Since last week, $2.1 billion worth of artworks have changed hands at Christie’s and Sotheby’s in New York. “Les Femmes d’Alger (Version ‘O’)” by Pablo Picasso sold for $179.4 million, highest price ever paid for a painting at an auction. The bronze, “L’Homme au Doigt,” by Swiss artiest Alberto Giacometti went for $141.3 million, a record for a sculpture.
There was Mark Rothko’s abstract painting “No. 10,” for $81.9 million, another Picasso, a Van Gogh, Lucian Freud’s “Benefits Supervisor Resting,” for $56.2 million, an Andy Warhol, Claude Monet’s “Nympheas” for $54 million, a Francis Bacon for $47.8 million, Rothko’s “Untitled (Yellow and Blue),” which describes it perfectly, for $46.5 million. It was an international feast of money: At Christie’s, there were bidders from 35 countries, at Sotheby’s from over 40 countries.
These sales will goose second quarter GDP by over $2 billion, not counting the money spent on luxury hotels, restaurants, parties, transportation, gifts, and the like. This is how the “wealth effect” is supposed to work – cranking up the real economy. Central banks, and particularly the Fed, which instigated it, have been saying this for years. We grudgingly admit the “wealth effect” worked. This side of the economy is hopping.
It so happens that the St. Louis Fed, which apparently hasn’t gotten the memo, reported that “the middle class may be under more pressure than you think.” It determined that the “middle class,” as defined in the report, has seen its median income fall by 16% between 1989 and 2013.
Yet there’s a problem in this gorgeous scenario: the Fed has stopped QE last year and since then has been engaged in a veritable cacophony about raising rates. It could end the party. Bonds, stocks, and art could crash. Fed heads have vaguely threatened to do it for months but keep pushing that vague threat further into the future every time the market backs off its all-time high just a little.
“The decision to raise rates is actually three decisions: Not just when, but how quickly and how high,” explained San Francisco Fed President John Williams on Tuesday. He’d go into the June meeting in a “wait and see mode,” he said, playing down the crummy Q1 economic data as transitory. “I see a safer course in a gradual increase, and that calls for starting a bit earlier.”
New York Fed President and vice chairman of the FOMC, William Dudley, chimed in with an ominous undertone: when it comes time to raise rates, it will bring on a “regime shift” that will stir markets, he said.
Fed heads have been doing this for weeks, some more dovish, others with hints of market turmoil as an inescapable consequence. Get used to it, they’re saying.
So long-term bond yields have soared. The German 10-year yield made a spectacular move from 0.05% to 0.71% in a few weeks, and prices have plunged from insane highs. According to Bloomberg, “more than $400 billion” went up in smoke in May alone. Investors that bought at the peak of the ECB’s QE-momentum gravy train have gotten run over. And yet, almost nothing has happened so far; yields are still ludicrously low.
This sort of thing scares the Fed-pampered denizens of Wall Street. For years, bonds and stocks have done one thing: go up. No matter how vertigo-inducing the new high, there would always be another one shortly thereafter, even if yields would have to become negative.
All this is happening just when everyone is fretting about how liquidity will evaporate the instant the real selling starts. There simply won’t be many buyers crazy enough to bid at prices that are at survivable levels for sellers. That’s scary to them; they’d actually have to face some risks.
And so they’ve been fighting back with all their might against the very notion of ever raising rates. Temporarily shorting German bunds is one thing. But losing a few trillion dollars and never be able to make them back is another.
They’re pushing in a variety of ways. For example, Potomac Research Group, in a note to clients, trotted out former Fed Vice Chairman Donald Kohn, now on Potomac’s payroll. He figured, given his Fed experience, that a June rate hike was off the table. This was then promptly passed on to the media.
The purpose is to create market expectations that the Fed won’t dare to disappoint in order to avoid a major tantrum. And it’s working, of sorts. While long-term rates have risen, short-term rates, which reflect what the market expects the Fed to do, have not. Bloomberg:
On Thursday, futures contracts were implying that traders saw the fed funds rate at about 0.3% rate by December. That’s the lowest estimate of the year, and about half the forecast for the overnight lending benchmark that the Fed gave in March.
