John M. Suddeth, Jr., CFA
There is an interesting new documentary on HBO titled, The Price of Everything. It deals with the contemporary art world and the associated eccentricities. There were many entertaining scenes that are far away from our everyday work life. What ultimately stood out were the record breaking prices being paid for art pieces. The triptych artwork shown below, painted by Francis Bacon in 1969, was (to date) the most expensive single piece of art ever sold at auction, commanding $142 million. At the time of the Bacon sale, Christie’s auction house achieved a record $691 million at a single art auction, which had bested a prior year contemporary art sale record of $495 million. According to Arts Economics**, the combined sales for art in 2017 totaled $64 billion, up from $56 billion in 2016. Beyond art, record amounts of liquidity have also poured into automotive collectibles, with the auction sales at the 2018 Pebble Beach Concourse d’Elegance totaling $367 million, surpassing the 2017 total of $328 million. The 1963 Aston Martin DP215 (shown below) while beautiful, fetched an astonishing $21.4 million in 2018 at the Sotheby’s auction. These are meaningful figures, and, when viewed in totality, amount to billions of dollars changing hands for nontraditional assets. So, is seeing the arguably staggering prices of illiquid alternative assets, perhaps without “an anchor in objective reality,” worrisome or supportive of financial markets? We see it, first, as evidence of the massive amounts of liquidity that the worlds’ banking and economic systems create. Secondly, we see the trend speaking to the large amount of truly discretionary capital in search of diversification. And thirdly, we see it simply as the manifestation of subjective preferences for specific types of tangible assets over financial assets. Regardless of the intent, the ability to purchase a $142 million painting or a $21 million dollar car is going to fall within a small echelon of the global population. However, the scope of spending isn’t all relegated to the ultra-high net worth. The 2018 Christmas season reported spending levels that topped $850 billion, a 5% increase from the prior year.*** Ultimately, that level of consumption, whether for gifts or for illiquid alternatives, further strengthens our conviction of reasonable economic vitality and for our long term premise of owning shares of cash generating businesses. For better, and at times for worse, those businesses just happen to get revalued in the markets each business day.
At the same time, we understand there are worrisome trends at hand that mandate consideration. Global hostility and trade wars are real. Income inequality (juxtapose a picture of the migrant train caravan against a $21 million dollar vehicle) has a direct connection to politics, and those sentiments are leveraged in the media and then find a way into financial markets. There are still unknown consequences tied to automated trading, and the massive passive investment binge that we think leads to significant pricing gaps and extreme single name stock volatility. Today, the speed and reach of media may work against stabilizing financing markets. Being “fully informed” 24/7 is perhaps harmful at times when monies start following a trend or a herd. To top it all off, there is the Federal Reserve hiking interest rates in the face of a slowing global economy. Given the collection of issues, we fully understand why investors want to stay “safe and liquid” when markets swoon and nerves are frayed.
Still, as we wrap up a challenging 2018, we can’t help but be encouraged. Case in point was the recent successful landing of a NASA space probe on the surface of Mars. The Lockheed Martin built craft traveled some 301 million miles over a six month period, before landing on Mars. This is the second Mars landing and, within eight minutes of landing, the craft sent a signal back to the U.S. with a clear photo.
We stand in awe of the engineering genius and creativity that is at work today. While we can’t yet define the commercial breakthroughs likely to germinate from this specific mission, we are optimistic there will be many for both Lockheed and NASA. Yes, yes, pessimism toward a likely recession or political impasses are real and easy to find; just switch on the news or thumb through your social media. We challenge you to think longer term as over the last 60 years the average recession has lasted about 10 months. Painful in a world of short attention spans, but it certainly should not be debilitating. While many are daunted by the “wall of worry,” we see attractive capital investments aplenty, with valuations at enticingly cheap levels by both relative and historic standards. Warren didn’t send us a text, but our gut tells us that Mr. Buffett, at the ripe old age of 88, is licking his proverbial chops. As he said, “fears regarding the long-term prosperity of the nation’s many sound companies make no sense.”