The Orange Balloon Dog Read online

  THE ORANGE

  BALLOON DOG

  Bubbles, Turmoil and Avarice in the Contemporary Art Market

  Don Thompson

  CONTENTS

  ART, PAY, LOVE Chapter 1 High School with Money

  IS VALUE THE LAST PADDLE RAISED? Chapter 2 The Orange Balloon Dog

  Chapter 3 Three Studies of Lucian Freud

  Chapter 4 $26 Million for Nine Words

  Chapter 5 Jeff Koons and Popeye

  Chapter 6 Ludwig’s Play-Doh

  THE ART OF MORE Chapter 7 Sotheby’s and Third Point

  Chapter 8 Foraging for Collectors and Consignors

  Chapter 9 Lisson Goes to New York

  Chapter 10 The Art Adviser

  TEARS IN THE MARKET FABRIC Chapter 11 Perelman v. Gagosian

  Chapter 12 The Knoedler Fakes

  Chapter 13 Government-Plundered Art

  Chapter 14 Freeports and Tax Ploys

  Chapter 15 The Uneasy Marriage of Art + Fashion

  Chapter 16 Art Market Regulation

  AN UBER FUTURE Chapter 17 Art in an Uber World

  THE NEW WORLD OF MUSEUMS Chapter 18 Not Your Father’s Museum

  Chapter 19 Museum Exhibitions

  Chapter 20 Private Museums

  Chapter 21 The Most Influential Buyer

  THE BUBBLE Chapter 22 Gaming the Art Bubble

  Postscript

  Endnotes

  More Reading

  Index

  ART, PAY, LOVE

  CHAPTER ONE

  HIGH SCHOOL WITH MONEY

  “The art world used to be a community, but now it’s an industry.”

  —Jeffrey Deitch, art dealer1

  “To admire art is human. To acquire it is divine.”

  —Christie’s full-page advertisement in the Styles section of the Sunday New York Times and the Art section of the Financial Times of London on May 24, 2015

  DEMAND AND PRICES AT THE HIGH END OF TODAY’S CONTEMPORARY ART market are driven by the ultra-rich, national wealth funds, agents and untaxed transactions. The idea that the most newsworthy aspect of contemporary art is the price paid for it is now widely accepted.

  My two previous books on the contemporary art market, The $12 Million Stuffed Shark (2009) and The Supermodel and the Brillo Box (2014), were written on the premise that the market for contemporary art involved informed buyers and sellers who interacted to determine a rational price for a work of art. In the early stages of writing this book, that premise was shaken.

  One challenge came in November 2014, at the evening and day sale art auctions at Christie’s, Sotheby’s and Phillips in New York which generated $1.66 billion in four days. Christie’s alone registered a record-breaking $853 million. The combined total represented $6 million in sales each auction minute. Following that auction cycle, specialists said they were confident the next year or two would produce a billion-dollar auction evening.

  Two Andy Warhol silkscreens with ink, Triple Elvis [Ferus Type] (1963) and Four Marlons (1966), sold at Christie’s as lots 9 and 10. Each carried a pre-auction estimate of $60 million. Elvis shows singer Elvis Presley as a gun-toting cowboy in a publicity still for the 20th Century Fox movie Flaming Star. It had three bidders and brought $81.9 million. Marlons is a silkscreen reproducing a still from the Columbia Pictures movie The Wild One. It portrays actor Marlon Brando wearing a leather jacket and cap. It brought $69.6 million. Both were consigned by the German state-owned casino WestSpiel, where they had hung for years in a members’ lounge, uncommented on. They were sold to provide equity funding against which the Westphalian state would provide financing for a new casino in Cologne.

  It is never clear whether audience applause following a record auction lot sale acknowledges the auctioneer’s efforts or the bidder’s determination, or represents appreciation for being witness to a record being set. The Elvis sale brought sustained applause. Marlons brought none, perhaps because it was the second offered and did not equal the hammer price for Elvis.