The market is essentially calling the Fed’s bluff. Traders are betting that policy makers won’t be able to raise rates this year without disrupting stocks and bonds, something that they’d really rather not do.
Not to speak of art, housing, VC portfolios of billion-dollar startups with no sales, Silicon Valley…. Everything is on the line.
Over the many months that this cacophony has lasted, expectations of rate hikes have been moved from early 2015 to June 2015, then September, and now further out. There simply cannot be any rate hikes, ever! The party must not end. And these players are threatening the Fed with a “market-wide tantrum” if it does raise rates in June, or whenever. What remains to be seen is if the Fed can develop a mind of its own, at least occasionally, or if it admits to being just a bunch of figure heads, put in place to serve Wall Street’s whims and desires.
But there are consequences. By now, how many years does it take to save up for a down payment in major US cities? Are you sitting down? Read… How Soaring Housing Costs Impoverish a Whole Generation and Maul the Real Economy
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I think one of the Fed’s strategies with all this is to talk about it so much that when the time actually comes, everyone will just yawn. That, and rest assured they are keeping the stock market up with futures contracts as before.
Even if they do raise rates, it will be purely symbolic and minimal. That is what they want/have to do. Prove they could restore the system. Truth be told, 1/2% is about all they have time to do before things turn really bad.
Hundred million dollar houses, paintings, and boats shows me that that the money guys would rather have the stuff than be in cash. I don’t think they care about the income as much as the markets think they do. They are diversifying out of cash into asset classes which hold relative value. If the financial markets collapse they can still live in the fancy house, look at the pictures, and spend a day on the boat. While the cash will still be worthless, their stuff will still be nicer than anybody else’s.
By the way, art crashed during the financial crisis … there were some sales under pressure, including by Lehman CEO Dick Fuld. And suddenly there were no buyers.
$100 million paintings, $30 million vintage Ferraris and other inflated collectibles are a compelling argument for a ‘wealth tax’ instead of relying so heavily on income tax for revenue. I’m not against people being rich enough to own rare cars and art but it should cost them to tie up so much capital to buy the work of dead artists and car makers.
A doctor or small businessman is called ‘rich’ if their income is over $250,000 and are taxed heavily for every dollar they make over that threshold but there are no Picasso’s hanging on their walls or vintage Ferraris in their garage because they cannot afford to tie up that kind of capital on frivolous ‘investments’.
If those with vast wealth want a billion dollar art and auto collection tax them 1 or 2% of the assessed value. They may have to find some other productive investments to pay the $10 or 20 million per year cost of that collection. That will still be less than the property tax rate most lesser ‘rich’ people must pay on the equity of their house!
They already have that concept enshrined in the law. Unsurprisingly, being billionaires they employ literally armies of accountants. CPAs and tax attorneys to shield them and their assets as much as possible. Couple that aspect with millions in campaign contributions in order to preserve those exemptions and loopholes and viola!, it turns out “they did build that” and are entitled to continue owning it!
Art is a very subjective asset. Beauty is indeed in the eye of the beholder. The invention of the camera obviated it’s original function of recording actual human reality and transferring it to a more permanent medium to carry it beyond the inevitable death of the artist/subject. Once freed of this rather mundane task it flew off into abstraction and “art for art’s sake”. In the rarefied atmosphere of these multi-million dollar purchases I think it’s more about “bragging rights” than wealth preservation, though they will obviously retain some value as “one of a kind” possessions, even if only to a different buyer for the same reason. Upon discovering the frescos in Pompeii and Herculaneum it was discovered that along with classic Roman themes there were also abstract frescos that were totally unexpected. I’m sure their owners gloried in them right up to the eruption of Mt. Vesuvius.
Import and export prices are crashing, no retail sales growth, no income and wage growth, all this signals stalled GDP and deflation. We seem to slowly mirror Japan’s economy.
The US, Japan and Europe have severe structural economic problems. These structural problems will NOT be solved in the next few years. We are in a deflationary world.
Yes real estate in some cities like NYC, SF, London, Sidney and Vancouver are crazy bubbles. But for individually unique reasons these are one offs. Central banks will let these go bust and at sometime these home prices will start going down.
