Sotheby's Presents Andy Warhol's Post-Mortem Economic Commentary

According to Artprice’s 2006 Art Market Insight report, Artprice’s Global Price Index grew 25.4% y/y, seeming to indicate that the global economy was healthy in 2006. Often viewed as a reflection of the economy, auction results have been followed with increasing interest over the past decade now. The November 7 “Impressionist and Modern Art” auction at Sotheby’s (BID) pulled in just under $270 million, well below the $355-$494 million that the art world had estimated.

Following the poor results Sotheby’s shares posted their biggest one-day loss dropping by an astounding 28%. Considering that a majority of the works auctioned could only be afforded by the world’s wealthiest investors, the results sparked a sense of concern. Perhaps the poor auction results were an indication that, amid increasing sub-prime woes, record high energy prices, and general economic uncertainty, fears of an economic recession in the US are growing.

Artprice’s Global Price Index, which is updated quarterly, posted continued gains in the first and second quarters of 2007, breaking its all time high/base level set in 1990. The index rose from 99.5 in the first quarter to a staggering 116.7 in the second quarter. It was around the beginning of August that the first signs of the US sub-prime crisis emerged, marking a financial epoch characterized by global uncertainty led by the world’s largest economy.

Since August the global market place has been marked by increased volatility, economic uncertainty in the US, and a general uncertainty around the global implications of a looming economic recession in the US. As one might expect, this was reflected in the art world, as indicated by the Global Price Index, which declined from its all-time high of 116.7 in the second quarter, to 105.2 in the third quarter. Although the q/q decline was smaller than the q/q gain from the first quarter to the second quarter, the results reflect what could turn out to be the beginning of a sustained correction in the worldwide marketplace. Unsurprisingly, the third quarter decline in the Global Price Index seems to mirror US market sentiment. The Fed’s MPC members have recently downgraded their fourth quarter GDP growth forecasts. Following 75bps in rate cuts, the Fed finds itself in an increasingly difficult place as record high oil prices accompanied by the weak US Dollar make policy decisions increasingly difficult. Uncertainty still exists around the exact extent of the sub-prime situation, clouding the global economic outlook well beyond the coasts of the North American continent. The Euro-zone faces increasing inflationary pressures, amplified by the sharp rise in inflation measured in October, yet the ECB has opted to maintain a “wait-and-see” approach as UBS, and Barclays amongst many other European financials, are thought to have significant unannounced sub-prime losses. Trends in the art market paint a perfect (and prettier) picture of the current economic environment.

The poor auction results on November 7 were concerning as the events are highly anticipated in one of the world’s art capitals. Ensuing the November 7 “Impressionist and Modern Art” auctions all eyes were focused on the “Contemporary and Postwar Art” auctions the following week. Sotheby’s pulled in just under $316 million, marking the auction the most lucrative “Contemporary and Postwar Art” auction in the company’s history. Similarly, Christie’s November 13 “Contemporary Art” auction generated $325 million, during which 12 new auction records were set for individual artists. Among the pieces sold at the auctions was a piece from Andy Warhol’s “Campbell’s Soup Can” collection that sold for $8.4M, not all that uncommon for the second highest grossing artist of 2004, 2005, and 2006. The strong auctions results suggest that perhaps the poor results at the “Impressionist and Modern Art” auctions were as much of a fluke as many believe the negative reading on non-farm payrolls was in August, while others seem to believe that the poor auctions are still a sign of things to come.

Billionaire collector Eli Broad predicted that “troubles in the sub-prime mortgage market will rein in recent astounding levels of spending” according to the Robin Pogrebin’s late-August NY Times article on the Art World. Commenting about the outlook for the art world Broad said [sic]:

We’ve seen an unprecedented appreciation of contemporary art over the past 35 years, and we’re bound to have a correction. I don’t know if it will happen at the November auctions, or if it will happen next May.

While spectators saw the good, the bad, and the ugly in the beginning of November, focus will now fall upon the auctions in May. While the shaky auction results in November seem to mirror the global economic volatility since August one thing is certain, looking ahead, the probability of a recession and/or correction seem to be on the rise, and will paint a gloomy future for the economy if market risks continue to materialize.