“Non-financial assets form the greater part of world wealth and have been more stable in value during periods of financial and social turbulence.” – Roger Ibbotson and Gary Brinson, “Global Investing”
The devolution of confidence in traditional investment alternatives, in concert with the elevation of the importance of design and aesthetic throughout the world, points to a renaissance in the value of art to a degree never before witnessed, and eventually, to comfort with the trading of art instead of trading stocks.
After all, the art auction market is fair and transparent with a degree of stability that many financial institutions, and even some AAA-rated U.S. government debt, can only dream about.
The Current State of Things
The U.S. has experienced many decades of economic growth facilitated by technological innovation and ongoing reductions in the cost of labor. As a result, it has enjoyed one of the highest rates of consumption in the world, bolstered by low interest rates and record rates of liquidity, all courtesy of the rest of the world’s willingness to buy U.S. debt.
The DJIA is down 13.1% year to date and the S&P has fallen 12.4% in that time. The U.S. dollar has lost 10% against a basket of six currencies over the past year, 40% over the past six years, a time when the price of oil is up seven-fold. The Chinese Yuan is up 7% year-to-date versus the dollar after having gained 7% in all of 2007.
The U.S. money supply is growing at the rate of 16% per year, the highest rate of growth since 1971 and, correspondingly, Gold is up 283% against the dollar since June 2001. The real source of many consumers’ wealth, their homes, have already lost 16% of their value since the peak in 2006.
Writeoffs related to the credit crisis have already passed the $450 billion mark. Keep in mind that this still only reflects sub-prime losses, as no commercial or Alt-A losses have been taken as of yet. After assuring in June that economic risks had diminished, Fed Chair Ben Bernanke testified in mid-July that “there’s no doubt there’s further deterioration in the cards for bank earnings and we’ll continue to see financial sector woes play themselves out.” Despite inflation in the form of rising consumer prices, currently at an annual 5.6% rate, the highest since 1991, the stresses in the financial system negate almost any efforts by the Fed to tackle inflation. That does not bode well for the dollar.
Fannie Mae and Freddie Mac:
The liquidity and capital crisis at these two mortgage behemoths is set against their guarantee of a whopping $5.3 trillion in mortgage credit, or half the total of all U.S. mortgages. The main issue however, revolves around their relative under-capitalization; the two have only a combined $81 billion in capital and that inadequacy means that raising capital has become a priority in this era of mortgage crisis. That roughly 2% of liabilities in the form of capital means that the danger exists that if the value of the mortgages that they guarantee declines by a small percentage……From where that capital will come is the big question, and it is increasingly likely that it will be the U.S. taxpayer who will have to shoulder the burden once again. Why? Absent their ability to raise additional capital in the public market they will almost certainly be rescued by the federal government because they are at least implicitly, if not so stated in their prospecti, guaranteed by the federal government, meaning that their failure would send a pronounced negative signal to the nations’ creditors were they allowed to fail. Hence, their bailout could cost as much as 10% of GDP, the rating agency S&P has said and “could create a material fiscal burden to the government that would lead to downward pressure on its rating.”
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