I see the US, Japan and ECB keeping rates at zirp.
If deflation hits the US equity markets the Fed will purchase ETFs, same as Japan and the ECB. A central banks charter is to keep bond and equity markets stable. Why? Pension funds, insurance funds and the banking system require stable markets. If these crash the nations economy goes bust
I know this drives dooms day folks crazy but central banks are required to not see market crashes happen. Don’t fight central banks, you will always lose in some kind of way.
I predict no rate hikes and the Fed start buying ETFs within 3 years. Easiest way to bail out underfunded state and city retirement pensions and ameliorate some structural ailments.
So you would recommend at this point to not buy housing in NYC, right – do you see prices coming down a little there? I am sitting on large cash in savings, wondering whether to buy or simply invest…
As an investor I’m now just over 75% cash. The second (OK the minute) I sense “Here comes da Crash. Here comes da crash” (apologies to Laugh-In – just gave away a bit about my age there didn’t I) The 25% (ish) I’ve in the market will be moved to a selection of 7 (or so) inverse ETF’s I’ve been following religiously. They should make the ride down a not too uncomfortable journey.
As for the remaining 75%, that powder will be dry. When the Flood has receded – the doves have come out – and opportunity begins to show multiples that tantalize not mortify – I’ll be back! (apologies this time to my good friend the Terminator)…
Now, if only the HFTers don’t make their, at the speed of light move, the rare time during a trading day I’m on the toilet – Sh*t, I’d hate to miss the party – but – stranger things have happened…
Did you run the numbers on how that would have worked out after the Nikkei crashed?
If we are truly entering a long deflationary period, that strategy won’t work – it depends on a genuine recovery and expansion.
Regards,
Cooter
The Fed has really painted itself into a corner. Well, the Bernanke Fed did the painting, and Mrs. Yellen and her minions are left holding the mop and bucket.
The trouble is that when the Fed raises rates most major asset classes – stocks, bonds, real estate, art – are likely to swoon. Those asset classes are all major bubbles, and interest rate hikes are the pin that will prick those bubbles.
Leverage is great on the way up, but it’s a killer on the way down. Corporate earnings will plunge if corporations are forced to refinance all their stock buyback debt at higher rates. At the margin, people buy house payments, and that $1,500 a month mortgage payment will buy a lot less house at a 6% rate than a 4% rate. And nobody will buy expensive art in a southbound market.
Furthermore, there is the little matter of the banks’ $550+ trillion derivatives bubble. It’s entirely possible that as little as a 50 basis point hike could sink some of the major banks.
Now, let’s add in the prospect of a US recession and it may be that the perfect storm is building. If so, the world’s central banks are going to be impotent in the face of that storm.
The fundamental problem for the US and the rest of the world is that, in all of world history, no country has ever successfully created long-term wealth and prosperity through the printing press.
And this time is NOT going to be different.
My old man is a masters of finance … used to be an auditor (I never, ever got to hear the good stories until I got about my age) … he could pencil fsck a grizzly bear out of a moose carcass … anyway, I was talking with him back when they picked Ol’ Yellin’ … this is our common interest these days … go look and find pictures from the couple months around that time.
The woman wore black. I mean, it was a very consistent dress theme … but eventually someone tapped her on the shoulder and she changed her dress. I made up my mind then she was the bag holder. She was dressed for a (dollar) funeral.
Banking is a man’s game (according to the string pullers) and they stuck a lady with the bag because that is how shallow they really are. Par for the course. You are spot on in that respect.
Hey wolf, if you sold a paper letter version, I would sub my old man for the right price. He refuses to get a PC. I cherry pick and print the good stuff and USPS it to him, but a monthly sub (with comments?) might be tempting depending on the price. He is complaining about his economist news letter tonight when I called before the wife and I went on a nice 2 hour walk in the Alaskan rain forest … getting thin and too liberal he says hehe.
