Andy Warhol’s silkscreen “200 One Dollar Bills” just sold for 43.8 million US dollars at Sotheby’s in New York. This is good news because the fact alone that people are buying again art in a big way, shows that yes, the financial crisis might be over. But it leaves also a bittersweet feeling with regards to the vanishing value of money. Accounting for the actual inflation, 200 US dollar in 1962, had the purchasing power of 1,400 US dollars of today. The US inflation multiplied prices by seven in the last forty-seven years, an average yearly inflation rate of 4.2%.
To reach 43.8 million dollars with 200 dollars of 1962, of course real one and not the ones painted by the founder of pop art, one would have needed an average yearly inflation of 29.9%. This number might seem excessive at first but it wouldn’t even qualify to be considered as “hyperinflation”. Between 1983 and 1992 Argentina, experienced a yearly inflation of 70%.
Prices for art are going up again but so do prices for every other major assets. A client asked me a couple of days ago, whether emerging market equities could be considered as the next asset bubble. Why not? But looking at the returns since March 2009 one could currently equally make this case for commodities, government bonds, global equities, or gold. Everything is just going up. The high correlation of asset prices spotted during the financial crisis and the crash last year hasn’t vanished at all.
One can find a fitting story for each asset class. Equities are up because, we ultimately didn’t experienced the end of the world as we know it. Moreover company profits have surprised and are continuing to surprise positively, and so does the economy. Government bonds are up, because actually we aren’t out of the woods when it comes to assess the credit crunch. There is still the risk of sliding in a Japanese-like lost decade, during which, Japanese Government Bonds were the only Japanese asset actually performing. Gold is up, because confronted with the huge liquidity creation of central banks and the abysmal debt creation of governments, inflation might become a serious issue going forward.
Given the multiple and contradictory stories around, paradoxically despite the extraordinarily high correlation of asset prices the best strategy remains to be broadly diversified and not necessarily only focus on one possible view of the world. What all the current stories have in common is the fact that the value of money, expressed in asset prices is shrinking. If this were to continue the next asset bubble would be plain and simple: assets.
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