Macro and Credit - Orchidelirium

"What, if as said, man is a bubble." -  Marcus Terentius Varro, Roman author

Looking at the recent parabolic surge in Bitcoin (BTC), for us it first resonated with the Dutch Tulip Bulb Bubble of 1637 given the existence of 840 different crypto currencies for a total market capitalization of 85 billion USD. Yet, after our initial thoughts, we reminded ourselves for our chosen title analogy of the Orchidelirium Victorian era flower madness when collecting and discovering orchids reached extraordinarily high. Orchidelirium was seen as similar to Dutch tulip mania. What we find amusing when it comes to Bitcoin is that in November 2013 Nout Wellink, former president of the Dutch Central Bank, described Bitcoin as "worse than the tulip mania," adding, "At least then you got a tulip, now you get nothing". No offense to Nout Wellink but at least when you bought European High Yield in the past you used to get some yield, now you get nothing but at least, in case of default, there is some form of recovery given that what make most of the value are the expectations of the reimbursement of the principal. More recently, Dutch politicians have offered to ECB supremo Mario Draghi a solar-powered plastic tulip in reminder of bubble concern as reported by Bloomberg on the 10th of May in their article entitled "Draghi stays calm on stimulus as Dutch warn of risks with tulip". The latest parabolic surge in Bitcoin and other crypto currencies, while not powered by solar power but mostly by computer power and speculative endeavors, we find the analogy with Orchidelirium of particular interest given today there still exists some levels of orchid madness, that has sometimes resulted in theft of exceptional orchids among collectors such as the Ghost Orchid. Indeed we live in interesting times and no doubt some level of orchid madness can be felt but we ramble again.

In this week's conversation, we would like to look at potential cracks in the credit cycle such as slowing loan demand in particular in consumer credit in the US and other late credit cycle indicators such as the ebullient art markets and classic cars.

Synopsis:

• Macro and Credit - Is the US consumer "maxed out"?
• Final charts - Modern art, fine wines, & horses, are assets that tend to peak just before the start of a pronounced downturn

• Macro and Credit - Is the US consumer "maxed out"?

Back in March 2017 in our conversation "The Endless Summer" we concluded our long conversation asking ourselves if the US consumer was somewhat "maxed out". We indicated as well that this on-going "Endless Summer" had created a significant windfall for the holders of financial asset. While in recent conversation we have argued that we remained short-term "Keynesian" given the large inflows pouring into various asset classes, while longer term we do remain "Austrian". We are still very cautious for the second part of 2017. 

The "wealth effect" has globally lifted all boats but, in our book a credit cycle's length is around 10 years, so we do believe we are entering the last inning and that the final melt-up in asset prices could be significant before the usual "Bayesian" outcome. From our credit perspective, it appears to us that "cracks" in credit in the US are beginning to show up, particularly in the form of slowing loan demand. While we are not yet sounding the alarm bell, we think in the coming months it is going to be paramount to monitor credit demand and in particular consumer credit. 

You already know the story relating to Commercial Real Estate (CRE) and Commercial & Industrial Loans (C&I) from our recent musings. Despite the "Orchidelirium" over consumer confidence numbers post the US election, C&I growth is trending down (since the beginning of the year) and they are more reflective of what is happening in the real economy. As we indicated recently, weak loan demand tends to be associated with higher volatility yet markets are displaying very high complacency and seem to be oblivious to this recent negative trend, making this continuing rally, one of the most hated bull market in recent history.

From our credit and macro perspective, we live in a credit world hence the importance of tracking loan demand. The latest Fed Senior Loan Officer and Opinion Survey (SLOOS) showed that all is not well in the world of credit as per Wells Fargo note from the 17th of May entitled "Fed Survey Points to Slowing Loan Demand":

"The Fed’s Senior Loan Officer and Opinion Survey showed cooling loan demand for businesses and consumers in Q1. Citing uncertainty and lower risk tolerance, banks continued to tighten standards for CRE loans.

