Thursday, February 05, 2009

"Camille's Reclining" Declining

Contrary to momentum investor hopes, buying high, or recent highs, can be perilous to your financial well-being for a very very long time, in nominal terms but more acutely in real and relative terms. Such an emblematic example was reported in Bloomberg yesterday:
Feb. 4 (Bloomberg) -- A Claude Monet painting of his wife Camille reclining in a flower-strewn meadow sold tonight at Christie’s International in London for 11.2 million pounds ($16.2 million) with fees.

It was bought by a Paris-based representative of Christie’s, taking instructions over the telephone.

The 2-foot 8-inch wide canvas, dating from 1876, had been estimated by the auction house to fetch 15 million pounds, making it the most valuable estimated work offered in London’s February series of Impressionist and modern art sales. Its final price was less than a bronze version of Degas’s best-known “Little Dancer” sculpture that sold yesterday at Sotheby’s for 13.3 million pounds.

The Monet’s price history reflects historical demand from art collectors. It had last appeared on the auction market in November 1999 at Sotheby’s New York, where it sold for $15.4 million.

In June 1988, at the height of the last art market boom, the painting sold for 14.3 million pounds with fees at Sotheby’s in London.
Twenty years, and nominally one hasn't made a penny!! And the real-term returns would undoubtedly be more negative than -50%, an astronomical difference between even something pedestrian like T-bills. Of course one presumably has had the privilege of Camille Monet's two-dimensional company for the duration which may be some consolation to those prefering Monet to say, Leroy Neimann. Van Gogh's "Dr Gachet" (see post) hardly fared better only coming back into the money 18 years after Daishowa's Saito rang the bell, and then only briefly, for today, Ken Griffin is no longer "bid", and impressionists, while still eye-wateringly expensive for mere mortals, are clearly no longer be the store of value in real terms previously believed.

So yes, price matters. Homes bought in hot markets this decade, tech stocks, EM bonds and stocks bought mid-decade, US Bonds and perhaps Gold bought now, are also reasonable candidates to suffer Dr Gachet's curse.


Anonymous said...

"So yes, price matters. Homes bought in hot markets this decade, tech stocks, EM bonds and stocks bought mid-decade, US Bonds and perhaps Gold bought now, are also reasonable candidates to suffer Dr Gachet's curse."

Do you also think US first-lien, floating rate loans are a reasonable candidate?

martin said...

One would have to agree that Treasuries are toast longer-term. But gold, there's the rub. What will the USD be worth 10 years from now is perhaps a better question than what gold will be worth.

Anonymous said...


I’m really struggling with the fact that so many reasoned people, whose opinions I respect, are veering towards the ‘gold is bubble’ meme.

First off lets take price alone; what kind of bubble peaks 20% above its old high? TMT goes hundreds of multiples parabolic, housing and CRE (and the debt behind them) shoot the moon, treasuries (maybe rightly so) plumb century like lows, but one gold commercial gets a sloppy 30 second spot during the Super Bowl and the intelligentsia are all over it? How so? Sure it’s up a healthy clip off the lows, but overlay a gold chart with any other bubble and I believe it’s hard to make the case that right now this is a bubble. One may be forming, that I agree with, but right now, no go.

Second, how many normal, working people, outside of the financial sphere does anyone know that actually owns gold? I have been long of gold since the age of 21 (luckily I’m just now 29 and not 47) and friends and associates of mine that I’ve talked to about being bullish on the barbarous relic for years are only now starting to contemplate, repeat, contemplate whether they should be long a bit of it. I’m only now not getting a head in the stars look when I talk to people about gold, and it’s only because the price has gone up, they’ll hear me out, but they are unlikely to yet allocate any capital towards it. Still, they won’t sell the equity in their 401k or IRA. They’re in for the Siegel long haul.

Sure, there exists the diehards, but every single asset class has its own diehards, and they will remain regardless (lets call them the GATA long haulers), but it is, as always, on the margin that shifts the pricing. Sentiment is obviously turning, and being long it makes me uncomfortable, but it is not yet overwhelming. I wonder about the difference in advertising dollars spent by the securities industry and residential real estate industry versus the shops hawking gold? Flat guess is many, many multiples.

I mean look, I’m not happy being long of this almost useless metal, and am not a narrow minded ‘bug’, but I know monetary disorder when I see it, and that’s what we got and have had for quite some time.

