New Chinese and Russian Billionairs Needed to Sustain Record Prices for Art

Forbes has an interesting article with comments from Doubline Capital's Jeffrey Gundlach on the sustainability of the upper end of the art market. Gundlach tells Forbes it is sustainable so long as Russia and China are producing new billionaires who need to transfer wealth from those economies.

The rest of the post is more about Gundlach's past and thoughts on the future of the financial markets and his love of collecting contemporary art.  But the insight on the art market is interesting.

Forbes reports

Doubline Capital’s Jeffrey Gundlach, the new ‘Bond King,’ and an avid collector of modern and contemporary art from the likes of Piet Mondrian, Jasper Johns and Andy Warhol said he believes the record $160 million price Pablo Picasso’s 1955 Les Femmes d’Alger fetched at a Christie’s auction on Monday evening is sustainable “as long as the world continues to mint new billionaires in Russia and China who can’t get their money out of there fast enough.”

Gundlach’s comments, made on a Tuesday evening call with Doubline investors, indicate he sees no slowing at the high end of the art market as long as new emerging market wealth is being created and in need of a safe store of value.

Monday’s record breaking sale price – $179 million once fees are counted - beat previous record-holder, Francis Bacon’s triptych titled Three Studies of Lucian Freud which sold for $142.4 million at a 2013 auction. Alberto Giacometti’s L’Homme Au Doigot sold at the Christie’s auction on Monday for $140 million, while Edvard Munch’s Scream set off the record pace of the contemporary art market when it sold for $120 million in 2012, Forbes’ Agustino Fontevecchia reported.

Normally known for bold and contrarian calls in the bond market, Gundlach said rising art prices reflect a growing number of billionaires in Russia and China who are looking for a way to park money in more stable jurisdictions outside of their local markets. He equated high end pieces of art to Manhattan town-homes, another fast rising market fueled by offshore money.

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For Gundlach, however, modern and contemporary art is a true passion. About his growing collection, Forbes Life reported in December:

As a boy growing up in Buffalo, New York, in the 1960s, Gundlach was quite literally dragged into an appreciation for art by his mother, who was always taking him to museums and galleries. After moving to Los Angeles with dreams of becoming a rock star following college, he wound up as a successful bond trader and began to collect American landscape artists such as William Wendt and Guy Rose. “I needed something to put on the walls that was better than a poster. I liked the California art, pretty pictures, seascapes, mountainscapes, I bought a lot of them,” he says, admitting to acquiring at least 50 works by the early 2000s. “I thought modern art, abstract art and nonrepresentational art was the biggest scam going.

Then, in May 2002, while on a business trip to London, Gundlach made an afternoon visit to the Tate and had what he considers his art awakening when he went to see “Carnation, Lily, Lily Rose” by John Singer Sargent. “He is arguably the greatest portrait painter in American history. The quality of the paint in the light is just beautiful,” says Gundlach, noting that Sargent’s perfectionism would often cause him to halt tennis matches when the light was ideal, just so he could paint.

“I started wandering around [the Tate], and I kind of got lost, and I found myself in the modern area thinking, ‘What is all this junk?’ I see in this corridor that this artsy-looking guy is sketching, and I wonder what he thinks is so interesting to sketch. So I walk over, and he is sketching this Mondrian (“Composition with Yellow, Blue and Red,” 1937-1942), and I look, and I think this is the greatest thing I have ever seen. I instantly got it.

Indeed ever since that 2002 trip, Gundlach has been on a modern and contemporary art tear, amassing a collection that includes the works of not only Mondrian, Rauschenberg and Johns but also Franz Kline, Cy Twombly, Andy Warhol, Richard Diebenkorn, Philip Guston, Willem de Kooning and Joseph Cornell, among others. He also has quite a few “specific objects” by minimalist Donald Judd, including examples of his “progressions” and “stacks,” which greet guests as they enter the home. In all, Gundlach has about 40 paintings and sculptures at his Los Angeles property, ranging from Warhol’s iconic 1962 “Lemon Marilyn” (for which he paid an estimated $28 million in 2007) and “Orange Car Crash” in his den to Marlene Dumas’ “Die Baba,” scowling at visitors in his living room.

Gundlach isn’t alone in envisaging a steady drip of record prices for scare assets that are open to offshore money. Pershing Square Capital Management’s William Ackman recently spent upwards of $90 million on a 13,500 square foot Midtown condo overlooking Central Park on the premise he will be able to flip the real estate at a profit. So far, Ackman believes he’s in-the-money on the condo flip when looking at recent selling prices on a square foot basis.

During his investor call, Gundlach spent much of his time reaffirming some of his counter-intuitive views. The Federal Reserve, Gundlach said, won’t raise short term interest rates in 2015 out of an abundance of caution. He also sought to downplay recent headlines about Doubline Capital’s strategy. Yes the bond firm is buying Puerto Rico general obligation bonds, but they currently amount to about 1% of assets. Gundlach believes that Puerto Rico will likely meet or come close to meeting the face value of its GO bonds and said he’s likely to add to a relatively small exposure.

Gundlach also said that, contrary to media reports, he’s not predicting a disaster in the high yield bond market in 2015 or 2016.

Source: Forbes