Is A Bubble Forming In The Art Market?

Is A Bubble Forming In The Art Market?

As some hedge fund traders are labeling the stimulus-dependent stock market a “bubble,” could another bubble be forming in the fine art market?

“Best year ever” in art

In 2013 the art market had its best year ever, with indexes measuring art prices up nearly 15%.  “2013 was indeed the best year ever recorded in [art] auction history,” said Thierry Ehrmann, founder and CEO of “This splendid year was shored up by a globalised demand, particularly with buyers from Asia, the Middle East and Russia, who played a crucial role in the market’s fine performance, and displayed a voracious appetite for flagship artists of the 20th century, landing them in a spate of records.”

So why the talk of an art market bubble?

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China overtakes US in art auctions for first time in history

The world of art had been drastically changed by the emergence of a power that no player in the market could hitherto ignore: China, whose annual sales results “crushed those of the superpower America for the first time in history,” Ehrmann said. “In China and the US alike, sales of art works have never been so vigorous.” Ehrmann noted global annual sales was up by 13%, rising from $10.6 billion to $12 billion, and the global price index gained 15 points last year, making for an overall rise of 80% in 10 years.

Art market crashes after stocks

The art market has a history of crashing after stock market bubbles pop.  China, perhaps considered among the largest potential bubble economies, has made important strides in supporting the best year ever in art.  While this is not a definitive sign of a top, such speculative excess is notable.

Ehrmann asks the question: Are the escalating prices and the prestige sales arousing frenzied competition, where profit can climb by several millions in a few minutes, the symptom of a new speculative bubble?  His answer: No.

“Because the art market no longer depends on a handful of wealthy buyers whose withdrawal from the game would cause a general collapse, but is now nourished by a growing number of extremely rich buyers who have been won over to the high spheres of the art market for various reasons,” he said. “We are now seeing the emergence of new museums designed to make nations shine; private collectors rubber-stamping their pedigrees through the quality of their collections; investment funds which sometimes revise their choices after nurturing micro-bubbles and productive to-ings and froings over new names, and new billionaire buyers for whom the acquisition of a major work is simultaneously a personal adventure, a form of social enhancement and a prime investment.”

Art price index

In his defense, while art prices have risen and fallen, after the 2008 crash prices have generally stayed within trend line support, although statistical analysis of any art index can be even trickier than a hedge fund index due to a number of various study bias.

Best second half performance in history

Art best second half results in decade

With the art market coming off its best second half of the year in history, Ehrmann details the breakdown by category.  He notes that while the global price index for art posted a rise of 80% over the decade, more detailed indexes show that all media gained from this increase: prices for photography rose by 25% in ten years, 27% for paintings, 28% for sculpture, 38% for prints, and above all 185% for drawings: a spectacular leap largely due to the activity in mainland China. “The drastic economic changeover in genres is thus linked to the diversification of the cultural powers at play,” he notes.

Will the art market crash?  One might consider that if it did it would likely be a lagging crash rather than leading a stock market crash, as has happened in the past.

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)
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