This is by some guy called Ambrose Evans-Pritchard, writing in the UK’s Daily Telegraph. Well, with a name like that you wouldn’t imagine he’d have missed too many meals in his life. He’s probably right in picking that it’s not a good sign for the future of the world when someone can pay $450 million for a painting, even if Leonardo da Vinci did paint it. Reading between the lines of overblown pretentious verbiage, I reckon he’s saying the world is in for another major financial crash, engineered by the same grotesquely over-paid, grasping, selfish “financiers” that brought us the last one.
Leonardo da Vinci has special cachet. What is striking about the Christie’s soiree in New York last week was not so much the US$450m ($661m) paid for his rediscovered Salvator Mundi but the prices fetched by everyone else.
Buyers forked out $46m for vermilion spirals from the Bacchus series by Cy Twombly, executed 12 years ago with a paint-drenched brush on a pole. Soothing sands called Saffron by Mark Rothko fetched US$32m.
The week’s haul at Christie’s and Sotheby’s topped US$1.5 billion, with Asian buyers snapping up Monets. Fernand Leger’s abstract Contrastes de Formes fetched US$62m.
It screams late-cycle liquidity, recalling Japan’s impressionist fever in the late Eighties before the Nikkei collapsed and the bottom fell out of the art market.
Bitcoin clinches the argument. It has risen more than 1,200 per cent over the past year to more than US$8000 – five times an ounce of gold – on a “greater fool” presumption.
This is not a criticism of blockchain technology. It will flourish. But you cannot yet buy and sell things in any meaningful way with cryptocurrencies worth US$180b.
Bitcoin will end badly, either when the Chicago Mercantile Exchange launches its futures contracts in two weeks and allows traders to short it, or when the global cycle turns. A runaway asset boom can last a long time when the G4 central banks are holding real interest at minus 1.5 per cent and spending US$2 trillion a year soaking up “safe assets”
And here’sAcademic bulls say the stock of central bank assets is still growing. Market bears counter that the flow is falling, which matters more to them. Hence the recent rout in high-yield credit. Junk bond funds saw the biggest outflows since 2014 last week.
A parallel retreat is under way in East Asia where US$800m of bond sales in steel, solar and palm oil were cancelled. These are minor tremors. What threatens the universe of stretched asset values is the return of US inflation. The boom is built on the premise that the Fed will bathe the global system with ample liquidity.
Yet that is precisely what is now in doubt as US unemployment drops to a 17-year low and the dormant Phillips curve reawakens. The New York Fed’s underlying inflation gauge has jumped to a post-Lehman peak of 2.96 per cent.
All it will take from now on is a single piece of hard data to confirm this trend and the markets will reprice interest rate futures abruptly, shaking the whole edifice of global risk appetite.
Staccato rate rises by the Fed would ignite a dollar surge, squeezing an estimated US$10.7t of offshore dollar debt. There is a further US$14t of global dollar debt hidden in derivatives and FX swap contracts, pushing the total to US$25t.
I didn’t want to upload the whole pretentious, jargon-loaded article – just give you a taste – but here’s Evans-Pritchard’s conclusion:
“Major players in the City are watching with wolfish concentration. Bank of America says the air is getting thinner for risk assets but tells clients to stay with the “Icarus trade” as long as you can still breathe.
Mark Haefele, investment chief at UBS, says it is too early to bail out but the coming inflection point is “something we think about a lot”.