Business Loan Demand Tails Off

The Federal Reserve’s April 2017 Senior Loan Officer Opinion Survey (SLOOS), which roughly corresponds to Q1 2017, points to a general slowdown in loan demand for businesses and consumers. Reports of tightening lending standards varied across loan categories, however.
As shown in the below chart, large and small businesses demand for loans has been moderating since the start of 2016. Domestic and foreign banks reported weaker loan demand on net over the first quarter.

Notably, the slowdown in commercial & industrial (C&I) loan growth does not appear to be due to stricter lending standards, as banks reported no significant net tightening. The survey showed a modest net easing for C&I loans by domestic banks, but a slight tightening by foreign banks.
The SLOOS C&I lending data are contrary to the details within the GDP release. While the survey data point to a slowdown in business loan demand in Q1, the GDP report indicated a strong pickup in business fixed investment with outlays rising at a solid 9.4 percent annualized rate. The strength in business investment may reflect firms’ use of other sources of funding, such as bond issuance and stronger profits.

Consumer Loan Demand Cools

The Fed survey also showed a cooling in consumer loan demand, a finding consistent with the weaker pace of consumer spending in Q1. Lenders reported reduced demand for most consumer loan categories over the quarter, with particular softness in demand for credit card and auto loans (below chart).

A moderate share of banks reportedly tightened auto loan standards in Q1, marking the fourth consecutive quarter of net tightening. Banks stated widening spreads of loan rates over their cost of funds and raised the minimum credit score threshold over the quarter. For credit card loans, a modest share of banks reported easing lending standards, while terms on other consumer loans remained unchanged on balance. We do not take the softer consumer lending report as the start of a new trend and look for consumption to re-emerge in Q2.

CRE Lending: Continued Tightening

The April SLOOS showed that lenders are continuing to monitor pockets of risk in the commercial real estate (CRE) sector, as a significant net share of banks reported further tightening in most CRE loan policies (below chart).

In fact, a major share of banks cited a more uncertain outlook for CRE property prices, vacancy rates and other fundamentals, and reduced risk tolerance as reasons for tightening credit standards. In a recent speech, Boston Fed President Eric Rosengren noted that while a handful of favorable factors have helped support CRE valuations, “positive trends can sometimes evolve into prices that increase more than fundamentals justify.” Banks’ continued tightening of CRE credit should help ease financial regulators concerns of elevated pricing." - source Wells Fargo

While the slowdown in consumer lending is yet to show a similar trend seen recently in other segment such as CRE and C&I, it will remain essential to monitor the situation in the coming months. From our point of view, while equities market are still racing ahead and credit spreads tightening with a clear outperformance of high beta in that respect, it remains to be seen how long fundamentals will be deteriorating and if Q2 will see some sort of reversal. So far, credit weaknesses are simply being ignored by the Orchidelirium crowd. 

In similar fashion, we read with interest Bank of America Merrill Lynch Global Economic Weekly note from the 26th of May entitled "When is "intervention" "manipulation"?" asking themselves about the weakness in consumer credit:

"Are there cracks in consumer credit?

• Consumer credit creation has slowed, adding to concerns that consumer demand has weakened.

• We see several factors at play—some benign—which help explain the slowdown, prompting us to fade some of the weakness.

• We remain positive on the consumer outlook as fundamentals are solid but think it is wise to keep an eye on these indicators.

Credit slowdownThere are signs that consumer credit creation may be slowing. According to the New York Fed’s Quarterly Report on Household Debt and Credit, new mortgage originations dropped to $491bn in 1Q from $617bn in 4Q. Also it showed that the growth in the number of open credit card accounts decelerated in 1Q 2017, implying that demand for revolving credit may be slowing. In fact, respondents from the Senior Loan Officer Opinion Survey reported that demand for credit cards on net has slowed despite looser credit standards (Chart 2).

