馃攳
The Economics Of The Art Market: Why This Painting Isn't Worth $450 Million - YouTube
Channel: Economics Explained
[0]
in 2017 at a Christie's auction house in
[2]
New York a mysterious art buyer won this
[5]
painting after bidding a record-breaking
[9]
450 million dollars but this wasn't just
[12]
any piece of art this was the Salvator
[15]
Mundi a painting by the legendary
[17]
Leonardo da Vinci news of the staggering
[20]
purchase price sent shockwaves through
[22]
the entire art market which
[24]
interestingly enough has been a reliable
[26]
indicator of impending market bubbles
[28]
for decades 450 million dollars is
[32]
enough money to purchase an array of all
[35]
kinds of investments from 1% of General
[38]
Motors a small suburb of investment
[41]
properties or an archipelago in the
[43]
South Pacific all while still having
[45]
about 50 million dollars left over as
[47]
walking around money even better each of
[51]
these investments would generate income
[53]
allowing you to retire quite comfortably
[55]
from the yield generated from them a
[57]
painting on the other hand regardless of
[59]
whatever any art broker tells you is
[61]
just that a painting and although it may
[65]
look great over your fireplace it will
[67]
never bring in cash flow that's because
[69]
the only way to make money in the art
[71]
market is if someone is willing to buy
[73]
your artwork at a higher price than the
[75]
price you paid perhaps for some
[78]
emotional reason in essence it's the
[81]
epitome of the greater fool theory the
[84]
idea that some fool or buyer will
[87]
eventually come along and purchase your
[89]
artwork with the hope to eventually
[91]
resell it to yet another buyer at even a
[94]
higher price which is like a game of hot
[96]
potato for billionaires arguably this
[99]
isn't investing it's speculating because
[103]
any appreciation is held entirely within
[105]
the eyes of the beholder and when it
[107]
comes to the world's most expensive
[109]
painting the Salvator Mundi they'd
[112]
probably only be a few dozen people on
[114]
the planet with the ability to make such
[116]
a purchase therefore limiting the market
[118]
for prospective buyers so how is it that
[121]
this illiquid asset class reserved for
[124]
the elite has been able to command such
[126]
lofty valuations for let's face it
[128]
strokes of paint on a canvas what drives
[132]
the high-end art my
[133]
how can art be used to move money around
[136]
in creative ways to get around taxes and
[138]
perhaps above all why would anyone Park
[141]
so much money in a picture when there
[144]
are other asset classes that actually
[146]
generate cash like real estate rentals
[148]
or dividend paying stocks this video is
[151]
proudly brought to you by Squarespace
[153]
start your 14 day free trial to build a
[155]
beautiful website today while saving 10%
[157]
on your subscription by using the code
[159]
economics explained at checkout get
[161]
started now by going to Squarespace comm
[163]
slash economics explained so without
[165]
further ado let's explore the economics
[168]
of the art market investments are often
[174]
viewed through a black-and-white lens
[176]
you are either making money or you're
[178]
losing money there isn't any room for
[180]
gray that's as true for corporate
[182]
earnings as it is for the colorful art
[184]
market and despite the headlines of the
[186]
latest jaw-dropping art sales this
[188]
market isn't exclusively reserved for
[190]
the super-rich in fact the art market
[193]
has quite a range from prints that you
[195]
can buy online created by freelancers
[198]
and aspiring artists to higher-end
[200]
pieces that you can find at your local
[201]
art gallery like everything in the
[204]
universe the price of a painting is
[206]
ultimately the function of the same
[208]
supply and demand forces that all
[210]
products are subject to on the lower end
[212]
of the spectrum art provides a nice pop
[214]
of color to an otherwise dreary studio
[216]
apartment so people are happy to buy it
[219]
so long as they are willing to pay
[221]
enough to cover the cost of materials
[223]
and construction for the business
[224]
selling these items with a bit of profit
[225]
hey presto you got yourself a
[227]
transaction some might argue that these
[230]
sorts of decorations are not real art
[232]
but you know what most of it looks just
[235]
fine to me
[235]
we're not art critics here we are
[237]
economist and for the sake of describing
[240]
how the art market works these little
[242]
feature walls will look just fine as
[244]
things get slightly more rarefied though
[247]
the supply side of our equation is no
[250]
longer limited by how much it costs to
[251]
produce these items but rather how many
[254]
examples physically exist if we assume
[257]
that an original Picasso is inherently
[259]
more pleasing to the eye than a $20
[262]
print from Ikea
[263]
then people are going to want the
[265]