  Another challenge to my premise of market rationality came two weeks later while I was browsing at a booth at Art Basel Miami. I had a ten-minute discussion with a New York couple on the merits of a small Warhol portrait on exhibit, offered at $17.5 million. On the spur of the moment they decided to acquire. “It has great colours,” the woman gushed, “and it is Christmas. Let’s buy it.”

  At the time there were crises outside the art world. One was the West African Ebola epidemic. I couldn’t help thinking, as the couple went to negotiate their Warhol purchase-because-they-could, of the dent they could make in the epidemic with a $17.5-million donation for medical technicians and supplies. Or of how much larger a dent WestSpiel could create with its $151.5 million from the two Warhol silkscreens.

  The reality, as I hope emerges from the examples that follow, is that prices for high-end contemporary art bear little plausible relationship to any concept of present or future value. Some sellers get to preen, some buyers get to display their new toys and play a grown-up version of “Mine is much bigger than yours.” Others get to store their art in foreign duty-free warehouses in the hope of future price appreciation. The New York Times gets to publish half-page stories that treat contemporary art sale prices the way the newspaper might report an initial public offering for a new photo-sharing app.

  Buyers, mostly male and mostly from the financial world, become case studies for the income inequality discussed in Thomas Piketty’s 2014 book Capital in the Twenty-First Century, which was first published in French in 2013. Piketty argues that the rich—notably the world’s 2,200 billionaires—will continue to get richer as a result of free-market capitalism. The reason, he says, is that returns on invested capital are greater than growth in incomes or rates of economic growth. There is another reason, which Piketty doesn’t mention. Digital technology businesses tend to have “winner-take-almost-all” dynamics that produce a huge gap between the successful and the almost successful. Think of Facebook or Uber. The digital age produces greater wealth inequality.

  There are certainly more wealthy individuals prepared to make bids of $100 million and up at auctions. Piketty calculates that by 2045, the richest one-tenth of 1 percent of the population will own half the planet’s wealth. They may also own the same percentage of the great art left in private hands. In the interim much of that great art appears at top art fairs, where vips who can afford the art get free admission. Those who can’t afford the art pay high ticket prices.

  In November 2014, hedge fund operator Steven Cohen was the only bidder at Sotheby’s New York—at $101 million—for Alberto Giacometti’s sculpture Chariot (1950). This is a 43/4-foot-tall (1.45-metre) bronze stick-thin figure of a goddess atop a chariot with large wheels (see photo insert). Sotheby’s had estimated Chariot as high as $115 million. It was the second most expensive sculpture ever sold at auction, but the press reported the price as a failure for the auction house rather than as a miscalculation in the estimate.

  In November 2015, Shanghai resident Liu Yiqian spent $170 million at Christie’s New York for Nu couché (1917–18), a striking red Modigliani painting of a reclining nude model (see photo insert). In February 2016, Chicago hedge fund operator Ken Griffin paid the David Geffen Foundation $500 million for two Abstract Impressionist paintings, Willem de Kooning’s Interchange (1955) and Jackson Pollock’s Number 17A (1948).

  Have you heard of Adrian Ghenie? He is a promising Romanian artist, still under forty when his 2008 painting Nickelodeon (see photo insert) was offered at Christie’s London in October 2016, with an estimate of £1 million to £1.5 million ($1.2 million to $1.9 million). The name apparently refers to a small movie theatre. Nickelodeon is large, 73/4 × 131/2 feet (2.36 × 4.14 metres). It sold for £7
.2 million ($9 million), more than four times its high estimate. Los Angeles dealer Stefan Simchowitz described Ghenie extravagantly, as “positioned as the next [Francis] Bacon.”2 There were seven bidders for Nickelodeon; the final two were each wealthy, each unwilling to back down from a challenge. The successful bidder was a European collector bidding on the phone.

  The 1-percenters who spend fortunes on the works of artists such as Giacometti and Warhol are not the problem, at least not to the long-term health of the art market. A more serious problem is the prices being paid for mid-level artists. Of even greater concern are prices paid for emerging artists. What can you say about several million-dollar sales, in a single fall 2014 auction, for work by artists who had never had solo shows with a mainstream dealer? It has become ever more difficult for artists to receive recognition unless their work is expensive. This is the art of more.