Regards,
Cooter
The sting pullers will always put a woman in charge when the going gets bad.. and then put a man back in place when times are better. It’s what’s going on right now in the world. Just look around in every country, province, state and corporation that is doing badly, they put a woman there to get run over by the bus. Examples. US Fed, GM, province of Ontario, just to name a few. I’ve been saying Hillary will be up next for years now and i’d be extremely surprised if she didn’t get elected. It’s very shallow, but it’s how they work.
What’s that old saying by bankers.
There is no wrong or right
There is only Profit and Lose
There Is no truth
There are only ledgers.
First, I would like an assertion that we are in, or not in, a currency war.
Second, if we are (as I believe), then raising rates will strengthen the dollar, tank exports, blow up the financialization machine, and take some air out of asset bubbles.
The Fed can never lower rates. They ACT like they are going to, just like a cheating husband SWEARS he won’t tap the neighbors wife again. If they do, the consequences of many years (decades?) of bad decisions will finally come home to roost. Pension balance sheets will get destroyed. A bazillion corporate investments, designed to break even at low rates, will go underwater and the carnage is going to be epic. They aren’t buying back stock for a reason, that comes AFTER all the dumb investments with low rates of return.
Personally, I am desperately trying to get out of debt (almost there) because one day this will come around, but I don’t think they are going to choose it … I think it will be foisted on them.
Regards,
Cooter
I agree that, despite the central bankers apparent mastery of the universe, total control of anything is rare, if not impossible. The next day of reckoning will come and there are so many things that could go wrong, singly or in combination, I doubt anyone’s ability for prediction. A Black Swan event is likely. Or simply the hubris of the string pullers. Many of you have clearly identified the problems and the mechanisms that have created them. But it may be as simple as” the more there is to lose, the greater the panic.” This, despite all of the arm waving, disinformation, and out-right lies being put out to misdirect regular folks. I may change my nom de commenting to Pawn. Perhaps because that is what I feel like in this chess game, or more likely my survival strategy post crash.
Boucher’s comment about not fighting the central banks smacks of fatalism. I can’t blame him if that is the case, but I find it interesting that he thinks that we are fighting the banks. I can’t speak to what the rest of you feel in your heart of hearts, but I for one have simply gotten out of their way. I to am trying to get back to a debt free position, and part of that solution is turning their own weapons against them. I will not forgive them for abusing me with usury when the sky was falling. I learned negotiating skills in the car biz way back when, and if I can’t obtain my objective I walk away and wait til they’re pleading to come back to the table. Or as one of my mentors responded to a colleague who was making fun of him for writing up so many $25 mini deals, “25 is 25, SCHMUCK!” If politics is the art of the possible, so is guerrilla war. Turn their own strength against them, jiu jitsu the clowns.
People on this site obviously stay well informed (beyond the main stream press propaganda). In my little world the following observations:
Wife works for Wells Fargo. They just announced a 5 year ‘initiative’ to ‘become more efficient’. Corporate speak for job cuts. This on the tails of a number of job cuts across various departments. Two friends in 50’s out of work and poor prospects. Most of their money in their house.
Charlotte real estate market got back hot again but starting to fade. Overpriced spec houses and existing houses not selling. Apartments being built excessively; every developer and his brother in on this. Apparently the banks have been ‘sold’ (conned) into believing this is the next great thing. Actually what else can they make loans for??
City got hit with 22M budget deficit due to state politics jacking around their income stream. 22M out of 700M budget and threw them in a tizzy because they had every last dime spent. Slight raise in property tax coming even though they made it look like they scoured every department for cuts (they didn’t). Bottom line, no excess funds, no rainy day account. Wait till things really slow up!
Retired neighbors really struggling. Good people. We live in a modest ‘middle class’ (what’s that?) neighborhood that is trying to be yuppified, so house prices have climbed. But you can’t eat your house. No yield for savers; especially conservative savers.
Most everything turned upside down these days.
It’s not because of wall street, even though your right the whole system would crumble, its how bad the economy is looking that will keep the fed from raising rates.
Of course a recession could trigger selling and re-analyzing risk and be enough to push wall street over the edge anyhow, no reason for the Fed to raise rates, they could, but whole economy would sink faster.
Central banks don’t have the power people think they do. They cannot ‘raise’ rates, they can only take credit when they rise.
