“Fed moves to loosen tight credit,” begins a story in the New York Times this morning.
A related article – in the LA Times – tells us that the crunch in subprime is now grinding down on cash-out refinancing, investment property and vacation homes.
But the Fed makes haste to the rescue. Two days after cutting rates down to 2%, the Bank of Ben Bernanke announced – without much fanfare, hoping it would be ignored – that it would accept credit card debt, student loans and even car loans as collateral. Student loans are now being traded on private markets at discounts of about 25%. But the Fed takes them at full value…and charges only 2% for the loan, about half the rate of consumer price inflation.
What kind of way is that to run a bank, you might ask? Don’t bother…
The bubble has sprung a leak…the Fed is doing all it can to keep it pumped up.
*** Meanwhile, Warren Buffett has gone into the business of insuring municipal bonds. His competitors don’t deserve their triple A rating, he observed last week. AMBAC, for example, watched its stock price tumble from $96 to $4 in the space of a year. Its credit is so bad it has to pay 14% to borrow money. Buffett says he’s never before seen such a company rated AAA.
*** And the art market is preparing for a big test. So far, the very peak of the socio-economic pyramid has been relatively immune from pain. The rich are still getting richer, as near as we can tell. Occasionally, the papers speak of problems among the “rich.” But the people they are talking about are not really rich. Often, they have two large incomes…two large houses…and two large mortgages – along with all the expenses of living high on the hog, circa 2008 – including private schools, club memberships, ski vacations, and so forth. At the end of the day, they don’t really have much capital to protect them from rising prices or adverse economic trends. But the truly rich are truly different. They don’t have mortgages. They don’t depend on their incomes. And they often have sources of wealth beyond the dollar.
The rich can afford to hold gold, for example, even though the yellow metal provides no yield. They don’t need to rely on it to pay for their retirement…so they can take a longer view. They can invest differently because they don’t need current income. And they are often more concerned with protecting or enjoying wealth than with making more. But they are human, just like the rest of us…and just like the rest of us; they are gullible, credulous, and moronic. The last time we looked, Manhattan apartments were selling at record prices. Luxury airplanes and yachts are still selling well, too. And so are works of ‘art.’
Here we add a little detail that we think may be important. Recent sales at Sotheby’s and Christie’s have set records for Chinese and Russian art. You won’t have to think long or hard to figure out why. The Chinese and Russians have a lot more money than they used to.
The rich in the West have more money too. But so far, the art market has been doing a good job of separating them from it.
The test of prices on Western art is coming in three weeks, when the big auction houses have $1.8 billion on sale. In recent years prices have swollen to bubble levels. Many works have little or no real merit – they are merely gaudy, sensational, or pure gimmicks. Still, investors felt clever paying extraordinary sums for these things…and then, even cleverer when they went up in price.
The works of Richard Prince, for example, were put together just a few years ago. Kenny Schachter, an art-critic friend of Marc Faber’s, described his oeuvre as “consisting of large silkscreens on canvas, of purloined covers of pulp fiction novels involving a series of books with nurses in the titles…” such as “Wayward Nurse,” or “Surfing Nurse,” and so forth. In 2003, you could have bought one for $75,000 to $150,000. Two years later, prices topped $1 million. A year later, one was sold at auction for $2.5 million. And in 2007, one of the nurses hit $6 million.
“What is the inherent value of these works?” asks Mr. Schachter.
About as much as a dot.com without a product or a business plan, is our guess. But what will addled buyers pay? We don’t know…it depends on how eager they are to get rid of their money.
Markets and Money