It’s very decorative, it’s very large, it looks very expensive, it’s very splashy. I’d identify the new owner as being very rich, and it’ll brighten up his expensive apartment. Would you want any more reasons?

 

John Richardson, Picasso biographer on why Les Femmes d’Alger (Version O) is worth the $179 million it fetched at a Christie’s auction recently, a new record for the amount paid for a work of art sold at auction

 

Cecil Graham: What is a cynic?

Lord Darlington: A man who knows the price of everything, and the value of nothing.

Cecil Graham: And a sentimentalist, my dear Darlington, is a man who sees an absurd value in everything and doesn’t know the market price of any single thing.

 

Oscar Wilde, Lady Windermere’s Fan

It probably isn’t coincidence that the quote from Oscar Wilde, published in 1893 during a period widely known as The Gilded Age, seems so apt in reference to the Picasso auction results. That period, like today, was marked by a vast and growing inequality and an ostentation that is only finally being rivaled today. It also isn’t coincidence that Mark Twain found the age so easy to satirize – the Gilded Age moniker does come from a Twain book – because the rich, especially the new and undeservedly so, do really stupid things with their newfound wealth. Like buy Picasso paintings just because they’re big, expensive, splashy and match the couch in the multimillion dollar Manhattan apartment. I don’t need to satirize the Picasso purchase; Mr. Richardson has done that quite nicely for us and I’m pretty sure his tongue was not even in his cheek at the time.

Let me clear this up for Vanity Fair, which posed the question to Mr. Richardson. The Picasso painting in question is worth $179 million because someone was willing to pay that much for it. That is the price but it says very little if anything about the value of the painting, which is, in a sense, incalculable. The price on the other hand speaks volumes about our society and our economy and maybe, probably the person who bought it. The smoking hot art market, record Porsche and Maserati sales, a record number of $20 million plus apartments under construction or for sale in Manhattan, all of these stories say it is a glorious time to be rich. And while the price of the Picasso may tell us little about the painting’s true worth, it does speak volumes about the value of the dollars required to obtain it and the work entailed in acquiring them.

The contrast between the rich, especially the very rich, and everyone else has rarely been greater, at least in modern times. Against the backdrop of the Picasso sale is the reality of a US economy that even now, 6 years removed from the financial crisis, continues to struggle, that is still described as in recovery when it should have long ago completed the twelve steps and moved on to a more independent existence. Of course, it is hard to leave rehab when the doctors offer a continuing supply of the substance that landed you there in the first place. Now, after years of repeated therapy, one can’t help but wonder if cold turkey might have been preferable, if the health risks – to our economy, to our society, to our national soul – of continued use might outweigh the compassionate course of attempting to minimize the pain of withdrawal.

I am as much a free market capitalist as anyone you will encounter but the quote about the Picasso sale struck a nerve with me. It just seemed so disconnected from the reality of our economy, so flippant, so lazily, easily snobbish that it made me wonder if the speaker’s ear was made of actual tin. I do not envy the very wealthy or feel any malice toward those who have earned their wealth or even those who have merely gotten lucky either through the DNA lottery or the state sponsored version. Today’s rich, however, are increasingly comprised of a class that has neither earned their wealth nor gotten lucky; they’ve achieved their status through a distortion of economic reality, a sense of entitlement, a bending of the rules that impede only the honest, a manipulation of the odds and risks that must apply for capitalism to truly work.

Take, for instance, the wealth being accumulated by the directors and officers of today’s public corporations. The compensation packages of these privileged few, this entitled class has moved well beyond what can be justified by the value they provide to the corporations they lead. CEOs, CFOs and directors today accumulate head spinning wealth, generation spanning wealth, while risking nothing more than their reputations, the value of which for many is suspect in any case and can be rehabilitated at little cost other than time. Today’s corporate leader is risk averse – he plans to move on before the long term consequences of his actions are realized – preferring to take the easy route of financial engineering, to concentrate on stock price rather than corporate value, to risk other’s capital while demanding to be compensated as if he is risking his own.