I tried to buy 40 developed lots from GMAC six months ago for pennies on the dollar, which was overpriced as houses in the area are selling for less than the costs of bricks and sticks. Broker told me at the time his client could ‘hold on until value returns’. I asked him if he’d looked at their bond prices recently. He had not. And right when it’s buckets time for GMAC they get the butter from Uncle Sam. The point is that this Bill Gross/Bernanke plan to peg asset prices above clearing levels that offers capital which has balance sheet capacity to deal with illiquidity issues that come with them is plainly insanity. I understand that the government is going to play a role in this is beyond respite. I’m not going to fling ideological food about this issue, but I’m not going to bite on assets that remained overpriced. And, therefore, I’m not going to entail my business, which has zero debt, to seek any loans, or put any new people to work. I’m going to do what I can to signal to them that the plan is not right. And one of the ways to do that is being long gold. And I’m just now seeing more people/businesses who feel the same way, but I don’t see my neighbors dumping their stocks for bullion yet.


Anonymous said...

RJ -

You make good and sensible points, and I argue with little. My point is not to diss gold. Moldbug suggests our diference (mine and his) is one one of tactical vs. strategic, and this is a charitable way of friends most respectfully agreeing to disagree.

I would suggest my skepticism on the gold price action is contextually-basedl, and not fundamental. My visceral opinion was delineated here, but I always do my best (not always successfully) to detach my forecast from my visceral opinion. We are probably in agreement on these sentiments but I'll let you decide on that after perusing my old post.

My skepticism is the same as that prevailing as one who is sympathetic in principal to LTG and Peak Oil arguments, but had no problem recognizing where the tactical fat tail in oil and commodities prices generally stood and the reasonable scale too. And this was based upon looking around at who was or wasn't invested, what the scale was, and where relative values stood in relation to other assets.

At the moment, Bonds, FX, and commodities, shipping, equity all suggest deflation and deleveraging. Gold suggests otherwise. Who is right? I think (as previously described) that we are in deflationary overshoot mode. Not on a 10yr horizon, but for the next 18 to 24 mos. I do not dismiss gold's signals lightly, but I think the majority of speculation is less-sophisticated, and speculative. An oz of gold buys more of a wide variety of alternative assets with all the others having limitations and caveats correctly recited by Moldbug and David Pearson. But nonethless a dollar now buys less gold and more of other stuff, and there is a lot of other useful stuff the dollar buys, and IF deflationary overshoot on my horizon is correct, then a dollar will continue to buy yet more of the other stuff relative to gold making gold even less attractive on further rises and the other stuff more attractive. Cash may very well garner great value in deflationary distress until it doesn't, but Gold specs find this hard to entertain, despite plausible sympathies that things are broken, and Gold is the only perfect substitute.

So my view is one that looks at the other stuff and says a dollar presently buys better value there, and so with all the other markets suggesting similar, gold AND the YEN and their admittedly less-sophisticated clientele stand out as the nails sticking up waiting to be hammered down. Completely licking my finger and sticking it up in the air, it seems that with al the other assets halved why not gold of similar magntiude from peak, and so 550 or even 450 doesn't seem an implausible washout before policy and monetization gains traction in stabilizing things and fanning broader inflationary expectations. Peak oil remains a reality, yet oil is 40 and less. The abyssmal state of monetary affairs remains a reality, but like oil, that needn't prevent specs from getting puked, and impetus - deflationary overshoot short term, can provide just the catalyst to trigger stops and reverse trernd-following and systematic macro positions to achieve the levels I suggest.


Anonymous said...

Thanks for the response Cass.

You are, of course, right. But I guess the fulcrum for me is Bernanke. The man literally does not get it; the market, one way or another IS going to clear. But he has no idea because he’s never done a day of real business in his life. And as the deflationary forces persist and worsen he isn’t going to take it lying down. I think it is an even money bet that we see targeted ‘money rains’, as described in the Fed working paper circa ’05 and in the ‘making sure it doesn’t happen here’ speech later this year (if we aren’t about to seem them immediately with the stimulus plan, though not targeted).

How does capital react to Fed open market purchases of Treasuries that are issued b/c of tax cuts and spending programs? That’s what keeps me long, as I just have a hard time fathoming the market just saying ‘O bother’ to that occurrence.


