The Francis Bacon Indicator
November 13, 2013
Ron DeLegge, Editor
If you think the stock market (NYSEARCA:SCHB) is a frothy, out-of-control maniac, you should get a load of the art market.
A 1969 triptych – three canvas paintings of Lucian Freud (see below) – painted by British artist Francis Bacon sold for a record $142.4 million at a Christie’s auction in New York earlier this week. The auction record of Bacon’s work blew away the estimated sale price of $85 million, along with the previous auction record of $122 million set in May 2012 by Edvard Munch’s “The Scream.”
Are record prices in the art market – particularly works by Francis Bacon - a warning sign of trouble ahead?
Bacon’s previous auction record of $86.3 million was set in May 2008 and from that moment to year end, the S&P 500 (NYSEARCA:IVV) crumbled 36.23% lower. This time around, will the Francis Bacon Indicator repeat itself? Assuming a similar sized correction, a 36% drop would reverse the S&P 500 back to third quarter 2010 prices near 1,136.
Courtesy of Christie's Auctions & Private Sales
Bacon, who died in 1992, claimed to be an “optimist for nothing” and deformed images and objects were his hallmark. Maybe Bacon’s fancy for human distortions is a fitting symbol of today’s radically warped art and financial markets. "Art imitates life" as the saying goes, right?
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Market bubbles can span years, even decades, but they are never indefinite.
Look no further than the great bond (^TYX) bubble which has already popped. Bonds are in the midst of a severe decline that began last year. The yield on long-term U.S. Treasury bonds (NYSEARCA:TLT) has soared 41.68% over the past year and prices for 30-year Treasuries are down 18.25%.
After the art market crashed in the early 1990s, the road to recovery was long and painful. In fact, the art world wasn’t able to get back to its 1989 highs until 2003, according to the MeiMoses index of art prices.
In a 1985 documentary Bacon described his 1963 painting “Study for Portrait on a Folding Bed” as an “absolute disaster” that “doesn’t work” and I wish they “would just burn this.” Remarkably, Bacon’s harsh assessment of his own work hasn’t stopped frenzied art collectors from bidding up his paintings at the auction block.
Although the connections between Francis Bacon and surging asset prices (NYSEARCA:SSO) may seem like a stretch, the re-invention of facts to justify higher and higher prices for stocks, real estate, and objects of wealth is predictably human.
Bacon himself said, “Great art is always a way of concentrating, reinventing what is called fact, what we know of our existence – a reconcentration…tearing away the veils that fact acquires through time.”
Try replacing Bacon’s own words “great art” with “great IPOs” or “great market recapitalizations” or something similar. Here's what you'll discover: Like a handsome painting, the unexpected results are quite revealing.
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