original Picasso now since there are
[268]
only a few hundred original Picasso's in
[270]
existence these pieces are going to be
[272]
allocated to the people with the means
[274]
to purchase them and those people will
[277]
only be able to purchase them from
[279]
people who already hold on to them which
[281]
is the foundation of a collector's item
[284]
collector's items are a really cool
[287]
economic anomaly when it comes to the
[289]
normal functions of supply and demand a
[292]
collector's item is normally defined as
[294]
any item that can no longer be produced
[296]
as a relatively limited supply and is
[299]
somewhat enticing to own because it
[301]
provides some material benefit rare
[303]
artwork ticks all of these boxes the
[307]
ability to produce new items and the
[309]
current supply is part of the reason why
[311]
people joke about artists works be more
[313]
valuable when they're dead you aren't
[316]
getting any more Velasquez or Goya's or
[318]
Rembrandt's so if you want one you've
[321]
got to hunt down what we have left here
[323]
on earth why these items become such an
[325]
anomaly though is because of the lesson
[327]
they show us in opportunity cost if a
[331]
wealthy family did hold on to an
[333]
original Picasso and was offered five
[335]
million dollars to purchase it they may
[338]
choose not to sell it
[339]
economic logic would then dictate that
[342]
this would mean that if there was
[343]
another similar Picasso for sale for
[345]
five million dollars the family would
[347]
choose to buy it in reality that's not
[351]
actually the case they may not have five
[353]
million dollars on hand they may not
[356]
want another Picasso or they just might
[358]
not be able to justify spending that
[360]
money on a painting opportunity cost
[363]
though would dictate that if you were
[364]
not willing to sell something for five
[366]
million dollars and that means you are
[368]
giving up five million dollars to own
[370]
that item which on the other side of the
[372]
equation would mean that you would be
[374]
willing to buy the same item for five
[376]
million dollars in both examples you
[379]
would be giving up five million dollars
[381]
to own that painting sounds logical
[385]
right and that's why it's one of the
[387]
foundational rules of economics but of
[389]
course it's wrong people are dumb and
[393]
emotions frequently impact these types
[395]
of decisions and nowhere is that more
[396]
apparent than in a collectible item that
[399]
have a perceived value as
[401]
an investment opportunity cost is a
[403]
really valuable tool to incorporate into
[405]
your thinking when making any type of
[407]
financial decision beard investing in
[409]
shares buying a house selling a car or
[412]
whatever it may be if you would be happy
[415]
to sell and buy an item at the price
[417]
discussed you are probably paying a fair
[419]
price
[420]
now as for our da Vinci here one could
[423]
feasibly argue that simply because there
[425]
was only one example of this painting in
[427]
the world on the supply side and there
[429]
was someone willing and able to make
[430]
this purchase on the demand side hey
[432]
presto you have your sale right here no
[435]
more questions to ask so instead maybe
[438]
what we should ask is not why this
[440]
painting is so expensive but rather what
[443]
made someone that was rich enough to be
[446]
able to make this purchase willing to do
[448]
so
[449]
as we saw earlier people normally value
[452]
items that they already own higher than
[454]
items that they are considering
[455]
purchasing since all collectors items
[457]
are already owned any potential buyer is
[459]
going to have to buy an item from
[461]
someone who is inherently going to apply
[463]
this psychological markup so the price
[466]
in theory should keep on appreciating
[468]
within reason in turn because people
[472]
expect the price to keep on appreciating
[474]
they are more inclined to hold on to
[475]
things that they now see as an
[477]
investment with this you very quickly
[480]
get yourself the makings of a
[481]
speculative asset bubble an asset by
[484]
definition is a resource with economic
[486]
value that an individual corporation or
[488]
country owns or controls with the
[490]
expectation it will provide a future
[493]
benefit like cash flows capital
[495]
appreciation or productive potential so
[498]
is art a wise investment well
[501]
historically yes but potential investors
[505]
need to be well aware that a lot of its
[507]
value is derived from what people think
[509]
it will be worth in the future rather
[511]
than based on any tangible benefits of
[513]
holding on to this asset like cash flows
[516]
or productive potential it must also be
[519]
recognized that a lot of this kind of
[520]
speculation goes beyond just art it can
[524]
be seen in high-end markets around the
[525]
world
[526]
things like watches motorcars vehicles
[529]
and even high-end bottles of whiskey and
