high debt. It may be time to consider that things are changing, and take this time to prepare.


Selva Freigedo Signature
Selva Freigedo,
Editor, The Rum Rebellion

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Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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