In this piece, we take a look at the potential causes of the slowdown in credit creation, specifically revolving credit, and what it means for consumer demand in the near term

Assessing the potential causes

A few potential reasons—some benign and some not so benign—appear to be at play for the slowdown.

1. Involuntary account closures:

The latest New York Fed’s Survey of Consumer Expectations (SCE) Credit Access report for February showed an uptick in involuntary account closures. Five percent of respondents reported that at least one credit account was closed by the respondents’ lender, up from 3.8% in the prior survey in October 2016 and the highest recorded since the survey began in late 2013. Breakdown by respondents’ credit score shows a notable pickup in account closures for less credit worthy consumers as 14.8% of respondents with credit scores at or below 680 reported an account closure, up from 9.6% in the prior survey (Chart 3).

This could be a potential sign that household finances may be stretched as households are beginning to have a more difficult time remaining current on their debt payments. Indeed, the New York Fed’s Report on Household Debt and Credit showed notable growth in seriously delinquent balances for credit cards and auto loans in the last two quarters (Chart 4).

We have already started to see pace of auto sales begin to moderate which we think could be a potential source of weakness for the economy. Further deterioration of the household balance sheet could slow consumer demand.

2. Perception vs Reality:

As mentioned above lenders are reporting looser standards. However, better consumer demand failed to follow. According to the NY Fed’s SCE Credit Access survey, close to 30% of respondents reported that they think they would be rejected for a credit card today, near comparable levels seen last year (Chart 5).

Additionally the same report noted that the application rate for credit cards fell to 25.3% from a high of 30.6% in June 2016, further corroborating the lack of increase in demand. What’s interesting is that application rates are down across the credit score spectrum suggesting it may be broad-based perception that credit is hard to obtain at the moment. Given that lenders remain constructive on lending standards, the slowdown may prove to be transitory.

3. The influence of Millennials:

In the wake of the Great Recession, Congress passed the CARD Act of 2009, a comprehensive credit card reform legislation to protect consumers. Under the bill, lenders cannot issue credit cards to a consumer under the age of 21 unless they prove they have independent income or obtain a cosigner. Given more restrictions to obtaining credit, many millennials are less “credit mature” in their 20s compared to the previous generations. Therefore, as millennials come of prime working age, many are having a tough time obtaining credit cards as lenders are unwilling to extend credit to individuals that have a short or no credit history, hampering credit creation. Moreover, due to the experience of the Great Recession millennials may be less inclined to buy using credit or are “convenience users” who pay off their entire credit card balance every month, limiting the need for multiple credit cards.

Implication for the economy

It’s unclear whether the slowdown in the growth of revolving credit is just a temporary soft patch or a more nefarious sign of a downturn in the economy. On one hand, we are starting to see some cracks in consumer demand. Even accounting for residual seasonality and warmer weather conditions dampening heating demand, personal consumption expenditures slowed notably to start the year. Also, the lackluster April retail sales report and a step back in auto sales since March does not inspire confidence that we will see a quick rebound. In this environment, a slowdown in credit creation stands out. On the other hand, we’ve had situations in the past where credit demand had receded during expansions only to reverse. Also, as previously mentioned, some of the potential factors at play for the pullback in credit demand could be more about changing demographics and tastes rather than a signal of weakness.

At this point, we are inclined to mostly fade the weak signals. The consumer backdrop is largely supportive. Job growth remains robust and given the low level of the unemployment, wage growth should head higher, albeit slowly. Also, aggregate household leverage has returned to healthy levels and the saving rate remains elevated (Chart 6).

This suggests that there may be another gear for consumption if households deemed it worthwhile to spend or it can be used as a buffer to stabilize against any potential negative shock that may hit the economy.