Likewise, they can never tell the truth, there would be bank runs. To a central banker, “everything is fine”, “there is no bubble”, “interest rates are appropriate”, “the central bank is always right” and ” the problems are contained”. Can you imagine what heck would break loose if Yellen was to come on TV and say, “there is a bubble in the stock/bond markets’?
Central banks can lower to some degree b/c they can lend like other banks: lending to the government by way of primary dealers sets a ceiling on short-term rates. However, the CBers cannot borrow like other banks, they cannot issue their own bonds. They can only sell what they have bought previously. The Fed borrows by taking deposits … the Fed has been accepting deposits since 2009! And paying interest on those deposits! The Fed is raising and lowering rates at the same time.
Shazaam!
Yellen has been trying to jawbone rates higher for almost a year without success. There is too much credit chasing the same limited ‘investments’. The real economy does not offer a return — it never has! Lending has been industry’s hidden subsidy, the cost of the subsidy to lenders was once manageable. Without real economic investment there is art, real estate and finance instruments (poker chips) as repositories for Wall Street dollars.
Guys, do you ever think where all this will end? An old bookkeeper once told me that whenever the economy starts contracting, the authorities will protect the profits of the rich by cutting some of the poor out of the economy. Now it seems they want to protect the profits of Wall Street by cutting out the entire middle class. Things cannot just keep going down hill like this without something happening. If the result is really screwing over the middle class then you are going to get an explosion. the government can pretty much kick around the poor all they want, they are used to it and have well developed survival mechanisms for dealing with their hard lives. The middle class are different. They try to be as good citizens as possible. When they get screwed over in response, they show a fury that cannot be matched. I wonder that the upper crust seems to have so little survival sense? Does being that greedy make you stupid or something?
Just because people tolerate a lot of pain for a long time does not mean they will tolerate it forever. The middle class in this country are the people who fought their way out of poverty and won. They do not come from the formally rich. Yes, the rich are stupid if they don’t see the future does not look good for them.
Be careful how you oppress people because you could be making them stronger.
Wolf performs a great service in his column, but it surprises me that he does not recognize the fact that the banks which own the Fed (and ditto for the other central banks) would like nothing more than to gather as many trillions more virtually interest-free as they can, despite periodic mumbling about the inevitability of a rate hike somewhere down the line.
The enormous prices paid for art have also sometimes been turned into enormous business depreciation expense deductions; recall the executive in Las Vegas who had Renoirs and Picassos hanging in his office and managed to put his elbow through one.
I agree with Jerry Bear about the middle class being a sleeping giant, in history this takes the form of backing the hard man after the collapse. These tend to be reactionary in nature, and depending on what ideas the country started out with. In France it was Napoleon, in England, Oliver Cromwell, Germany, Hitler, Russia the Bolsheviks and so on. The pendulum always eventually swings back from extremis. In England they actually chose to return to Monarchy. I am hoping a reactionary revolt in the US will swing us back in the direction of the Framers. If not it will be very ugly indeed.
Assuming the FED would never crash the market is a mistake, and it’s been made before by others.
In a private speech, Bernanke admitted that the FED was responsible for the 1929 crash.
He himself caused 2008 by “not bailing out Lehman.”
He could’ve done so with pocket change, but refused, then went on to hand out many times that much to other banks, while the market and economy crashed.
Essentially, everyone now trusts the FED. That will be very costly to them.
Everybody knows inaction by the fed exacerbated 1929.
That is why they acted after Lehman.
Lehman had to happen, true Darwinian market forces at work.
The result of QE has been to stave off the double dip, and suspend true Darwinian market forces.
The Fed may allow true market forces to reign when it feels its chosen few are strong enough to survive (Same reason Greece was bailed out by the EU twice, and they now no longer care if it goes under).
Or some global event beyond Fed control may force the situation.
The potential war developing over the “nine dash line of theft” in the “South china/Asian sea” could be that event, it could also solve/inflate away, a lot of economic issues for two of the biggest single economies on the planet.
China would be happy to have an opportunity to legislate its internal state and muni debt out of existence.
The fed may not be but the “US as A State” would be HAPPY to inflate its way out of debt.