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Billionaires Gone Wild: Why a Globalization-Fueled Art Bubble Spells Trouble For You and Me

When Sotheby’s stock goes crazy, history suggests that the rest of the economy is in for a bumpy ride.

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Why should you care about the fetishes of the super-rich? Because what they’re up to could portend big trouble for the rest of us.  When gazillionaires go on art buying-sprees, past history suggests that certain bad things could happen.

Crazy at the Top

Globalization, as you have undoubtedly noticed, is creating massive concentrations of private wealth all over the planet. According to the Forbes Billionaires report in 2013, the ranks of the world's billionaires have swollen to all-time highs, counting both the number of billionaires (1,426) and record net worth ($5.4 trillion).

That’s a sign of rising inequality, which is bad. What the 0.01 percent is doing with the money is quite worrisome, too.

When extreme amounts of excess capital gather at the top, the rich will compete with each other and seek to super-size their status. But they have a problem: once you have the houses, the yacht, the helicopter, and so on, what can you do with all that cash? You could do something economically useful, like start a business that makes things that are actually beneficial to people. But that’s not what the new bumper crop of high rollers is doing, for all their praises of themselves as job creators. Far from job creators, they more interested in becoming speculators and pleasure-seekers.

For the Big Kahuna, nothing is so alluring as art, and right now, the art market is on fire. Freshly minted connoisseurs from every region of the globe have been engaged in bidding wars at Sotheby’s and Christie’s: buyers from Asia, the Middle East, and Latin America are competing with Europeans and Americans to get their hands on the hottest treasures. In November, auction houses beat all previous records when New York-based Christie’s unloaded Francis Bacon’s Three Studies of Lucian Freud for a cool $142.4 million and sold the priciest work by a living artist, Jeff Koons’ giant steel sculpture, Balloon Dog (Orange), for $58.4 million.

Lots of people see all this art selling for millions and imagine that the rich are simply making a smart financial investment. Not so, say researchers. Studying sales of art between 1972 and 2010, a group of finance professors demonstrated that art purchases only returned an average of 6.5 percent — about what you could expect from investing in bonds, but with far more risk.

Art is a weird commodity, as much about bragging rights and treasure hunting as it is about finance. The market for art really makes a mockery of the old efficient market hypothesis: it’s opaque, easy to manipulate, and price is often unrelated to quality. But it might tell us one thing: who is about to get screwed.

Bubble Trouble

You may say that big art sales are a good thing — artists have to pay their bills, and so do curators, gallery workers, museum professionals, and others involved in the show. But there are several signs that the art world is in a bubble that could burst not only in the faces of those folks, but the rest of us, too.

Felix Salmon of Reuters and others suggest that the art market is now reaching a dangerously speculative bubble stage, and you can tell because people are starting to flip out. Art-flippers like hedge-fund billionaire Steven A. Cohen (recently nailed for insider trading), appear to be in the process of unloading big works of art on the assumption that it’s time to get out of the market. That would make the current buyers feel like suckers if and when the bubble bursts, and it would wreak havoc on folks whose jobs depend on art sales.