[531]
wine anything that is limited in supply
[533]
with ahem
[534]
to prestige is up for this kind of wild
[537]
speculative ride so with that out of the
[540]
way let's look at where art can be
[542]
really handy all righty so now do modern
[552]
global billionaire you fully understand
[553]
speculative investments you are welcome
[556]
fingers crossed you've already
[558]
understood these but it's all the same
[559]
now you are fully up to speed so it's
[562]
time to start getting really creative
[564]
with your use of art so this is what you
[567]
do go and find yourself a reputable art
[571]
dealer with a long history of
[573]
campaigning new and upcoming
[574]
contemporary artists or driving up the
[577]
value of already dead artists whatever
[579]
it is that you prefer to look up at
[581]
they're on your wall I guess this art
[583]
dealer will advise your collection of
[584]
paintings to purchase and you take his
[586]
advice to decorate that 100 million
[588]
dollar London town house you purchased
[590]
in the last video so let's say you spend
[592]
a total of 20 million dollars it sounds
[595]
incredibly expensive for some art but it
[597]
gives you a collection of let's say 20
[600]
paintings for an average value of a
[601]
million dollars each now you let your
[604]
art dealer do their thing they write
[607]
about this exquisite artists in
[609]
magazines or regale other billionaires
[611]
with diatribe about how this white
[613]
canvas is a reflection of a blank
[615]
society or whatever it is all in an
[617]
attempt to drum up some attention
[619]
surrounding this new artist then it's
[621]
time for Part B of this operation you
[625]
sell a painting or two through a very
[627]
public option house like Christie's or
[629]
Sotheby's and bid on it yourself through
[632]
an agent or a lawyer or a trusted
[634]
representative they place a few fake
[636]
beards and let's say they bid your
[638]
artwork up to ten million dollars
[641]
fantastic but don't celebrate too soon
[643]
because all you've done is actually
[645]
purchased this artwork off yourself and
[647]
probably lost a 2% Commission to the
[649]
auction house in the mean time but
[651]
here's where it gets good suddenly on
[654]
paper your artworks are now worth 10
[657]
million dollars each based on historical
[658]
sales figures bringing the net value of
[661]
your portfolio from 20 million dollars
[663]
all the way up to 200 million dollars it
[666]
sounds great
[667]
right
[668]
well yeah but in reality you would
[670]
struggle to actually sell those
[672]
paintings to a genuine buyer so you
[674]
aren't actually any richer in practice
[676]
but what you can do is this say you make
[679]
a lot of money one year and you would
[681]
have to pay tax on that sounds terrible
[683]
right but don't worry what you can do is
[686]
donate one or two of your paintings to
[688]
the local museum you can call this a
[691]
charitable donation of twenty million
[693]
dollars and the museum will be more than
[695]
happy to not along with this because at
[697]
the end of the day they are getting free
[698]
paintings that your art dealer has
[700]
drummed up some interest in this means
[703]
that you will be able to report a twenty
[705]
million dollar donation to the IRS by
[707]
just giving away paintings that
[708]
originally only cost you two million
[710]
dollars saving yourself about ten
[712]
million dollars in taxes with any luck
[715]
the museum might even name a wing after
[717]
you or invite you to their next
[719]
Uppercross soiree as a token of their
[721]
appreciation which is a great boost to
[724]
the old ego this is kind of a win-win
[726]
all around it's a win for you because
[729]
you don't have to pay tax it's a win for
[731]
the artist because they get to sell
[732]
their paintings at a markup it's a win
[734]
for the art dealer who gets to charge
[736]
you for their services it's a win for
[738]
the auction houses who get to charge a
[740]
commission for a sale that went nowhere
[742]
and of course it's a win for the museum
[745]
who gets some shiny new paintings in
[747]
fact all the key actors in this game are
[749]
incentivized to play along with this
[751]
little charade a fine art because they
[753]
are all better off for doing so in a
[755]
sense this whole great big industry is
[758]
directly subsidized by you the taxpayer
[761]
this whole thing gets even better though
[764]
because when you really think about it
[766]
artwork is just a rectangle with pretty
[768]
designs on it and it has a nominal value
[771]
based on what people agree it's worth
[772]
just like say a dollar bill works of art
[776]
are unbelievably useful for moving money
[779]
around in creative ways because it's
[781]
easy to transport hard to track why they
[784]
recognized and very useful for all the
[787]
reasons we saw above in a sense art is
[790]
like bitcoins for billionaires but it
[793]
still plays one last very very important
[796]
