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BUSINESS FIRST June\July 2012 www.businessfirstmagazine.co.uk


MAKING OFF SWAG


WITH THE


Joe Roseman on why recent record-breaking sales of Munch and Rothko signify the beginning of the Age of SWAG.


Two interesting headlines have hit the press over the last few weeks. Europe has once again lurched into economic crisis territory with equity markets falling sharply. At the same time, Edvard Munch’s Scream hit a new world record price of just under $120m at auction, swiftly followed by Mark Rothko’s Orange Red and Yellowfor $86m. At first blush, one might think it odd that


amidst the on-going catastrophe called EMU, where fears of sovereign default (and a consequent financial crisis) are back on the market’s agenda, the art world sails happily on with ever-new world record prices being paid for prestigious pieces of art.


Maybe that does seem odd. But it is not illogical and nor is it unusual. Academic research has shown that art prices are typically inversely related to the equity market during periods when equities are falling at their fastest. That makes art an excellent portfolio component. So what is the art market really telling us? Well, for one thing it is stating that investors are feeling far happier owning something physical rather than ephemeral. And financial returns have become ephemeral. Trust in government policy and central bank activity has been dealt such a body blow over the last 5-10 years that physical assets have become relatively much more attractive. Investors have lost faith in the policymakers.


Rothko's Orange Red and Yellow


It is also reflecting a logical reaction to the process of quantitative easing. Back in 1900, one US dollar would have bought just over two barrels of oil. Today, it would buy just 0.01 of a barrel, or under 2 litres. Today, an ounce of gold buys about 15 barrels of oil, which is what it has averaged over the last 100


years. Gold has held its purchasing power against oil whereas the printed dollar has lost virtually all its purchasing power. As central banks print more and more money, the need for investors to shift wealth into assets that protect against such debasement is crucial.


GOLD STANDARD


A return to a gold standard is something many serious economists are suggesting needs to happen in order to restore the credibility of both Western governments and central banks. Yet, regrettably, it seems that the only way that such a policy framework will ever evolve is in the aftermath of a crisis that is so catastrophic in nature that the entire capitalist system is shaken to its core and re-thought.


Such a crisis is not impossible to imagine. Across the OECD economies, government debt levels of over 100% of GDP are now very common. Academic research has shown that in such circumstances, generating economic growth becomes extremely hard. The demographics of the OECD bloc are also at a crucial inflection point where the number of retirees is rising very rapidly, making growth and budget deficit reduction even more difficult. Furthermore, peak oil and the


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