May 2001

Interview with economist William N. Goetzmann: 'The financial and the art markets do not crash at the same time'

In 2001, the Yale professor attributed the one- to two-year lag between crashes to the time it takes to liquidate assets

William N. Goetzmann notes that when financial markets crash, the art market tends to follow suit one to two years later © Arne Dedert; dpa Picture Alliance/Alamy Stock Photo

With Wall Street under siege, a recession threatening and uncertainty plaguing the art market, The Art Newspaper spoke to the prominent Yale economist, Dr William N. Goetzmann, to discuss the factors influencing the present situation as well as the effect on dealers and collectors.

Considered an expert in the area of risk and return on investments in art, along with historical stock market behaviour, Goetzmann holds the Yale School of Management chair in finance and management studies. He is also director of the International Center for Finance. He has been director of Denver’s Museum of Western Art and has made a documentary film about the life of the US realist Thomas Eakins.

The Art Newspaper: Could you describe how you carried out your research on the art market?

William N. Goetzmann: In studying the art market, I looked at recurrent sales of paintings and other works of art against financial indicators. I found a definite statistical relationship. I developed a database to look at long-term performance of the world art market. I collected US data going back to 1926, but with the UK, I went back to the 1700s. I took all cases where a work of art sold repeatedly and created a repeat sales index spanning from 1716 to 1986. For a financial index, I used the Dow and an index of the London Stock Exchange, which I constructed for this purpose. That way, I could trace realised capitalisation on paintings, rate of return, risk and correlation to other investments.

While the bubble has burst, the Nasdaq has plunged 58% since last year, and the financial markets are posting a $2.2 trillion loss, the art market seems to be flourishing. How do you account for six- and seven-figure sales at this year’s Tefaf Maastricht fair? Even at New York’s International Asian Art Fair last week, a number of dealers racked up substantial, seven-figure sales totals.

Europe is different; it is not driven.

Because of the statistical relationship between the financial and art markets, they do not crash contemporaneously. Whenever there has been a crash, the art market has followed with a one- to two-year lag. The reason for this is that financial transactions take a while. If one loses a substantial amount of money, it takes time to liquidate assets.

Whenever there has been a crash, the art market has followed with a one- to two-year lag. Financial transactions take a while. If one loses a substantial amount of money, it takes time to liquidate assets.

Can we expect a real art market slump shortly and how are these times different?

If the market finishes down this year, I would predict that the art market also would dip. So wait one more year. The volatility (the Dow roller coaster ride) in the past two years is highly relative to most of history excepting the 1930s. But compared to 1929, we have a very different economy; no hyperinflation and no war reparations in Europe.

The volatility reflects the continued uncertainty about the growth potential for high-tech stocks. Thus, earnings reports—good and bad—are likely to shock the market.

How do you see the present art market differing from earlier periods?

In the past ten years, collectors have appeared less discerning. They go for the high point, like the great Renoirs. I see the biggest discrepancy between the stellar prices paid for coveted paintings and anything else.

There is a growing homogenisation in taste for art. Whether the client is Chinese, Japanese or Latin, the taste is the same. They will buy Impressionists or Old Masters and that has an effect. It drives prices up. The world’s millionaires are competing for the same paintings and that signifies wealth and taste at the global level.

In addition, new buyers are constantly entering the marketplace. There are now Russian and Eastern European millionaires. They are not likely to buy Russian Impressionists, you can be sure.

What is really outstanding sells. It sounds like a nouveau riche model of the world: a small percentage always wants to buy culture that everyone else has heard of.

The London jewellers S.J. Phillips can recall that in the 1920s the rich would not buy because they were waiting for the market to bottom out. Do you think this reasoning is still around?

If it exists, we would have seen people picking up bargains in 1993/94. The question is, are there savvy collectors waiting for the market to hit the cellar and if so, how many are there?

What are some of the most surprising aspects of your studies?