Bottom line

The jury is still out on credit conditions for the consumer. Credit demand seems to have slowed but lending standards remain favorable. On the other hand, we are starting to see pockets of stress on the household balance sheet that could spark weakness in the overall economy but so far it seems contained. We will be closely monitoring credit conditions for early warning signs of a slowdown in the economy. It squarely remains a risk to our outlook." - source Bank of America Merrill Lynch

Whereas it is too early to envisage some clear headwinds for the US economy thanks to weaker loan demand, it is clear to us that, in this late credit cycle, it remains very important to track SLOOs going forward. While default rates remain subdued in comparison to 2016, tightening in credit standards in conjunction with rate hikes will eventually weight on High Yield but for now, inflows remain strong and in particular in Investment Grade as indicated by Bank of America Merrill Lynch in their Follow the Flow note from the 26th of May entitled "Inflows into high grade continues":

"The convexity trade

Buy what they buy or buy convexity. IG funds continued to see strong inflows, as the ECB has been buying a larger volume of corporate bonds over the past couple of weeks. Additionally, flows into equity funds have improved over the past couple of months, on the back of a supportive earnings story in Europe. On the flip side, flows into high yield have slowed significantly, as the market now offers the lowest yield on record.

Over the past week…

High grade funds recorded another strong weekly inflow, the 18th in a row. High yield fund flows also remained in positive territory for a fifth week, but last week’s inflow was marginal. Looking into the domicile breakdown, as Chart 13 shows, inflows to European-domiciled HY funds with a European-focus were also marginal, while the inflows from global-focused funds were offset by outflows from US-focused funds.
Government bond fund flows last week were negative for a third week. So far this year, the asset class has suffered losses in 14 out of 21 weeks. Money market funds suffered a sizable outflow last week, the second in a row and the largest in 60 weeks. Overall, Fixed Income funds recorded their 10th consecutive weekly inflow, but this one was the smallest in five weeks.
European equity funds continued to see inflows for a ninth consecutive week. However, the pace has slowed down w-o-w. So far this year, the asset class has seen more than $15bn of inflows.

Global EM debt funds continued to see inflows, for a 17th consecutive week. The asset class has so far this year enjoyed stellar inflows of over $33bn. Commodities funds had their 11th week of inflows, predominately driven by inflows into gold funds.
On the duration front, positive flow numbers were recorded in mid-term and short-term IG funds, for the ninth and 23rd week in a row, respectively. However, flows into long-term funds were negative for a second week." - source Bank of America Merrill Lynch

With such a strong tide in credit funds and particularly High Grade, it is hard to see how the Orchidelirium can cease for the time being. Many portfolio managers we know are getting bored by the day by this one way market, with new highs daily, record low volatility, tighter credit spreads and steady inflows. Apart from an exogenous factor such as a geopolitical event, it's hard to think about what could be a catalyst for a reversal in this Orchidelirium.

Some would point out to the record levels touched by household debt surpassing 2008 peak as indicated in Wells Fargo's Interest Weekly note from the 24th of May:

"Household debt rose 1.2 percent in Q1 to $12.73 trillion, surpassing the $12.68 trillion mark set in Q3-2008. After accounting for population growth and inflation, however, households are not nearly as levered as 2008.

Aggregate Household Debt Returns to 2008 Levels

Household debt rose by $149 billion in Q1-2017, bringing the aggregate level of debt to an all-time high (top chart). Although the return to this level of debt has grabbed headlines, there are a few important considerations when comparing household borrowing today relative to a decade ago.
First, the composition of debt has changed significantly. There has been a shift away from mortgage lending and towards autos and education-related debt. As a share of total debt, student loans have more than doubled from a 4.8 percent share in Q3-2008 to a 10.6 percent share today. Auto lending has seen a similar, albeit more moderate, trend. Mortgage debt, however, remains $670 billion below its 2008 peak.