  Some newly branded artists are rewarded like football stars. Consider Oscar Murillo, a young, lesser-known artist said to sometimes paint with a broomstick. One of his works, Untitled (Drawings off the wall) (2011) was purchased the year of its creation for $7,000. It resold at Phillips New York in 2014 for $401,000. The profit represented a return of about 5,600 percent.

  One collector on the waiting list for a Murillo painting was given a delivery date for a sight-unseen work, agreed to the price and immediately resold the right to the painting for a reported 75-percent profit—the sale agreement listing only the artist, the medium, size and approximate delivery date. One version of the story has the second purchaser immediately reselling for a similar profit.

  In 2016 the high end of the dealer segment was expanding. Larry Gagosian had fourteen gallery spaces in eight countries. David Zwirner, Pace and Marian Goodman had opened spaces in London. London gallery Lisson opened in New York. Each occupied some of the most expensive real estate on earth. The sales totals required to break even in these locations were described as improbable. The percentage of retail space devoted to art galleries in the city centres of New York, London and Paris was the highest in history.

  Being a high-end dealer, or an artist represented by one, is perceived as entree to a life of privilege. Über dealers travel on private jets and vacation on yachts. Major art auctions and art fairs get business-section coverage in the New York Times. One characteristic of the contemporary art market since the financial crash of 2008 is the pursuit of iconic artwork, trophy hunting at the highest level. Each successive auction season and major art fair sees a widening of the price chasm between trophy works and the rest. The use of the term iconic in discussing contemporary art is itself interesting. The word originally referred to religious artifacts. It is now commonly applied to Warhol silkscreens, Jean-Michel Basquiat graffiti paintings and Christopher Wool word paintings.

  There are not that many truly iconic works. Other art becomes what the auction specialist or the dealer or art adviser says it is. One market research firm, ArtTactic, sells access to a “top twenty” list of artists, with the listing based not on a measure of quality but rather on an analysis of market price momentum. Another firm, ArtRank, uses an algorithm to categorize emerging artists: “Buy now,” “Sell now” and “Liquidate” (unload at any price). Its premium service is limited to ten clients, each of whom pays $3,500 a quarter. In 2014, Los Angeles artist Parker Ito saw a painting in his 2012 Wet Paint series reselling for £56,000 ($67,000). It had initially sold at $1,800. ArtRank then listed Ito as “Liquidate.” His prices immediately dropped. Three months later, ArtRank reclassified him as “Buy.” As in any market, the price volatility attracts even more speculators.

  ArtRank has its dedicated followers. Los Angeles collector Rolando Jimenez called it “an essential tool if you want to evaluate your emerging art-collecting ventures as a serious investment.”3 New York art critic Jerry Saltz refers to some of the painters included in its listings as producing work for collectors who want expensive visual comfort food.

  Price bubbles occur when prices of securities or other assets rise faster than inflation or incomes and exceed the valuation justified by so-called fundamentals. The meaning of fundamental is more straightforward for financial assets than in the art market. Is the reputation of the artist a fundamental? Is an edition of a sculpture limited to five a fundamental? What additional value accrues to a work if it is promoted as enabling the new owner to join an elite set of collectors? Is reasonable value just whatever a bidder is prepared to offer?

  The high-end contemporary art world—dealers, agents and auction houses—is far more complex and sophisticated than is generally understood. After publication of my two previous art market books I was often asked for an explanation of some of these phenomena—the what, how and why. As an economist and academic I am supposed to know. Some phenomena I have come to understand; others still baffle me.

  The field of behavioural economics offers some insights, which I have included throughout the book. Some are related to irrationalities in decision making. Other explanations involve efforts to nudge individual behaviour when marketing art. A nudge is influencing a choice by altering individuals’ behaviour in a predictable way, but without changing their economic incentives. Putting fruit at eye level qualifies as a nudge. Banning junk food does not.