I have wondered if the interest in art is temporary, but it comes back all the time. The most seemingly solid US corporations may disappear but the liquidity of paintings, even those that appeared only once as far back as 60 years ago, can be stronger. There is still a market. With paintings, I had expected that works would fall out of fashion. But examples sold 100 years ago reappear.

Can you tell us about your findings on the auction scene?

In 1995 I had also looked at volume of auction sales and buy-in rates. Sales volume followed high prices, so there was a higher volume when prices were up.

We are seeing an increasing number of banks setting up art advisory services. What are your thoughts on such practices and art as an investment?

Overall, there is a persistent undercurrent of interest in investing in art. When it is treated as an asset today, no one does anything without an expert. But providing money to such experts is no different from backing a portfolio manager.

When art is seen as an investment it is highly volatile; it fluctuates wildly. So when looked at in a mixed portfolio, the volatility of works of art is like that of a small high-tech performer. The risk is enormous, often double that of other assets. Its value can be cut in half in a single year.

Art prices increase with inflation, but because art is so volatile, it is not a great inflation hedge.

Art prices increase with inflation, but because art is so volatile, it is not a great inflation hedge.

We are seeing a growing number of dealers with smaller inventories than, say, a decade or two ago. To what do you attribute such shrinking stock?

For dealers, inventory is really a risky asset. Because it is difficult to control the risk, in economic terms, it would argue against keeping large inventory

With dealers sharing investment in works of art, they can spread the risk. That situation mitigates the uncertainty. That is a trend which we will see strengthen.

Certainly, with blue-chip pictures, that kind of partnering is beneficial. But when there are problems of attribution and the works of art are second-rate, it is harder to put together consortiums.

As an economist, how do you see the recent price-fixing case against Sotheby’s and Christie’s? How will the current situation influence the success of Phillips?

The auction houses were caught red-handed fixing prices and they still haven’t rolled back their rates. Now Sotheby’s and Christie’s have put together a deal to ensure a duopoly by having a judge allow them to issue vouchers for their services. It is the most anti-competitive agreement I have ever seen.

When there is an estate sale, the executor has a fiduciary responsibility to use a highly reputable mechanism to market the goods. It is not a matter of the biggest bang for the buck. If I were Phillips I would question the other firms since they have been proven to cheat people.

What have you found to be some of the more elusive aspects of the art market?

I am interested in the top one-half percent of wealth in the world, what they are buying and just how many such collectors are there. But that is very hard to get a handle on; yes, there are more, but how many more?

What areas in the market are uncertain or difficult to measure?

We have no model to predict a crash.

Originally appeared in The Art Newspaper with the headline "The financial and the art markets do not crash at the same time"

Update: a 2020 vision

Over the past 20 years, the art market has developed an increasingly complex financial infrastructure. Art loans and auction guarantees have always existed, but now they are more formalised. Art freeports have emerged as a new nexus of trade. Risk models for art loans and insurance are now very sophisticated.  Yet at the same time, the market remains opaque—caveat emptor is as true now as it ever was.  Issues of authenticity and provenance loom large.

Since 2001, my co-authors I have studied the art market from a social angle. For example, which paintings set auction records over the past three centuries and why. There were only 35 record sales between 1701 and 2014, calculated in inflation-adjusted terms—six of them happened since 2001 when my interview appeared in The Art Newspaper and two more since our 2014 article— capped by the spectacular record of Salvator Mundi.  We found that the records told more about the buyers than the art. 

None of the record-breakers were exceptional within the artists’ oeuvres. But many of the record sales were associated with personal or national aspirations towards status. The Salvator Mundi sale might best be compared with Catherine the Great’s 1771 record-breaking purchase of Gerrit Dou’s Interior with Woman and Child—an acquisition that signalled to the world Russia’s aspiration to be a centre of high culture.

In other work since 2001, Christophe Spaenjers and Luc Renneboog and I measured the statistical relationship between art prices and income inequality over the centuries and found a strong relationship. Art goes up when the rich get richer—even when you adjust for average growth of income. -- William N. Goetzmann

Appeared in The Art Newspaper Archive, 114 May 2001