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Art is an investment to be enjoyed

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Tech stocks have taken a deep dive, blue chip stocks are struggling, stablecoins are unstable and not even asking questions about traditional crypto. Art markets, however, are alive and well – and it’s worth asking why.

Recently, an Andy Warhol painting sold at auction for $195 million, the highest price ever for a 20th century work of art. A dance hall-themed painting by Ernie Barnes fetched $15.3 million, or 76 times the original estimate. The Macklowe collection sold at Sotheby’s for $246.1 million, the highest ever for a single collection.

Has anyone else noticed a pattern? The strength of the art market may seem counter-intuitive, but it makes sense in today’s environment.

First, savings are still high due to reduced consumption due to the pandemic. And many rich people have bought additional houses and want to furnish them with art.

Second, the recent spike in inflation rates around the world has intensified the search for hedges. There are few real inflation hedges, and crypto has now been phased out of that role. But art can act as a hedge against inflation in almost any environment.

Art gives its owners the pleasure of looking at it on their wall, and no amount of inflation can take that away. It is both an investment and a form of consumption, and the latter is fairly protected against all macroeconomic conditions. When all else fails, spending money is a surefire hedge against inflation. Art also happens to be a durable good, so the expense is not entirely unnecessary.

Art is not always synonymous with pleasure for the buyer. Many art collectors, especially in the higher tiers of the market, keep their art tax-free and use it to donate questionable charities, “flip” it for a quick profit, or resell it on the “grey market”. I disagree with these methods, but they too can be lucrative in a volatile market where valuations are more subjective.

Many art sellers suggest that works of art bring a high monetary rate of return. Don’t be fooled. Too often these calculations are based on “survival bias” – that is, the artworks that continue to appear in the auction records are the above average performers. There is less data on the losers. Best estimates suggest that, over the long term, works of art have less price appreciation than stocks.

It is exactly what you would expect if some art buyers like to own and look at it. The total net rates of return, pleasure included, should equalize between the different asset classes.

So don’t buy art to get rich. But if you like the work, it will bring more pleasure than holding a lot of losing investments.

The rapid evolution of technology raises some questions about the future of physical works of art. Why not just have a near-perfect holograph of a Rembrandt on your wall? Why bother trying to buy an original copy of a lesser work of art?

But no one knows exactly when these quality holographs will arrive – and if they do, they’ll likely increase rather than decrease the value of at least some artwork. The originals will become more important and will be known to a greater number of individuals. The more time we spend staring at computer screens or digital replicas, the greater the value of the finest true works of art (or, for that matter, natural wonders).

To better understand reproducibility and its effects, consider the prints and lithographs of Picasso and Jasper Johns, two particularly accomplished printmakers. These prints and lithographs are of excellent quality and have been available for many decades and are much cheaper than the original paintings. Yet they have instead bolstered the reputations of Picasso and Johns, and likely increased the value of their works (both artists sell at or near the top of their market segments). Just as some buyers buy a print because they can’t afford a painting, others start with a print and move on to paintings as they earn more.

A warning: the art world is full of forgeries, frauds and uncertainties. So stay away from particularly dubious market segments, such as Russian Constructivism. But keep in mind that market downsides will eventually be reflected in the price. Precisely because savvy art shopping isn’t easy for everyone, a savvy buyer can do particularly well.

So before you conclude that all asset classes are collapsing, think again. Beauty should never be too far from your thoughts anyway.

More from Bloomberg Opinion:

• Bitcoin is a lot like the art market: Allison Schrager

• NFT art is all about the hype: Leonid Bershidsky

• Wealthy millennials splash millions on crypto art: Andrea Felsted

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Tyler Cowen is a Bloomberg Opinion columnist. Professor of economics at George Mason University, he hosts the Marginal Revolution blog and is co-author of “Talent: How to Identify Energizers, Creatives and Winners Around the World”.

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