One of the burning questions on the minds of economists these days is whether or not the top 1% of wealth owners can carry the economy solely on their backs, or do we need participation from the cash-strapped and debt-burdened 99%. In his article titled “Art for Art’s Sake? Or To Protect Wealth?” Randall Forsyth tackles the question with some interesting observations. The article appeared in Barron’s Online on May 1st.
“Happy May Day, capitalists. The putative 99% is set to re-Occupy Wall Street Tuesday and many of the 20%-plus of Spaniards who are unemployed are likely to join workers around the globe in the observation of international Labor Day.
The very rich, who Fitzgerald reminds us are different from you and me, will likely keep a low profile. Their priority is to hold onto their fabulous wealth — which is threatened from all sides by confiscation by broke governments, inflation and possible insurrections — and in the most salubrious manner available.
But how? Financial assets crumbled in the financial crisis and stocks have not recovered fully from the collapse. Hedge funds have failed to live up to their name in the crisis and more recently have acted mainly as a hedge against capital gains.
Government bonds protected wealth, provided they were issued by the right governments. Leave aside the likes of Greece but the official triple-A governments of France and the Netherlands have come under a cloud of doubt recently. Ironically, the obligations of the U.S. and Japan have been the reliable redoubts for the rich, but how long will that hold for the governments with the biggest debt loads?
As for gold, this store of wealth fell by about one-quarter during the 2008 crisis. Over the stretch of history, to be sure, the precious metal has maintained its value. But after it has been dug up from deep mines, gold then is buried again in some vault. Perhaps Auric Goldfinger, James Bond’s villain, got visceral pleasure from gold but that was part of his psychopathic nature.
The really, really rich would rather display their wealth in an ostentatiously discreet way. And in a way they can maintain that wealth and at the same time protect it from governments’ monetary debasement, confiscation as well as social unrest. Art works qualify on all counts.
The day after May Day, the record for the most expensive painting ever sold is likely to be shattered when one of the three versions of Edvard Munch’s painting, “The Scream,” goes under the gavel at Sotheby’s Wednesday evening. The New York Times Sunday Arts & Leisure section reported over the weekend the current record of $106.5 million paid for Picasso’s “Nude, Green Leaves and Bust” will likely be shattered by the familiar Munch work. The official estimate from the auction house is $80 million but the betting at Ladbrookes, the betting shop in London, is that the bidding could go as high as $150 million-$200 million.
That will be just one of the prized paintings going on the block at Sotheby’s and Christie’s, including key works by Warhol, Lichtenstein, Rothko plus Cezanne and Picasso, among others. The question is why are these works being put up for sale, and why now are they apt to attract such frenzied bidding?
While some works are coming on the block as the result of selling by estates, such as that by late financier Teddy Forstmann, the Times observes the other reason is more opportunistic. “Owners are hoping to cash in on the penchant of new, extraordinarily wealthy collectors from Russia, Asia and the Middle East for paying record prices for whatever strikes their fancy, adding that the market for “global icons” is driven by the new rich.
So, too, is the market for properties at the highest end of the most desirable cities. As Richard Morais writes in his Penta Daily column recently (Why London, New York Draw the Wealthy), Citi Private Bank and London real-estate advisers Knight Frank find the world’s richest continue to flock to the cities in the headline, plus Hong Kong and Paris.
“Any private banker will tell you that, as soon as a centa-millionaire in Moscow, Beijing or São Paolo makes their fortune, the first thing they do is figure out how they can ferret away large chunks of that wealth to countries that guarantee political and personal freedoms, have sound legal systems, a favorable tax environment, good security and good schools for their kids,” Morais writes.
Moreover, the Financial Times also observed last weekend on the basis of the Knight Frank data the ultra-wealthy tend to own four-to-five properties — two in the their home country, one in one of the so-called global cities of London or New York, and another somewhere it’s warm or cold, such as a ski resort.
You’ve got to wonder if it’s worth it. A billionaire presumably could rent out the poshest hotel suites in New York, London or Paris at a whim. But as Richard points out, there already are 63,000 people with $100 million or more in assets around the globe. Perhaps there might be too much competition for the best suite at the Waldorf.
I suspect something else is motivating the ultra-rich. They want to protect their wealth by having several houses around the globe, with art work on the walls or in the foyers. Not only can they portray themselves as latter-day Medicis, they can protect against a government seizing all their wealth. If the sans culottes storm one of their latter-day Versailles, they can board their private jet and ensconce themselves in their townhouse in Mayfair or between Fifth and Madison.
Or it might be more mundane. With central banks printing dollars, pounds, euros, yens and remnimbi with abandon, the uber-rich see what’s happening to their money. The bourgeoisie have seen our retirement accounts shrink and cost of living rise, and the middle class and below have been squeezed in their income and employment.
Meanwhile, the richest are protecting their wealth by scooping up properties they deem as impervious. That presumably should shield them from the vicissitudes of fortune over the long term while affording them the pleasure of royal living. You don’t get that from doubly taxed dividends.
This is what so-called quantitative easing has wrought. The super-rich clamor to put exorbitant sums of paper money into art works of questionable merit. Art historians quoted by the Times called “The Scream” too ugly to live with or depressing or mere kitsch.
Only excess liquidity can possibly explain the exorbitant prices paid for these art works and properties. Or the risks the rich feel that impel them to buy homes on different continents where they can take refuge. It may not be so good to be king.”