Anonymous said...


Then structure a trade that has a better payoff pattern in the event you're wrong - short wider 1yr OTM put spread to purchase the 1 yr OTM Call. or sell 5% OTM put to buy 2 10% OTM calls (or whatever advanatgeous strike combo makles sense). At least then you've got some vig.


chwee said...

There seems to be a critical feature about gold that too many anti-gold folks (who can come up with a lot of sophisticated sounding reasons) keep forgetting. It's really really hard to get more of it out of the ground.

Oil? Yes, we'll run out of oil. But in the meantime, we don't have the storage facility to store all the oil that the Saudis, Iranians, OPEC et al are pumping like crazy to meet their revenue needs.

Gold? The major central banks that wanted to sell their gold all picked the lows to dispose of it (BOE being a super classic example).

All other assets, treasuries, stocks etc are all PAPER assets. More can always be minted by those in authority.

Over the last 2 yrs, as various hedge funds blew up, liquidation of gold happened as margin calls went out. Those were the best times to load up, as it was just a temporary situation of supply overwhelming demand for a short period of time. We can empty all the gold in Fort Knox (hmm, how much is really left??) and it wouldn't even cover this coming year's stimulus bill. So gold is a bubble, it's overvalued? hahahah jeez.

Anonymous said...

Why would you own gold outright?

Why wouldn't you just buy calls on levered gold miners with debt maturities in 2011+?

It seems to me that the delta with gold miners is much >1, just like it was for iron ore miners and other commodity companies during the last commodities cycle.

chwee said...

Buying gold miners mean taking on company management, country, credit, dilution risks etc. The cult of equity still permeates too much of conventional 'investment' strategy.

I don't think the world economy is going to collapse back into the dark ages (though risk of war for political reasons has risen). It all comes down to what the endgame of too much US debt will entail.

Just like the real estate bubble kept growing for years beyond what rational people would think possible, it's the same for US treasuries as Uncle Sam keeps putting up treasuries on deck. Simply put, there's only 2 scenarios - US default or inflation to reduce the real debt burden. Default is not an option as there is a continued need for overseas funding. So when the final endgame is obvious, forget about the middle game jiggles. If you have leveraged gold positions, then if the price moves from $900 down to $700, yes you may get wiped out without proper stops. But if it's obvious that gold will eventually more than double within a few years, you really don't want or need leverage to stay in this game. It's just a trader's risk/reward calculation from a longer-term perspective.

So don't get sidetracked by intermediate price gyrations. The odds are stacked in gold's favour as most govts have put significant obstacles in terms of obtaining sizeable physical gold holdings.

Anonymous said...

Gold is to paper currencies as an agnostic is to church. It's a matter of faith.

Anonymous said...

Representative Kanjorski (PA): 550 Billion Draw Down on Sept 19, 2008

Kanjorski, "At 2 minutes, 20 seconds into this C-Span video clip, Rep. Paul Kanjorski of Pennsylvania explains how the Federal Reserve told Congress members about a "tremendous draw-down of money market accounts in the United States, to the tune of $550 billion dollars." According to Kanjorski, this electronic transfer occured over the period of an hour or two."

Spread this video around.

Bernanke/Geitner must be terrifying Congress with this information. Kanjorski also says that Treasury dropped the asset bailout idea because they quickly figured out it would cost $3 or $4 trillion dollars (at least at the prices the banks want paid for their junk assets).

This is insanity. Congress needs to adopt Professor Fama's proposal to seize the banks, wipe out equity, and force enough creditors to give up their debt claims for stock claims to leave the banks solvent.

This doesn't hurt the taxpayer. This doesn't hurt the public. This only hurts corrupt/incompetent bank executives and lazy shareholders/creditors let the bank executives take obscene risk with the US financial system.

Anonymous said...

Good exchange Cass & RJ. Fyi Cass think it was the Sunday Times who had an article bout 2 weeks ago on how the auction houses had made impressionist paintings fashionable purchases for the "nouveaus", a trend that seems to continue to this day.
Deflationary overshoot in the markets yes, but am still waiting for the full main st fallout (i.e. A to C of inflation (not hyper) quickly through B of deflation). Remain suspect of overvalued USTs, but maintian nimble positioning.
Btw, saw kung fu hustle t'other day for the 1st time - what a feast!
Have a great week all, JL

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