Bloomberg reports that next week, at Christie's in New York, the all-time record for a contemporary art auction will in all probability be broken. Calder, Rothko, Warhol, Lucian Freud and Cornell will change hands for more than half a billion dollars. The masters of the last half-century are fast becoming the Bitcoins of America's nouveau riche, a store of value and a highly liquid means of payment.
The art sellers are often the heirs of industrial empires, the buyers are hedge fund managers or east coast private equity managers. The other nouveau riche, those of Silicon Valley, are more secluded and prefer to treat themselves to science fiction toys such as companies for the extraction of minerals from asteroids or oceanic platforms with the ambition of becoming independent republics with zero taxation. Alternative managers, in addition to buying paintings and sculptures personally, are increasingly buying urban condominiums and suburban houses for their customers. Here the good deal is double, because on the one hand there is the revaluation of prices (we are talking about America, of course) and on the other there is a high yield on rents, infinitely more attractive than Treasuries and more inviting than corporate bonds.
It's fascinating to consider how the world has changed. Sophisticated finance, which in the common sense of Occupy Wall Street is experienced as destructive and parasitic, has spectacularly abandoned in a few years the engineering of practically incomprehensible tools (the CDO squared, remember?), high risk and high leverage and it moved on to cash purchases of the zero grade of the investment, the leased brick. Landlords, or almost. Mortgages are dead, the banks don't do them anymore. Their law offices are engaged in a huge litigation with attorneys of every order and degree over mortgages from the past decade. Their financial directors have to find the resources to pay the endless fines and billions of millions for errors in the carefree forms that allowed even a penniless person to buy a house in debt. Today banks hate real estate and their dream, which will soon come true, is to go back to lending to businesses, as they once did. Mortgages have basically been nationalized and are being paid out by federal agencies, Fannie Mae and Freddie Mac, who also make a lot of money from it.
However, mortgages are much less than they used to be and that's why it's back in fashion to rent. Alternative finance seizes this opportunity and creates an offer, buying houses and cottages with cash and immediately filling them with new tenants. Perfectly amoral (not immoral), vulture finance becomes lamb finance and fulfills a social function because this is where the dollars are made today. Amoral (not immoral) too, the laws of the market, however, remain in force. Buyer hedge funds drive up the price of houses and displace traditional demand, that of those who buy to live. Let's not talk about the middle-lower classes, be careful, because these, no longer having access to mortgages, cannot buy anyway. We are talking about the middle classes in the European sense (the American middle class is our working class) who, at these rising prices, no longer consider buying a house cheaper. The result is that real estate has shrunk structurally. Furthermore, from here on out, the rise in the price of American houses will slow down.
When Europeans think of real estate in the United States, they think of Midtown Manhattan, which however has its own story and is not representative of the national trend. The halved real estate eats up half a point of GDP growth and a million jobs. It is a thorn in the side of the Fed, which has to keep short-term rates at zero for longer than normally permitted and which is worried by the hypothesis of an increase in long-term rates, which are decisive in determining mortgage rates. In a context of an initial recovery of productive investments by businesses and a reawakening of consumption, slow-moving real estate moderates the strength of the cyclical acceleration expected for this year. This is a good thing for the stock market because it produces that Goldilocks scenario, neither too hot nor too cold, which allows rates to remain exceptionally low and equities to continue to rise inertially. John Templeton said that it is never wise to buy when the sky is completely clear. Today, bonds are strong and stable, and Wall Street is at an all-time high. Greece sells its bonds like bread and Mediterranean Europe is sending signs of recovery which, in the Spanish case, are not even too timid.
The sky, however, is not completely clear. Japan is a question mark, China is close to a re-acceleration which does not promise to be exuberant, Brazil is semi-stagnant and Russia risks recession. The European recovery, for its part, is two-thirds cyclical and only one-third structural, especially for Italy and France. These gray areas, paradoxically, are interpreted positively today because they confirm the Goldilocks-like scenario that the markets like so much. If everything, absolutely everything, went well, the central banks would no longer have an alibi and would be forced to raise rates, ruining the party for bonds and, at least for a period, also for equities. So the party is in full swing and we don't see major contraindications to enjoying it while remaining invested.
However, being comfortable at a party does not necessarily mean starting to drink or start talking too loudly. Greed, especially when many assets are at all-time highs, is never a good adviser. The SP 500 at 1900 (by now we are very close) deserves some tactical lightening and an at least temporary return to neutrality, above all in consideration of what is happening on the eastern front in the Ukrainian border march. Conflicts end when there is a winner or when the two sides are fed up with fighting each other. In Ukraine, however, we are in the initial phase, the one in which provoking the opponent is tantalizing and exciting. The Kiev government is populated by radicals and victims of the previous pro-Russian government. Some of them have been in jail and are pursuing revenge. Putin, on the other hand, is at the peak of popularity at home and cannot withdraw from the fray. Obama, for his part, cannot afford to appear weak in an election year in which the Senate is at risk for the Democrats. The third international agreement on Ukraine is also failing and positions on the ground are hardening. The entire global geopolitical order has entered a fluid phase in which Russia is drawing closer to China while Europe risks paying some not completely negligible price. The ECB is preparing to soften the possible blow, but cannot prevent it entirely. Have a good party, then, but staying sober and not straying too far from the television and the news.
Here is the site Il Rosso e il Nero