Second, although household debt has surpassed its previous peak, this ignores a series of other factors, such as population growth, inflation and growth in real output. As illustrated by the dark line in the middle chart, nominal debt per capita still remains short of its 2008 level. After adjusting for inflation, blue line, it is even clearer that the average household’s debt portfolio is smaller relative to a decade ago. When viewed through this lens, the recent growth in household debt looks much more modest.

Loan Quality Fairly Stable on Trend

In terms of loan quality, household debt delinquencies remained roughly flat in Q1, although there were some differences between categories of loans. Auto loan delinquencies ticked modestly higher and have risen very gradually over the past few quarters (bottom chart). Credit standards on autos have tightened from already relatively constricted levels; the median credit score for a newly originated auto loan was 706 in Q1, a 6 point increase from Q4 and well above the 686 reading in Q3-2007 on the eve of the Great Recession. Mortgage debt drove most of the growth in Q1. As we have highlighted in other reports, a mild winter weather likely pulled forward some housing activity that would typically take place in the spring. This in turn helped spur a strong first quarter for the housing market, with real residential construction expenditures rising at a 13.7 percent annualized rate. Auto loans and student loans grew $10 billion and $34 billion, respectively, while credit card balances declined by $15 billion.

On balance, the recent growth in household debt is a broad sign of strength rather than consumer weakness. Student loans remain a long-term secular challenge, and other areas, such as autos, warrant close monitoring as new data become available. That said, household leverage remains lower than it was in the 2000s credit bubble while the personal saving rate is higher. Despite the Q1 weakness, we expect real consumer spending to rebound in Q2 amid an ever-tightening labor market and healthy consumer confidence." - source Wells Fargo.

Yet, the latest batch in soft macro data such as retail sales and New Home Sales falling by 11.4% the most since 2015, it remains to be seen if indeed as in Q1 2016, that the soft patch we had in Q1 2017 with the now revised 1st Quarter GDP at 1.2% will be offset going forward by better macro data in Q2 2017. With US durable goods orders falling by 0.7% in April for the first time in 5 months we are wondering if the trend in softer macro is going to continue while confidence is very strong in another rate hike by the Fed in June. 

• Final charts - Modern art, fine wines, & horses, are assets that tend to peak just before the start of a pronounced downturn

Back in July 2016, in our conversation "Who's Afraid of the Noise of Art?" we quoted one of the recurrent themes of our friends at Gavekal research, namely that it has “never been so expensive to be rich” particularly if you want to snap up a classic Ferrari it seems. Kudos to our central bankers and their obsession with the "wealth effect":

"As most of our readers will know, modern art, fine wines, & horses, are assets that tend to peak just before the start of a pronounced downturn of the economic cycle. And interestingly, over the past couple of months, these assets have really been shooting up, breaking several records on the way" - source Gavekal, July 20th 2006.

History does indeed rhyme and we must confide that at this stage of the "credit cycle", we are afraid of the Noise of Art given back in 2006 our Gavekal friends indicated the following:

 "Usually, the last thing to go up in prices are rare automobiles" - source Gavekal Five corners, July 20th 2006.

This time it's different? We don't think so. Our final chart comes from Knight Frank's most recent wealth report and displays the stellar performance of classic cars in recent years:

"The Drive to Quality

For classic cars, “2016 was the year of the slowdown,” says HAGI’s Dietrich Hatlapa. For anybody not familiar with the market, that looks like a slightly downbeat claim as annual growth was still a very respectable 9%. But set against total growth of 151% over the past five years, it is clear that the market has dropped down a few gears. “Those who were in it just for the money have moved on,” says Mr Hatlapa. “The market is now more in the hands of the collectors and specialists, which I think is good news for the real enthusiast.”

According to data from the Kidston 500, another market-tracking index, of the cars put up for sale at the top international auctions during 2016, 78% sold by number – down from 84% in 2015 – while the proportion of cars selling for below their low estimate rose by 20%.

