Art still an inflation hedge -- with some thorns

What do economists and art experts see ahead for the art market? Good times, high prices, volume sales -- unfortunately, many believe, because people will continue to turn to art investments as a way to hedge against inflation. That is, they see high inflation staying around for a while.

For the past several years, "people have been moving away from cash balances, " noted Stanislaw Wellisz, chairman for the economics department at Columbia University. "They have had a limited amount of things to put their money in, such as precious metals, real estate, and art. As more investors enter the art market, the number of first-rate works are limited and their prices increase enormously. I think we have been seeing prices for artworks reflecting this."

He added that the art market will continue to be strong as long as double-digit inflation lasts.

Price increases have been constant for works of art by artists who are dead -- 15 percent annually, according to many investment analysts. Such increases, they point out, are for "works of the highest quality," although they point out that what is in fashion may make a difference. Nineteenth-century French painting (including the salon painters) and early American works are "in."

There is, however, "practically no market for newly produced works," said Charles Levin, chairman of Washington University's economics department, adding that he has a 23- year-old daughter living in New York City attempting to be an artist and "living on I-don't-know-what."

He sees the art market buoyed up by inflationary pressures -- "a lot of it panic buying." He compared the situation to two boom-bust speculations -- the tulip mania of the 17th century and the South Sea Bubble of the 18th century -- in its potential for collapse.

Living artists have always been a more speculative risk for collectors and investors than those who are dead. Alive, they may change their style or say something that might not be characteristic, or any number of things. Art is, of course, an image industry.

Not to suggest that collectors and investors continually scan the obituaries looking for artists. Bob Schonfeld, head of the appraisal department of Sotheby Parke Bernet, the world's largest art and antique auctioneers, noted that there has been heightened interest of late in the works of such people as Joan Miro, Willem de Kooning, Georgia O'Keeffe, and Marc Chagall, all of whom are quite old.

"Prices for works of better quality do much better than works of lesser quality in times of inflation," Mr. Schonfeld pointed out. "If the recession really grabs hold, this price spread will widen."

Recognizing the correlation between poor economic news and Sotheby's enhanced prosperity, Schonfeld declined to speculate on the future of the art market. He did say, though, that the number of art collectors would grow even if the investment angle did not make it seem so lucrative. Prices might not get quite so high, he felt, but people would still want to have it.

Whether the current urge to own art is based on an over- riding love of it or the desire to move liquid assets into commodities showing a higher rate of return than other investments, prices for works have jumped, in some works to almost exaggerated degrees. Last spring, auctioned works by Picasso and Van Gogh established record prices for modern artists, and Turner's "Juliet and Her Nurse" went for $6.4 million, the highest price ever paid for a work of art.

Noting that the art market is quite "volatile," Elizabeth Shaw, vice-president of the art and antique auction house Christie's, stated that the "unbelievable prices during the spring are not likely to be soon repeated, as the quality of works was so high. But, of course, high prices have a way of generating high prices."

Prices, though high, are "probably sustainable," according to Adele Wick, a professor in Tulane University's economics department, "because the demand components are strong and in place." These components include the increased involvement in the art market by banks and corporations, looking to build collections or decorate offices; the desire by many people to buy works of art which they can then donate to museums as a tax-deductible gift; and the number of people with high incomes with money to buy art.

She does not see the heightened activity in art buying as solely a reaction to inflation, as "the people who are buying art usually have very high incomes and are somewhat sheltered from a lot of the effects of a recession. It's only when you think of it as just like gold that there are problems."

Most economists agree that buying is a very "iffy" investment, since it provides no dividends (save for personal enjoyment) and is only worth what someone is willing to pay for it at a specific time -- that may be well below its appraised value -- depending on its condition and what styles are popular. It is more often than not as a contribution to a museum in order to achieve a sizable tax deduction (based on a work's appraised value) that it will perform as well as other investments.

Besides increases in prices, some economists see the potential for more frauds by those looking to capitalize on the inflation fears of the less knowledgeable.

"The racket feeds on inflation," warned economist Eliot Janeway. "There will be dynamic increases in charlatanism, hustlers, preyers on the greedy, hucksterism, and fakes. So long as inflation remains high, the trick is to find suckers for cheap merchandise."

Mr. Janeway noted the increases in bank and corporate purchases of artworks with alarm. With the amount of money and the way they are investing in art, he stated, "they will wreck the art market the way they wrecked the stock market. . . . If the First National has lost your money or invested it badly, you're not going to thank it for the beautiful scenery."

One incident involved a man who, claiming to be an art expert, persuaded an executive vice-president of a Wall Street brokerage firm to purchase 20 art objects from him for $80,000. The vice-president bought the works in order to donate them for a tax write-off to his alma mater. The works were later appraised as being worth less than $25,000, however, and the buyer brought suit against the seller for the difference between the appraised value and the purchase price.

Though not as fearful of rampant frauds as Mr. Janeway, James Ramsey, chairman of the New York University economics department, pointed out that "you have to expect some increases in frauds and fakes."

He noted that most people entering the art market are "fairly astute" and know where to get information or a second opinion. Those who are more inexperienced, however, stand a greater likelihood of being taken.

"The people who are defrauded almost invariably believe that they are cheating someone else," he explained. "They think that they are pulling something off."