The Wednesday Briefs 116 – 18 May 2022

THIS WEEK: Art as an Investment; Elon vs. Twitter; “Die in a Fire”; Energy Inflation; Lebanon Elections; Old Russia vs. Young Ukraine.

ART AS AN INVESTMENT

The largest auction of a private art collection pulled in $922 million this week in New York. Among the great works were paintings by Andy Warhol, Mark Rothko and Gerhard Richter. A single Rothko painting, “Untitled” from 1960, drew $48 million. Echoing the tough 2022 financial environment, Sotheby’s Chief Executive Charles Stewart mused after the auction: “What else are you going to invest in right now?”

There have been numerous articles claiming that art has been a better investment than the S&P 500 not only this year but on a long term basis. This can be nominally true for brief windows of time right after art prices have a surge and when liquidity is high. By nominally, we mean 1) before commissions, 2) before taxes, and 3) as long as market liquidity remains high. Taking each in turn, commissions paid to the auction house or to an art dealer or to a gallery can be very high when disposing of a work of art. They can run from 20% to as much as 50% of the nominal sale price. In the United States, gains on art are taxed as collectibles at rates – 28% at the federal level + state and local taxes – that exceed those imposed on other assets. Finally, if market liquidity disappears, say during a recession, it may take months to dispose of art at a desirable price.

These factors make art an unsuitable investment for the great majority of people. As a form of diversification, it must be viewed as part of a “vertical” configuration of assets, rather than horizontal. By vertical vs. horizontal, we mean that it cannot be considered with the same level of priority (horizontal) as other accumulated assets. But it does offer good diversification for wealthy people who already have a large portfolio of conventional assets and who add art as a last component (vertical). In this case, art has to be viewed as being “last in last out” in a portfolio, the asset added last and sold last. Indeed most significant art auctions take place at times of personal distress, after a death or at divorce or bankruptcy.

Of course, there are non tangible reasons to buy art, such as the pleasure and inspiration that it brings. Art dealers like to say that art at home enhances and enriches your life. We all invest every day in lifestyle and well-being in ways that deliver non-financial returns.

ELON VS. TWITTER

The cult of Elon means that not a day can go by without hearing about Elon Musk. Musk’s latest tantrum about Twitter fake accounts looks like buyer’s remorse and betrays his wish to exit the deal as soon as possible (as we had envisioned in the WB 113). When Twitter’s CEO claimed that the number of fake accounts does not exceed 5%, Musk tweet-responded with a poo emoji and later stated that fake accounts could in fact add up to 20%. The difference between 5% and 20% is immaterial if you believe Musk’s projections that he can grow the company 5x to 10x. From a baseline of 100, adjusting the starting line to 95 or 80 (5% or 20% fake accounts) is unimportant when the end point is 5x greater at 400-475, or 10x greater at 800-950.

Twitter management is intent on enforcing the terms of the deal which set a buyout price of $54.20 on the stock, and is unlikely to allow changes now that it has fallen back to $38. The company has retained JP Morgan as an advisor in what is shaping up to be an expensive legal battle. The choice of JP Morgan is interesting because there is no love lost between CEO Jamie Dimon and Elon Musk and because the bank is in the middle of an unrelated lawsuit with Tesla. Further, JP Morgan’s analyst has one of the lowest targets on Tesla’s stock, $335 or less than half its current level.

We are indebted to Elon Musk for accelerating breakthrough technologies at PayPal, Tesla and Space X. But his bid for Twitter is for him difficult and uncharted territory. Unfortunately, the legal ramifications will be a distraction for a long while.

“DIE IN A FIRE”

UC Berkeley computer scientist Nicholas Weaver says that all cryptocurrency should “die in a fire”. With the pandemic tide of surplus liquidity receding from the financial markets, he may well get his wish. The last few weeks have shown that, contrary to what had been advertised, cryptocurrencies very much toe the line of Federal Reserve actions. When money is easy, they race ahead; when there is talk of tightening, they give back their gains. They are not therefore a hedge against central banks’ allegedly flippant debasing of national currencies.

Not everyone is negative and crypto fans are of a diehard sort. Yves Lamoureux, an analyst who saw a “crypto winter” coming when Bitcoin traded near $70,000 (it is now below $30,000), remains devoted and is now calling for a bottom and a “consequential bull market”. It is indeed possible that cryptos and stablecoins are merely experiencing the same violent boom-busts that other nascent asset classes also experienced in their day, for example oil companies in the late 1800s, auto producers in the mid 1900s or dotcoms around 2000. In each case, hundreds of companies disappeared and the industry crystallized around a much smaller number of players. These previous busts erased 70 to 90% of gains. Since we are not there yet, there will likely be better entry points for crypto believers in the next year or two.

ENERGY INFLATION

Prices of gasoline and other refined products have surged before and after the onset of the Ukraine war. In the United States, a gallon of gas now goes for over $6 in some parts of the country. Naturally, people are not pleased. But this chart from the St Louis Fed shows that energy consumption expenditure as a percent of total consumption expenditure is rising but is nowhere near previous highs. This means that the consumer can in theory sustain further increases but that such increases would divert dollars spent on other items. Yet before feeling too cavalier about rising prices, we should be cognizant that the same chart would look different for the wealthy vs. the middle class vs. the poor.

LEBANON ELECTIONS

Turnout in the Lebanese legislative elections was relatively low but the outcome will have encouraged a long-suffering segment of the population that is yearning for meaningful change. Hezbollah and its allies lost their majority in parliament. The main opposition gained some ground. And several independent candidates, the ultimate agents of change, won their seats. If change is forthcoming, this election will have been the beginning of the beginning. There is a long road back for Lebanon to regain its rightful place.

OLD RUSSIA VS. YOUNG UKRAINE

Analyst Maxim Trudolyubov has a demographic angle on the Ukraine invasion. In a Twitter thread, Trudolyubov notes that “in Ukraine, people in charge of defense and key government functions are in their 40s and 30s. The average age of Russia’s key officials is 64. For Ukraine, the average is 44. It’s a war between generations.” Read the thread here.

The Wednesday Briefs are not investment advice. Please do your own work and discuss with professional advisors before committing capital.

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2022 French Elections with Axel Gyldén, 16 April 2022

Between the two rounds of the French Presidential election (last Sunday and next Sunday), Sami J. Karam speaks to Axel Gyldén, veteran reporter at France’s leading weekly L’Express. Topics include analysis of the first round results, President Emmanuel Macron’s popularity, Marine Le Pen’s probability of winning and what such a victory would mean for France and for Europe.

TO HEAR THE PODCAST, CLICK HERE OR ON THE TIMELINE BELOW:

With Eduardo Mufarej, Founder of Renova, 17 March 2022

What makes an effective politician? Politicians come from all walks of life but the vast majority of them do not have any formal training in political science or in government or in the tasks and tools of being a politician. Renova, an innovative non-partisan non-profit organization in Brazil, seeks to change that and to also improve governance, by training aspiring political candidates. In this podcast, Sami J. Karam speaks to founder and chairman Eduardo Mufarej about Renova’s mission, its training curriculum and its prospects.

TO HEAR THE PODCAST, CLICK HERE OR ON THE TIMELINE BELOW: