The end of the masterpiece bull market is a blessing for the art world

A painting by Adrien Ghenie called ‘The Sunflowers in 1937’ at the auction rooms in London.
A painting by Adrien Ghenie called ‘The Sunflowers in 1937’ at the auction rooms in London.
Image: AP Photo/Kirsty Wigglesworth
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London’s sales of Modern and Contemporary Art during the week of Feb. 8 were greatly anticipated by many different art market constituents but now that they’re over, no one is quite sure what happened. The auction houses were hoping to thread the needle by lowering the metabolism of a voracious market without shocking the system; dealers and collectors were looking for directional indicators; and the the press was eagerly competing to be the first to call a crash.

Everyone got a little bit of what they wanted. Although the day sales–the working end of the market where dealers buy and sell to each other and collectors peruse for finds–were flat, the flashy evening sales at Sotheby’s and Christie’s were down by half. The bulk of the drop came at the top end of the price scale, reflecting more a lack of supply than less swashbuckling demand.

Auction house specialists were engaged in a two-week-long trial by fire where consignors, who demanded estimates that were simply unrealistic, were cajoled into accepting sales below their original reserve prices. Many balked and simply let their lots fail on the block. At times, they passed up bids that were within a decimal point of achieving their minimum price.

In today’s market and macroeconomic environment, with few places to put cash, collectors really do prefer their art to having more money. Case in point, Sotheby’s star lot was a Gerhard Richter abstract painting of the type that has driven noteworthy prices for nearly a decade. It was withdrawn from sale. Some reports say the consignors ran afoul of Richter’s formidable dealer, and the prized piece had to come off the market to mollify her. Greed is a formidable motivator for sellers. At times, though, no amount of money can make up for the loss of social capital.

Is Fontana the new Warhol or the new Richter?

If another Richter abstract had sold last week, there might still be life in that market. There wasn’t. And there’s a good chance we’ve seen the end of the Richter abstract market—one of the most important global markets in Contemporary art—for the near term. Other artists who were notably lacking story lines and punctuation sales were Christopher Wool, Jean-Michel Basquiat and, the most important Contemporary artist of the last 15 years, Andy Warhol.

All three of these artists will be around for many years to come, to be sure. But for now, their markets seem to have lost energy and imperative. In the case of Warhol, the powerful cadre of buyers who could be counted upon to support Warhol’s prices have been happy to sit on their paddles these last two auction cycles. Have they sold all their holdings? Or do they simply not want to risk owning any more works? Perhaps they just think Warhol prices are quite high enough. Why push things beyond where they can go?

The pros may not be chasing Warhol and Richter but that doesn’t mean they’re out of the game. Cash is still trash in today’s negative interest rate world. So buyers are looking toward artists whose lower price points but historical importance give them greater room to run. For that crucial position of high-quality, high-volume, easily recognizable, globally appealing art, buyers continue to trade Lucio Fontana the way they used to do with Warhol and Richter.

On the other end of the scale, Romanian painter Adrian Ghenie, now entering mid-career status, continues to establish auction prices in the low seven figures. Sotheby’s was able to sell one of his works to a Chinese bidder for nearly $4.5 million which is just about the top of the new sweet-spot range for auction sales.

The masterpiece crash

The Ghenie price was a bright spot for Sotheby’s, but the sale could not keep up with the previous year’s exceptionally strong results. This drop was catnip to the press corps. After Sotheby’s Wednesday night sale, Bloomberg published a headline flagging the sale’s 44% year-over-year fall. The next morning, an analyst at Stifel blinked and downgraded Sotheby’s stock. Add to that the air pocket that global markets hit on Thurs., Feb. 11, as well. The headline, the analyst and the markets all cost Sotheby’s stock 17% of its value in one morning’s trading.

Then the art market got the bad news. It turns out that three of the top lots in the London sales—a Picasso, a Monet and a striking Basquiat—were, according to Bloomberg, all consigned by one owner. It didn’t help market confidence. The seller was taking a very visible loss on the Picasso and the Basquiat, which he had bought only two years earlier at very aggressive auction prices.

All three works sold easily, but at prices that disappointed even their reduced estimates. To make matters worse, Sotheby’s was selling the works to satisfy loans it had made to the consignor.

Bloomberg identified the seller as Jho Low, a young Malaysian investor who first came to prominence for lavish spending and ostentatious parties but has since gained notoriety for his ties to Malaysia’s prime minister, who is defending himself against claims he misappropriated development funds.

One reason the art market doesn’t identify buyers is that some buyers are simply better than others. Before the extent of Low’s dealings were revealed—Bloomberg tallied up $160 million in art sales from Feb. 2015 to this month (and there’s no telling how much he bought privately)—he was just the sort of buyer the auction houses were courting, a wealthy Asian looking to the world’s best art as a store of value.

In the art market, mere money doesn’t add long-term value. The market wants to see works and prices validated by great collectors with proven taste. Low’s aggressive buying—and exigent selling—seemed to put him in a class with Dmitry Rybolovlev as a serial over-payer–not really a proud provenance.

Had Low held onto the works for some period of time, he might have done well. And there’s a good chance Low’s sales in early 2015 netted him solid gains on the works he bought privately. But last week all three of Low’s works underperformed. Two them, the Picasso he bought for nearly $40 million and the Basquiat he got for $12 million were liquidated at significant losses, around $27 million and $9m respectively.

Now that Jho Low has demonstrated how to turn $52 million into $36 million in a little more than two years, will many buyers want to continue to show off their prowess as art investors? At the very least, the price point between $10 million and $50 million, where Low was eager to play, is going to seem like the riskiest territory in the market.

Will art go the way of ultra luxury real estate?

Art hasn’t been Jho Low’s only misstep. He has been a well-documented buyer of super-luxury real estate too with purchases in the kind of tall, skinny trophy towers that cater to overseas buyers.

As noted by no less an expert on global asset values than Blackrock CEO Larry Fink, the luxury apartment market and the trade in very expensive paintings have seemed to move in together recently.

Now both markets are hitting a wall. Earlier this month, the Financial Times reported that hedge funds were shorting the London ultra-luxury real estate market catering to Russian, Asian and other emerging market buyers shopping for secure domiciles in places like London, New York or Miami. The periphery, it would appear, is no longer able to afford the pleasures of the metropolis.

Or perhaps the appetite is just getting smaller. Emerging markets wealth is still looking to get out of places like China. And the buyers are getting far more sophisticated and experienced. They seem to be looking for less obvious but still expensive (unless you don’t think $500,000 to $5 million is real money) art.

Even though the headline numbers were falling in London, some of the market’s internals were driving forward. Both Phillips and Bonhams significantly improved their market positions this month. Christie’s day sale of Contemporary art didn’t drop appreciably. And Sotheby’s released figures for their Contemporary art day sale that showed average prices making a year-over-year rise of 35%.

For the art trade, the end of the masterpiece market is probably more of blessing than a curse. The easy money had gotten too easy. Better that a correction should burn a Russian oligarch and a globe-trotting playboy than sort of staid, reliable collectors who can be counted on as pillars of the market.

Then, again, perhaps the action just isn’t in Europe. Just as everyone was wringing their hands over the troubled art market, rumors began circulating of a massive private sale involving Willem de Kooning’s Interchange and a Jackson Pollock work. The gossip puts the price well above any single private sale or three times the top auction price for a single painting.

Is this true? Who knows. But the “Midwest hedge fund investor” who is suggested as the buyer also spent $200 million on a very, very large New York apartment recently.

Oh, and one more thing, with equity markets recovering this week, Sotheby’s stock has regained everything it had lost in the days after the London Contemporary sale.