Charting The Course

What the $179 Million Picasso Sale Can Teach us About Asset Values

By Mitch Siegler, Senior Managing Director

Mitch SieglerIt took just 11 minutes of telephone bidding before the final sale of “Women of Algiers” for $179.3 million (including 12% commissions), well above the $140 million pre-sale estimate and the most for any art work ever sold at auction. The same auction brought the sale of Alberto Giacometti’s life-size sculpture “Pointing Man,” which at $141.3 million set a record for the most expensive sculpture sold at auction. These sales were part of spring art auctions at Sotheby’s and Christie’s that combined to generate a jaw-dropping $2.5 billion in sales.

Women Of Algiers“For anybody that wants to have a major Picasso, this is it – and $179m in 10 years’ time will probably look inexpensive,” said Phillip Hoffman, founder and CEO of the Fine Art Fund Group. Abigail Asher of New York art consultants Guggenheim Asher Associates concurs. She told the New York Times “A new class of buyer has entered the market and they’re prepared to pay staggering sums for trophy pictures.”

Laurence Fink, the CEO of BlackRock, the world’s largest asset manager with $4.8 trillion in assets under management thinks it’s all about returns. At a recent Credit Suisse Megatrends conference, Fink said “The two greatest stores of wealth internationally today are contemporary art – and I don’t mean that as a joke, I mean that as a serious asset class – and apartments in Manhattan, apartments in Vancouver, in London.” These stores of value in safe haven countries are far away from the prying eyes of Russian and Chinese government bureaucrats and tax officials.

At Pathfinder, we don’t know diddly-squat about art – but we know a little bit about real estate, especially apartments and homes. And we think some of the same dynamics driving the feeding frenzy for expensive art are also contributing to a red-hot property market, especially for luxury homes and apartments. Below are a few musings:

1. When money is essentially free, funny things can happen. Hearkening back to Econ. 101, when something is too expensive (think expensive champagne), very little is consumed; when it’s inexpensive (think water, in California), we use too much of it. The Fed Funds rate, which hovers near zero (0% to 0.25%, to be precise), its level since December 2008, has created an environment where money is basically free, it’s dirt cheap to borrow and there’s a belief that ‘70s-era inflation is but a distant memory – like bell bottom pants and miniskirts or songs from Journey and Styx.

2. Record-low interest rates drive unprecedented inflation in a wide array of asset prices. Wait a minute. Didn’t you just say ‘70s-era inflation is but a distant memory? Actually, we said “there’s a belief that ‘70s-era inflation is but a distant memory.” And it’s been borne out in the data these past few years in the face of a rather anemic economic recovery – a primary reason that the Federal Reserve has been reluctant to boost interest rates is that the core rate of inflation Interest Rates(from wages, the cost of housing and other everyday items – but excluding the more volatile items like energy and food prices) has remained well below its 2% annual inflation target. But, that seems to be changing. All this money, like water after a monsoon, has to flow somewhere and folks we know aren’t too excited about parking their cash in bank certificates of deposit. And many investors have justifiably cooled on bonds – and they’ll be rewarded when (not if) interest rates begin to tick up (in late ‘15/early ‘16, we’re betting).

3. Asset prices in core investment classes (stocks and bonds) have risen dramatically. According to research from Morgan Stanley Investment Management, U.S. stock valuations have been higher than they are today just 10% of the time in the past half century. It’s a similar story for bonds. And, real estate valuations have also seen a sharp run-up since their lows in 2010-2011.

Global competition and the opening of financial markets means that far more buyers today are bidding for (and bidding up the prices of) stocks on Wall Street, bonds in capitols around the world, real estate in London, Hong Kong, New York and Los Angeles – and hard assets like Picasso’s “Women of Algiers”.

These blockbuster art auctions and record-breaking mega real estate transactions are occurring in an environment where cash from around the world floods into U.S. office buildings, apartments and other properties. Bloomberg quotes research firm Real Capital Analytics, which reports that commercial real estate transactions in the U.S. jumped 45% by dollar volume in the first quarter. The biggest demand driver according to Bloomberg: foreign buyers, who accounted for $24 billion in U.S. property transactions in the first quarter, fueled by cheap money and a search for a safe haven. “That number is poised to grow further because the majority of sovereign wealth funds have yet to hit their target allocations for real estate,” according to Preqin Ltd., an alternative-assets research firm.

Mitch Siegler is Senior Managing Director of Pathfinder Partners, LLC. Prior to co-founding Pathfinder in 2006, Mitch founded and served as CEO of several companies and was a partner with an investment banking and venture capital firm. Reach him at msiegler@pathfinderfunds.com.