The pattern is the same in the US, says Brian Rabold, Vice President of Valuation Services at specialist insurer Hagerty. The firm’s Blue Chip index, which tracks the value of 25 of the European, US and Japanese cars most prized by US collectors, fell by 1% last year. “Over the past year or so we’ve seen a shift from a sellers’ to a buyers’ market,” he says. “People are becoming more selective. Last year there were 26% fewer auction sales of cars over US$1m in North America.” He also notes a shift in interest towards new models like the Porsche 911R. “Our top 1,000 clients are buying cars from the 2000s like never before.”

But despite the slowdown, the rarest cars in the right condition with the most desirable provenance will continue to set world records, says Mr Hatlapa.

Simon Kidston, who set up the Kidston 500, agrees: “Yes, the pace of deal making is noticeably slower, and the headline figures don’t convey that the underlying mood is much more reflective and uncertain amongst buyers and sellers. But until there are better, more mobile and tax efficient havens for cash, the market is likely to remain active and capable of reaching new peaks when fresh discoveries emerge from hiding.”

As if to prove the point made by Mr Hatlapa and Mr Kidston, a Ferrari 1957 335 Sport became the most expensive car to go under the hammer ever, in euro terms at least, when it was sold by Artcurial in Paris for €32m.

In the US, the annual Monterey sales also delivered new benchmarks. An historic 1962 Shelby Cobra went for over US$13m with RM Sotheby’s, making it the most expensive American car to sell at auction. A 1955 Jaguar D-type grabbed the record for the priciest British car to go under the hammer when it fetched almost US$22m. And, dispelling the myth that nobody is interested in older cars any more, Alfa Romeo joined the party with a 1939 8C Lungo Spider making just under US$20m – a new record for a pre-war vehicle.

However, the most expensive car sold last year was handled privately by Mr Kidston. The exact price achieved for the 1962 Ferrari 250 GTO has not been revealed, but it exceeded the highest sum ever paid at auction (US$38m for another 250 GTO sold by Bonhams) for a classic car and was possibly the biggest deal ever struck." - source Knight Frank - The Wealth Report 2017

However, there is more under the hood that meets the eye. As we indicated back in our July 2016 conversation, we have kept a close eye during the last couple of months on our interesting, yet entertaining exercise of building up a "virtual garage" made up of "classic cars" of interest and monitored on an ongoing basis their valuation by using the website "mobile.de". What we have continued to notice since we added a few cars in our "virtual garage" is some interesting price revisions taking place. For instance a Ferrari Dino 246 GTS was parked in February 2017 at the price of €449,000 and now is offered at €397,000. Another Ferrari Dino 246 GT was parked as well in February for a price tag of €375,000, now it is offered at €315,000. A Ferrari 250 GTE was parked in May 2016 for €475,000 and is now offered for €395,000. Rarities such as some 1955 Mercedes-Benz 300 SL Coupé Gullwing are still commanding an impressive 1,600,000 EUR price tag and are yet to show any price revisions at the moment. 

What we find of great interest is the "Cantillon effect" and the significant rise in price appreciation for classic cars can be directly link we think to our central bankers generosity and their "dear wealth" effect and some form as well of Orchidelirium. Yet, the classic car market continues to face some headwinds as per the latest read from the Hagerty Market Index which is an inflation adjusted open ended index (similar to the DJIA or NASDAQ Composite) based on change in dollars and volume of the market:

- source Hagerty

Furthermore in a period of Orchidelirium and in similar fashion to 2006 we are not surprised to see records being broken in art auctions as per last week in New York as reported by ArtNet:

"A staggering $1.6 billion worth of art changed hands during New York’s auction gigaweek last week. The three houses stuffed 11 sales of Impressionist, Modern, postwar and contemporary art into just five days. The combined total is up $400 million from the equivalent sales in May 2016, which made $1.2 billion. What should market-watchers take away from the onslaught? Here are our parting observations:

Biggest Trend: Big-Ticket Lots

Top-heaviness seems to increasingly define the evening sales. Both Christie’s and Sotheby’s were deeply reliant on a few top items. Consider Sotheby’s postwar and contemporary sale, where the record Basquiat, which sold for $110.5 million, represented a third of the evening’s $319.2 million total. Throw in the second-priciest lot of the night, a Roy Lichtenstein that fetched $24 million, and the two items account for about 42 percent of the sale.