  My favourite nudge example does not involve art, and may actually be an oft-repeated urban fable. It concerns Hurricane Sandy, which struck the New York City area in 2012. Hours before the storm’s peak, police went door to door on Staten Island—an area just above sea level—warning residents they had limited time to leave. Many had decided to stay at home and defend against looters. The option of forcible evacuation was considered. Instead, police officers offered reluctant residents permanent-ink markers to write their Social Security numbers on their arms, for ease of identifying their bodies after the storm. Many thought for a moment, returned the marker and decided to evacuate.

  In the world of art auctions, an obvious nudge is when an auction house lists the previous owners of a work on offer, the books that have illustrated the work and the museum shows that have included it. A more subtle nudge comes when auction rooms are repainted to provide the right setting for the material on offer. For the November 2012 Sotheby’s Impressionist sale the salesroom was a flat off-white, intended to provide a neutral background to the art. Immediately after the sale the room was repainted a dark, semi-gloss blue, with the same colour slipcovers for the chairs. This was thought to provide a more appropriate mood for contemporary art.

  Other auctions use a blue motif for contemporary sales, for openness, and chocolate brown for Old Masters, representing timelessness and earth. A moderately disharmonious colour is used for highly abstract work, to elicit feelings of creativity. This is based on the intuition of auction specialists (who are reported to all be women). The research literature on colour indicates how different hues may affect social interactions, but not how colours influence the evaluation of objects. Most cultures assign meaning to colours, but different cultures assign different meanings. With the diverse cultural mix of collectors in an auction room, it’s hard to understand how one could choose the perfect colour to enhance sales.

  An even less obvious nudge than colour is the quote at the beginning of this chapter: “To admire art is human. To acquire it is divine.” This was the headline for a May 2015 Christie’s full-page advertisement that ran in the Sunday New York Times at a cost of $114,000 (at publishers’ listed rates) and in the Financial Times of London at about 60 percent of the NYT rate. Under the quote and in much smaller print, the ad said: “You may have heard about our recent record breaking week of sales in New York. This was an unprecedented way of bringing together some of the world’s most celebrated work.”

  The headline was not intended to elicit thoughts of art, but rather of luxury. The goal of Christie’s (and Sotheby’s) advertising is not to announce the evening auctions. Any likely bidder is aware of the date and location, and has been approached by the auction house and received a catalogue. The i
ntention of the ad is to reassure those with the resources to bid at a Christie’s evening auction of the status and exclusiveness of the event. It reassures the bidder of what an acquisition from Christie’s represents, compared to simply purchasing an expensive object.

  Luxury has two value components: luxury for oneself and luxury perceived by others as unattainable. To sustain the latter perception requires that there must be many more people familiar with what the Christie’s brand represents than could possibly afford to bid there. Think of Bonhams auction house, a purveyor of goods that are expensive but not considered as luxury. Few say, “Please come to dinner, I would like to show you my new painting which I purchased at Bonhams.”

  The next chapters discuss works sold at two extraordinary auctions, at Christie’s in fall 2013 and at Sotheby’s in spring 2014. Later chapters discuss art values, “the art of more,” disruptions in the art market, the world of museums and how to game the art bubble.

  When you read in the pages that follow about frantic bidding and record prices, keep in mind that in a rational world where there was agreement on the value of art, there would be less speculation. There should be an economic term for this “agreement” phenomenon; behavioural economists just refer to it as the Groucho theorem. Groucho Marx was not an economist; he was an American comedian, considered one of the funniest performers of his time. He died in 1977 at the age of eighty-six—and had his last performance a week before his death. The Groucho theorem is his declaration that he would never join any club with standards so low that it would accept him as a member.

  The behavioural economics version of this would have two wealthy art speculators having an early dinner together prior to a Sotheby’s evening auction. One, Michael, mentions that he plans to purchase a Franz West sculpture offered that evening for $4 million. The second, Neil, admits that he is the consignor of the West, and that $4 million is much more than the auction specialist suggested as a reserve price.