In the Media | May 2014

Jeff Koons's Popeye Is the Fifth Column

By Martin Sosnoff
Forbes, May 19, 2014. All Rights Reserved.

At the Sotheby’s May evening auction, Steve Wynn was the successful bidder for Jeff Koons’s life-sized Popeye sculpture, knocked down at a disappointing $28,115,000, and destined for one of Steve’s casino properties. Within this lot is some cautionary metaphor about conspicuous consumption reigning, again. The Koons piece is an immaculate, but exaggerated life sized presence in colorful, shiny sheet steel.

When Wynn took control of the Golden Nugget Casino in Las Vegas some 40 years ago, I sold him my block of stock, a reportable position. He deserved all his successes, a great operator who made Vegas a family destination resort while competition still ran grind joints.

I accept that there are hundreds of art buyers who easily qualify for spending $50 million or more on “name brand” work. Whether this is driven by connoisseurship, emotionality or trading savvy is another story. These big hitters are equivalent to whales at gaming casinos: Alice Walton (the Warhol Coca-Cola), Elaine Wynn (the Bacon) and corporate types like Russian oligarchs and Malaysian honchos, dealers – investors like the Mugrabi family, the jewelry purveyor Graff, even a handful of hedge fund operators.

The economics of taste suggests, long term, elevated art prices don’t hold up, excepting masterpieces. More critical, overindulgence ultimately is divisive for the country by calling attention to how the top 0.1% conduct themselves. Eventually, a public outcry congeals. Congressmen begin to speak out on income inequality. Unions get their raucous voice back.

Our middle-class holds minimal free capital for equity investment. A market rising 32% makes Buffett and his ilk billions richer, year-over-year. For the family with $50,000 in stocks, if that, we are talking chump change. Individual pension fund assets carry a discounted value based upon when they can be withdrawn.

Republicans and major multinational corporations call for tax breaks on the repatriation of offshore earnings, but the facts suggest just the opposite is called for. Corporate income tax rates rest much lower than during the sixties and seventies. Wage earners gain no leverage when the unemployment rate is elevated. Take home pay rises at a measly 2% rate, unless you work for Twitter or other dot com operators and are richly vested in zero cost equity.

Twitter’s insiders disgorged hundreds of millions of shares once their lockup ended. Employees drove Twitter down 17%, overnight. Such action is indicative of a middle class as yet capital starved. Not just machinists, even young computer code writers.

If I were Dan Loeb, instead of coveting Sotheby’s, an overpriced piece of paper that just broke below $40, I’d be driving a Buick and seeking naming opportunities at hospitals and graduate business schools. Buffett and Bill Gates are great role models here, and as far as I know disinterested in $100 million Bacon canvases.

The problem with conspicuous consumption is it can take decades, even centuries before it ends. Never happily. The French Revolution was preceded by bread riots but their political system for centuries exempted the nobility from taxation.

When I compare our present Gilded Age with the past, I see major differentiation. End of 19th century, Robber Barons mainly were industrialists with controlling positions in oil (Rockefeller), steel (Carnegie), railroads (Vanderbilt), the Guggenheims (minerals), Rosenwalds and Hartfords (retailing). Yes – there was J.P. Morgan and Jules Bache and a few Russians, but no Chinese, Japanese and Malaysians throwing their money around in the art world.

Land based wealth existed but yielded minimal returns in rents and farm income. There’s no material book value in Twitter and Facebook excepting cash and intellectual property. We have come a long way from when wealth rested in hard assets – minerals and chemicals, now in serious oversupply.

Art world players mainly are linked to stock market wealth. They include a couple of dozen hedge fund operators. Likewise, private capital operators at KKR, Blackstone, Carlyle and Leon Black. Throw in a dozen VC’s and Internet founders. Although establishment corporate management has learned how to milk their income statements, only a handful walk away billionaires. Unconventionally designed yachts belong to Russians and headman owners like Larry Ellison at Oracle.

If our S&P 500 Index puts together another year like 2013 in the next couple of years, the art market, surely goes through the roof. Deal proliferation would break out all over, too. Analysts would disremember how to punish tech houses with big disparity between GAAP and non-GAAP earnings.

The stock market is capitalized currently at 16 times earnings, not 10 or 11, vulnerable to any sign of a decelerating economy. I don’t know where hedge fund capital comes out in a bearish setting. After all, most of them weren’t bullish enough last year and badly trailed the market.

Obama doesn’t even have an inclination or the power to tax the carried interest of private capital operators at standard rates. Don’t expect any substantive tax reform that redistributes income downward to the poor and lower middle class categories. It could take decades. Infrastructure spending, what the country needs desperately to create jobs, is a stalled initiative for years to come.

The Levy Economics Institute at Bard College rightly underscores that rising income inequality weighs down the economic setting. GDP momentum, absent positive numbers on exports, must depend on rising private borrowing. But, a high debt to income ratio is unsustainable unless the stock market shows late foot.

The distribution of income over three decades flows to the top 1%. They control most of the assets in equities but are themselves vulnerable to a stock market bubble as denouement.

In the sixties and seventies, from my ski chalet in Franconia, New Hampshire I’d zip out in zero degrees early mornings with my band of brown baggers. We sharpened our own skis at home, and ate tons of spaghetti together. My next door neighbor, a dermatologist who was coining money, even in New Hampshire, asked me if it was okay with the group if he bought a new Caddy.

I told him to drop down one price point. The group might frown on such conspicuous consumption. Les did just that. Those days are gone but not forgotten.

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