Crazy Art Prices Flash Warning

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The biggest news last week had nothing to do with the Fed or the upcoming G20 meeting or whatever else you care to name.

It was artist David Hockney’s ‘Portrait of an Artist (Pool with Two Figures)’ selling for US$90.3 million.

This smashed the previous record for a living artist at auction.

When you see record prices for art sold at auction, you know we’re closer to the top of the market than the bottom.

These things have a bit of history…

For example, back in 2007, a Picasso painting sold for US$95 million. At the time, it was the second most expensive painting ever auctioned off.

Even Australian art sales had a monster boom into 2008.

You don’t need me to tell you what came next.

The Japanese went nuts for paintings in their bubble of the late 1980s.

There are other examples. Point being: These big art prices tend to flash a bit of a warning sign.

However, there’s no precise timing tool here.

Back in 2016, there was chatter about crazy-high art valuations too. One or two financial commentators did the same thing I’m doing now — linked it to a potential stock market peak.

Here we are today, and the bull market continues.

So there’s no reason why markets can’t keep coasting higher from here too.

But — as above — we’re definitely closer to the end than the start of the US bull run.

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Perhaps we can think of this US$90 million sale a different way?

To the wider public, seeing art go for crazy money doesn’t suggest a recession or downturn is coming anytime soon.

In fact, it’s closer to fostering a boomtime mentality.

That kind of environment can help retail buyers get more comfortable putting their money into the market. This is what can draw more buyers in.

And it’s only when everybody’s ‘all in’ that we’ll see this bull market finally finish.

I don’t think we’re there yet.

There are still so many worries out there. And bull markets climb those.

Psychology is at play in the market at all times. It’s what makes following the market counterintuitive so often.

Here’s another example…

Going against the herd ain’t easy

As you know, we’ve spent the last week in the United States.

The cold snap in Baltimore blew out of town on Friday. But it was still nicer inside than out. I found myself chatting with Bob the Yeti in the hotel lounge.

He can teach us a thing or two.

Bob’s a big, bearded man who lives out in Utah. He showed me the scene from the back of his porch. Imagine a national park with a snow-capped mountain in the middle of it — beautiful.

Bob was a day trader for 20 years before deciding to give pure research and writing a go for a while. A big part of his trading was oil and gas futures.

Early last week, we were having a drink after dinner.

I mentioned the big drop in oil. It went down 7% on 13 November.

Bob said he’d never seen it so oversold in almost two decades.

He went on to say that he’d be buying the next morning if he was still actively trading.

Sure enough, oil rallied back up for the rest of the week.

Sound easy? No.

It takes a lot of guts to step into the market like that. Oil had dropped for 12 straight sessions. It’s right then that the news looks most dismal, too.

The mainstream media equated the drop in oil with a fading outlook for the global economy.

Who wants to buy oil futures when the demand could be falling and the price is collapsing?

But that’s where the best profit potential always is — buying off panicked sellers.

But doing the opposite of the crowd at very volatile and emotional periods makes trading a tough game.

It ‘feels’ wrong to buy at times like that. Our lizard brain doesn’t go for rational thought when it comes to our money. It goes for emotion.

Let’s relate this back to the US$90 million painting above.

When the market is really booming, it ‘feels’ like the right thing to have your money in the stock market.

The outlook will be rosy. Business conditions will appear good. There’ll be strong earnings. The politicians will say everything is fine. There’ll be excited discussion of new technologies.

Paradoxically, that’s when you have to be most wary.

We’re not there yet, but our task for 2019 is to keep watching for any signs of excess and speculation.

Art prices are one of them.

Regards,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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