Today it is the “activist” investors – activist being a term that soothes the political hoi polloi; God forbid one call them corporate raiders or greenmailers – the Carl Icahns of the world, advocating policies that reward short term thinking – and coincidentally insider executives – who are lionized for extracting shareholder value as if eating the seed corn of future growth were worth celebrating. In the process, these raiders of the corporate purse increase the risks to long term investors, using money borrowed at Federal Reserve suppressed rates to extract their ransom before moving on, cutting an LBO like swath across corporate America. Bankers may have learned their leverage lessons in 2008 but a comeuppance still awaits the rest of corporate America and the bond markets that continue to fund buybacks, dividends and mergers at the expense of true investments in the future.

There is a price to be paid for this practice of granting extraordinary rewards to those who perform very ordinary tasks. It is seen in the juxtaposition of headlines in the financial press – S&P Closes At Record High; Economy Sours; Clintons Report Earnings of $30 Million – and in the economic data where the headlines celebrate more jobs but the details reveal the reality of an economic pie sliced into ever more part time pieces. Those who lament secular stagnation want to believe that there is some mysterious force that is pushing us toward zero growth, that human ingenuity and innovation have limits. The truth is that we have over-valued near term, instant gratification at the expense of the risk taking that matters, that produces the creative destruction that produces long term growth. That tends to happen when a society is allowed for long periods of time to discount the future at zero interest rates.

The long term performance of the US economy, the last 15 years or so, has been poor and the short term is not looking any better. As in the last few years, we entered 2015 with economists and the Fed professing, again, optimism about growth this year. And as has happened in those previous years, the reality of the new year hasn’t lived up to the hype. The economic data has been consistently weak and unlike last year when spring brought a thaw, the data has continued to weaken as we move into the second quarter. The Fed’s labor market conditions index, JOLTS, retail sales, business inventories, the Empire State survey, industrial production and consumer sentiment were all less than expected last week and some, at least, point to an economy on the verge of recession.

We may yet avoid recession in the short term. The yield curve has actually been steepening over the last few weeks as inflation expectations rise from the depths of deflationary despair. That is not something we should expect if we are truly on the doorstep of another recession. Likewise credit spreads – my other main recession early warning indicator – which are slightly elevated but not at levels that are of particular concern. And of course, the stock market shows no signs that recession is in the offing, continuing to defy gravity at levels that should only be attained during a boom. But we will eventually have another recession and it is then that we will see the damage this period has done to our economic well being, present and future.

I do not advocate a legislative solution to this pervasive, pecuniary inequality. Inequality is a necessary ingredient for future growth and shouldn’t be suppressed by committee. Legislation cannot, in any case, rid us of this tawdry, splashy, decorative wealth, cannot return us to a state of dignity and understated class. Only society can enforce a sense of propriety and punish the ostentatious for flaunting what was ill gotten or at least too easily obtained. It is, after all, the electorate, us voters, that swallows the promises of politicians while tolerating the corruption that has become so common that we are numb to its revelation. It is, after all, our own fault – shareholders – that corporate insiders are enriching themselves at our expense. We have routinely allowed compensation packages to grow to obscene proportions, content to watch stock prices rise regardless of how it is accomplished, willingly accepting a devil’s deal of more now in exchange for less later. Until that changes, until we, the owners of the companies that underly the stocks we own, stand up to the usurpers of our capital – our hirelings for gosh sakes – our future will continue to be debased, tomorrow devalued in favor of today. Until we, the voters, demand better from our leaders, until we put their jobs and presumed privileges on the chopping block, we should expect them to continue to feed us biscuits and call it cake.

Click here to sign up for our free weekly e-newsletter.

“Wealth preservation and accumulation through thoughtful investing.”

For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Joe Calhoun can be reached at: jyc3@alhambrapartners.com or   786-249-3773. You can also book an appointment using our contact form.

Print Friendly, PDF & Email