Screaming and Shouting

If you read this blog you’ll know that I’m interested in finance. But I’m also a bit of an art fan. A couple of headlines in the last week or so have made me think of the two subjects together.

The first headline was that, as you might well be aware, the Vix index of equity volatility is at, or at least close to, its all time low.

Vix is nicknamed ‘the fear index’ since traditionally it rallies when there is chaos. For instance, it got up to 80% back in the dark days of 2008. During the Greek crisis in 2010 it broke 40%. Now? Well, it’s at 12% as I write.

This seems to puzzle a lot of people. Surely markets should be afraid right now? There’s a (let’s be kind) somewhat unpredictable fellow in the White House whose domestic troubles even members of his own party are comparing to Watergate. The increasingly less amusing leadership of North Korea is openly talking of nuclear war.  And there’s an actual war cracking on in the Middle East.

It doesn’t seem to make sense – at least, that’s the tone of the articles I’ve read.   But let’s get back to Vix in a bit.

The other headline that made me pay attention was that a painting by Jean-Michel Basquiat (1960-1988) was sold at Sotheby’s New York last week for $110 million. It’s the highest amount ever paid for an American artist at auction. A Japanese billionaire bought it amid a frenzy of competition.

Now this isn’t the most expensive artwork ever bought at auction (that honour goes to a $300 million canvas by Paul Gaugin) – but it’s pretty stunning for a painting that is only just over 30 years old. And $110 million, even if you are a billionaire, is a mighty chunk of change.

But it was not just the big, flash, headline canvases that made silly money at the sale – lot after lot beat the (rather punchy) estimates by wide margins.

For example, lot 176 was by Carl Andre. Older readers may remember this artist’s name from the fuss that was created back in the 1970s when the Tate gallery acquired his work ‘Equivalent VIII’ for the nation – it was an array of 120 firebricks.

Lot 176 in New York was called ‘Magnesium-Magnesium Diapole (N/S)’ and consisted of two 100cm by 50cm by 0.5cm plates of industrial magnesium to be laid, side-by-side on the ground.   Estimate: $60,000-80,000. Where did it trade? $180,000.   (No. It was not me buying.)

It is tricky to measure the way art appreciates or depreciates in value as an asset class. Many have tried, or are trying, because if they can convince buyers that art represents a good investment they stand to gain – whether they are auction houses or funds set up to invest in art.

One difficulty is that a lot of art doesn’t trade in a way that is public. Private sales – ‘off the tape’ as it were – are common. Another is that about 20-30% of lots at auction don’t sell – usually because they don’t reach their reserve prices (so called ‘buy ins’.)

But even though I collect art exclusively because I like it (if I bought for returns the 25% or more bid/offer would scare me off), the distinct impression I get from years of close perusal of auction results is that across the board art prices are currently on fire.

This is odd, because, of course, as a financial asset art is intrinsically worthless (although you might be able to mend something mechanical with Andre’s magnesium). The value comes simply from what people are willing to pay. And they seem willing to pay plenty, whether for canvases or for plates of metal. They have the money, and that’s all there is to it.

Which brings me back to Vix.

Of course, Vix doesn’t really measure fear – it measures volatility. And in equity markets volatility normally comes from moves lower. Seen as a whole, equity holders are long. This is why puts are more expensive (in volatility terms) than calls. That’s where people need the insurance. Stock markets don’t ‘crash’ higher.

But currently, stock markets are stable. More than that – they’re buoyant. Several indexes are at record highs. This despite the fact that many large companies are trading at prices that imply multi-billion dollar market caps despite not making any profits whatsoever (no names here, but you all know who they are).

Why? Low rates / Have to put the money somewhere / Trump budget / I feel lucky / Another sucker will come along in time / This time the tech bubble actually makes sense.   Just take your pick. In short, collectively we have the money and that’s all there is to it.

So, it seems that equity markets and their volatility and the recent record prices for garish canvases are just two sides of the same cheap money coin. Indeed, economic research suggests a measureably strong relationship between art prices, equity returns and top level incomes through history (“we have the money”). [1]   All of which makes me think of a trading rule for our modern times.

Buy the Vix when you can’t sell your Pics.

Well, at least it’s snappy.

[1]. Art and Money, William Goetzmann, Luc Renneboog, and Christophe Spaenjers, Yale School of Management, 2010. https://www.aeaweb.org/conference/2011/retrieve.php?pdfid=69

Pre-order the new edition of Kevin Rodgers’ book ‘Why Aren’t They Shouting?’ at Amazon.