"The establishment of the capital world, hesitant and uncertain"

John Dizard of the Financial Times has a fascinating article in which he goes to the blue-chip art auctions to get a reading of the mood of the Seriously Rich. And what he finds is not encouraging. Even the wealthy are rattled.

He also argues that the Euro is overbought and will trade down by the second half of next year. That’s an interesting call. Currencies are know for being able to maintain price levels that are a large departure from their “fair” value for prolonged periods, so calling a turn is risky business indeed. But Dizard’s investment recommendation is valid simply if the euro quits rising against the dollar by then.

From the Financial Times:

The people who buy impressionist and modern art at the New York and London evening auctions represent the core money of international private capital. Not the most aggressive or innovative money, not the most leveraged money, but the money that will be around, at least through the next cycle.

Most of the time, the “imp and mod” sales in the capitals of capital are the most predictable and efficient parts of the art world. Impressionists are not only popular with the public, but were prolific and for the most part consistent in their styles. Rich people were also taught as children that “modern” art, the commercially successful, abstract European and American art of the first part of the 20th century, was also an acceptable taste. Modern art has a list of canonic brands, or “artists”, who made enough stuff to create liquid markets….

So the outcome of the imp and mod sales in New York last week were pretty unsettling. I was following the proportion of American participants in the sales, which most of the time is a useful indicator of how flush the country’s rich people are feeling. The experts and handholders at the auction houses were, like me, expecting that the Americans would be lying low, even in New York.

Using the numbers from Christie’s, for example, the post-September 11 2001 low of American participation in imp and mod was 47.5 per cent in the autumn of 2002. It then rose with the economic recovery and the “mission accomplished” part of the Iraq war to 78 per cent in the spring of 2004. By last spring, in contrast, only 29 per cent of the buyers were American and 48 per cent European. So I expected that the New York sales would be telephone duels between competing owners of vaults of euros.

‘Twas not to be. Instead, the Americans in the sale room were flipping their paddles like they were at a ping pong game, in what auctioneer Christopher Burge called “fast and furious” bidding. They wound up buying more than 48 per cent of the sale by value, with Europeans picking up about half that with their far stronger currency.

I scouted the room afterwards to get a sense of what happened. Apparently, the usually calm establishment rich had decided that they wanted anything but their rapidly depreciating cash. Yes, they had less buying power than last year, or last week, but it looked as though next week and next year their money would be even less useful. So buy “things”. Gold, yes. Impressionist pictures? Can always sell them.

The next evening, at Sotheby’s, was even more disturbing. About one-third of the way through the sale, the establishment money – European, US, Russian, Chinese, or whatever – just pulled back and sat on its cheque book. Afterwards, the Sotheby’s people averred they might have over-reached on some lots, but I think the answer was simpler. As one art financier told me: “Sometimes the music just stops.”

To a financial market observer, this is much like seeing the pilot leaving the cockpit wearing a parachute. You could come to the same conclusion by tracking the decline of the “AAA” ratings agency brand, but it was more unsettling seeing the establishment of the capital world, hesitant and uncertain, all in one room.

This tells me that we could see reversals of primary trends very soon. One, I believe, is the strength of the euro. The weakness of the US position is well known. The weakness of the southern constituent countries of the euro is less efficiently discounted.

The cri de coeur of French President Nicolas Sarkozy over dollar weakness in the dollar’s home tells us that the ability of the European Central Bank board to maintain a consensus, in public at least, is at risk. The problem is that the economic vulnerability to what could be called the “Latin bloc” is more immediate than the inflation threat to the “German bloc”.

I don’t know whether the euro will put in its top this month or in December or in January of next year. The key event is the Spanish election in early March. After that is out of the way, it will be much easier for whatever Spanish government is in power to admit the country’s economy is in a bad way, and to point at tight ECB policy as the cause.

So look at selling the euro against the dollar in contracts maturing from the end of the second quarter through at least the end of next year.