Biggest Winner: Christie’s

All told, Christie’s made $833.9 million from its four sales last week, besting rival Sotheby’s by nearly $200 million. The publicly-traded auction house made a combined $635 million from its five sales. Meanwhile, Phillips, which did not hold Impressionist and Modern auctions, made $128.9 million last week.

Biggest Loser: The Owner of This Wade Guyton

It’s easy to focus on record prices and dizzying numbers, but don’t forget: Not everyone who puts an artwork up for auction makes money. To wit: One unlucky collector bought Wade Guyton’s Untitled (2005) at Christie’s New York in March 2014 for $1 million. It sold at Phillips last week for $670,000—a $330,000 loss. Ouch.

Most Likely to Make Auctioneers Nervous: Big-Ticket Withdrawals

Each house withdrew a major lot at the last minute last week—an indication of just how skittish consignors can get in the absence of guarantees. At Phillips’ contemporary art evening sale, the consignor of the second-highest estimated work, Gerhard Richter‘s Abstraktes Bild (1994) (est. $15–20 million), got cold feet. (“It is the consignor’s decision to take the painting out of the sale and we have to respect that,” Phillips’ chairman Cheyenne Westphal said after the auction.) The evening before, Christie’s withdrew Willem de Kooning‘s Untitled II (1977), which had a hefty estimate of $25–35 million. But perhaps the biggest disappointment was Tuesday’s last-minute withdrawal of Egon Schiele‘s painting Danaë (1909) (est. $30–40 million) from Sotheby’s Impressionist and Modern art sale. Not only was it the priciest lot of the evening, it was also the cover lot of the catalogue. The painting’s $30 million low estimate had represented some 20 percent of the low estimate of the sale overall.

And…the Best-Selling Artist of the Week: Jean-Michel Basquiat

Not only is the American artist responsible for the most expensive single work of art sold last week—the $110.5-million canvas Untitled (1982)—he also cleaned up at all three auction houses. All told, the 27 Basquiat works on offer in both the day and evening sales sold for a total of just over $200 million. Here’s the breakdown.
Christie’s: $57,863,500
Sotheby’s: $130,905,004
Phillips: $12,976,000
Total: $201,744,504" - source ArtNet

Absence of guarantees are indicative of tightening financial conditions as well in the art market. If you read again our July 2016 you well learn that auction guarantees have proliferated since the financial crisis. Irrevocable bids were part of financial machinations that distort the art market. When highly valued works with prearranged bids come up for auction, in many cases there is no genuine bidding and they were bought by the guarantors. In the past, so-called irrevocable bidders were compensated with a part of the auction house’s sales commission only if another buyer purchased the artwork that they had backed. Now, by opting for a fixed fee, they are guaranteed a payout and can get the artwork effectively at discount. Auction houses have resorted in the past to "vendor financing" but as well as paying some buyers to bid on its artwork. If potential buyers are not even agreeing on fixed fee to make at least a minimum bid as per Sotheby's 2016 incentive, then we are not surprised there were big-ticket withdrawals. Yet another indication of deterioration in the "credit" cycle coming this time around from the art market.

So not only there is a risk for yet another soft patch in Q2 and other macro releases and additional pressure from loan demand and consumer credit, but we think you should also keep a close eye on what is happening in the art market also at risk of facing a "soft patch". While "classic cars" have enjoyed "stellar returns" for the savvy and wealthy investors, they continue to show sign of slow down and price revisions.

"The stock market is filled with individuals who know the price of everything, but the value of nothing." - Philip Arthur Fisher

Stay tuned!