One of my pet distinctions is the one between a bubble and a speculative bubble. All speculative bubbles are bubbles, but not all bubbles are speculative. In the markets, the late-90s dot-com bubble was speculative: it was based on the greater-fool theory that even if you were overpaying today, you'd be able to sell to an ever greater fool tomorrow, and make lots of money. A speculative bubble is fueled by flippers - people who don't much care for or about what they're buying, but who reckon that whatever it is, they'll be able to sell it at a nice profit. So the Miami condo bubble of the mid-00s was speculative, while the current Miami real-estate market, which is nearly as hot, isn't.
Non-speculative bubbles are often fueled by FOMO: you spend more than you can really afford on an apartment today, because you have a very rational fear that if you wait any longer, you'll never be able to afford a place to live, no matter how much you stretch. And one way of ensuring that speculative bubbles never take place is to put lots of friction in the system: no one will ever buy-to-flip a grand NYC co-op apartment, for instance, because New York's co-op boards are very good at preventing such activity, and making life miserable for would-be flippers.
This is one reason why I've long said that even if there is a bubble in the contemporary-art world (and I think there is), it's not a speculative bubble. The people spending millions of dollars on trophy art aren't buying to flip; the people selling aren't selling to make a fast buck. Rather, they're selling because of one of the "three Ds": death, divorce, debt. The exceptions to this rule are dealers, of course, along with a small number of collectors who are so active they start becoming quasi-dealers in their own right. If you're well connected in the art world and willing to make an opportunistic purchase, then you'll probably be willing to make an opportunistic sale as well, when the price is right.
But right now, I'm beginning to see indications that things are changing: if you look at this month's big contemporary art auctions, you'll see quite a lot of art being flipped, including art being flipped by one of the biggest collectors of them all, Stevie Cohen. According to Carol Vogel and Peter Lattman in the NYT, Cohen is selling a Gerhard Richter which he bought from the Pace Gallery last year, along with "about a dozen other pieces, mostly at Sotheby's (BID) , that he acquired in recent years at art fairs and auctions".
On top of Cohen's works, Vogel has found other pieces being flipped this month, including Three Studies of Lucian Freud, by Francis Bacon, which "was purchased by a consortium from a private collector in Italy within the past 12 months"; and Apocalypse Now, by Christopher Wool, which was sold by David Ganek very recently. Between them, the Richter, the Bacon, and the Wool are going to account for a substantial percentage of the total amount of money spent at auction this season, which means that auction totals are increasingly comprised of short-term trades, as opposed to sales from individuals and families who have owned the objects for many years.
(Incidentally, talking of auction totals, Vogel mentions "Christie's record $495 million postwar and contemporary art auction just six months ago" at the top of her piece. In nominal dollars, that auction was indeed the largest ever. But the NYT now only uses the word "record" for real records, not nominal ones - and Christie's November 2006 Impressionist and modern sale raised $570 million in today's money.)
It's rare for people in the art world to buy a piece and then immediately consign it to auction. It's common for works of art to be sold in the primary market for well below their auction value - but precisely because it is so common, there are lots of rules and protocols which mitigate against such things happening. When work is being sold at below-market rates, there's naturally a lot of demand for it, which means that dealers can pick exactly which buyers they want. And if any buyer dares to flip such a work, he knows he'll be blacklisted from then on in. Instead, if a buyer wants to sell a work he bought from a gallery, he always asks the gallery first.
As for work on the secondary market, well, dealers do occasionally find themselves a bargain. But they normally take their time and try to find a buyer themselves, because if they consign to auction, the auction house will take about 12% of the final sale price, in the form of buyer's commission. If you're a dealer selling a painting, you're much better off finding that buyer yourself, and persuading him to pay the full amount to you directly. In order for flipping at auction to make sense, the buyers at auction have to be rich naifs who are hard to find through normal channels.
So what does all this very public flipping mean for the contemporary art market? Four possibilities present themselves.
Firstly, galleries don't have faith in their own prices. If Cohen is auctioning off works he bought from galleries, it's fair to assume that he gave all of those galleries the opportunity to buy back the pieces first - and that they declined. On top of that, one of the notable things about Cohen's Richter is that it is coming to auction with an estimate of $15 million to $20 million, which is below the $20 million he's reported to have paid for it in 2012. Cohen is a trader, who marks to market: of all people, he's going to worry the least about taking a loss. But he also wouldn't sell now if he thought there was serious potential for price appreciation.
Secondly, we might be seeing the smart money rushing to the exits. They could make more money selling privately - but that takes time, and maybe they don't think that they have time.
Thirdly, it's possible that the auction houses are doing something which Dan Loeb accused Sotheby's of in his recent letter:
Based on discussions with market participants, it is our understanding that it has been Sotheby's who has most aggressively competed on margin, often by rebating all of the seller's commission and, in certain instances, much of the buyer's premium to consignors of contested works.
While it's relatively commonplace for auction houses to charge big sellers no commission on their works, it's very uncommon for the auction house to share any of the buyer's premium with the seller. But if that's happening, that might explain why the sellers are suddenly more willing to use the auction houses as a place to sell their works.
Finally, the quality of the buyers at auction might be weakening, with art-world types being replaced by - for lack of a better word - rich chumps. Auction houses, with their global reach and transparent sale system - the highest bidder always wins - are naturally better suited than art dealers to find collectors who are new to the scene and looking for trophies. And if dealers want to sell to such individuals, they might be forced to go the auction route.
What's interesting about all four of these possibilities is that they all suggest the same thing - that the contemporary-art bubble is entering its final stages. When a bubble becomes speculative, it becomes much more dangerous, and fragile, and short-lived. This bubble is a robust one: it has been going for many years, gathering momentum all the way. Even the financial crisis barely made it stop for a breather. But if we see another record-breaking season in New York this week, don't take that as a bullish sign. It could just be that we're entering a period of feverish selling.