role
[801]
so art is useful for all manner of
[804]
financial maneuvering but one of the
[806]
biggest reasons the wealthy elite of the
[807]
world love it so much is because it's a
[809]
very cost dense physical asset if you
[812]
think about things that you could buy
[813]
for 100 million dollars you could get a
[816]
private jet or a yacht maybe some very
[819]
very high-end real estate or a portfolio
[821]
of stocks and bonds the first few are
[823]
great but they are huge if you want to
[826]
stash your wealth discreetly than a
[828]
300-foot mega yacht is not the most loti
[831]
approach Plus running costs and
[833]
depreciation make them a pretty terrible
[835]
investment anyway a share portfolio
[838]
could be better but most share ownership
[840]
is electronically certified these days
[842]
and falls under the jurisdiction of
[844]
pesky government authorities that may
[846]
look to seize your assets in the event
[848]
that you are all I don't know laundering
[850]
money artwork is small easy to store
[854]
holds its value and can be worth an
[857]
insane amount of money which means it's
[860]
ideal to keep in a bunker somewhere in
[862]
some tax haven or a free port to ensure
[864]
it is there and ready to sell if you
[867]
ever need it one of the most fascinating
[869]
applications of this type of asset is
[872]
something the average person would never
[874]
even think of this is a rashard mill
[877]
what you're fishing autos are divided on
[879]
this timepiece but those who like them
[882]
love them and you could argue that they
[884]
are basically akin to works of high-end
[886]
art at least in the way that their
[888]
market works this watch here is worth 3
[892]
million US dollars which is just as
[896]
insane as some painting that costs 450
[898]
million dollars the reason that it can
[900]
get away with costing so much is the
[902]
same as with the artwork it's rare
[905]
people expect it to keep on appreciating
[907]
in value you can show off to your other
[909]
rich friends and sometimes you can pull
[912]
off some financially funny business with
[914]
it but a key benefit here is that it is
[916]
strapped to your wrist in the event a
[919]
billionaire in a less than stable
[921]
country is forced to leave in a hurry
[923]
they can literally establish themselves
[925]
financially in any nation around the
[927]
world simply by using the watch on their
[930]
wrist
[930]
it is unknown if anybody has actually
[932]
used a watch of this scale for this type
[934]
of desperate cash flow boost but
[936]
wristwatches are a well-known way of
[938]
keeping some functional cash flow on you
[940]
at all times
[946]
art is weird
[949]
it's difficult to understand its hidden
[951]
meaning and it's more difficult to
[952]
understand it's hidden markets and
[954]
outrageous prices the old adage that
[957]
something is only worth as much as
[958]
someone is willing to pay for it may not
[961]
hold true in this weird and wonderful
[962]
world of the global elite but for now
[965]
dear billionaire you have yet another
[967]
tool in your arsenal to properly move
[968]
money around in creative ways to ensure
[971]
that it's working for you and not for
[973]
some governments somewhere this is not a
[976]
world filled with passionate aficionados
[978]
willing to drop tens of millions of
[980]
dollars in the name of the Arts it's a
[982]
world filled with savvy investors
[984]
businesspeople and the moneyed elite
[987]
high-end art is not some abstract
[989]
expression of society conveyed onto a
[992]
canvas through labored brushstrokes it's
[994]
a financial instrument to move money
[996]
around the world the high-end art market
[999]
is not filled with creative artists it's
[1001]
filled with creative accountants if you
[1006]
would like to learn even more about the
[1007]
economics of the art market be sure to
[1009]
check out economics of art which is a
[1012]
website that we have created in
[1013]
partnership with the sponsor of today's
[1014]
video Squarespace on the site you will
[1017]
find interesting articles about the art
[1019]
market including a list of the top
[1021]
twenty most expensive art sales in
[1023]
history as well as other interesting
[1026]
data that we didn't have time to include
[1027]
in this video so be sure to check that
[1029]
out at the economics of art and of
[1032]
course if you want to create your own
[1034]
website with Squarespace you can do so
[1036]
while saving 10% on your subscription by
[1038]
going to Squarespace comm slash
[1040]
economics explained just click the link
[1043]
on the screen now which is also
[1044]
conveniently located in the description
[1046]
below if you did enjoy this video please
[1048]
consider liking and subscribing to a
[1050]
huge thank you to our new patrons over
[1051]
on patreon you guys continue to make
[1053]
these videos possible as well thanks
[1055]
guys bye
Most Recent Videos:
You can go back to the homepage right here: Homepage