Date: 5/18/2021
Author: Mr. X
Don’t listen to what rich people say. To become one of them, watch what they do.
Over the last few weeks, I’ve been warning people that tech stocks might be overvalued. One of the best investments over the past year has been lumber. Base and precious metals are also doing well. Even the Biden Administration is now reluctantly admitting that inflation could be a concern.
Consumer prices have spiked far more than many experts expected, and the last jobs report was lackluster. Many businesses are desperate to hire workers, but some of the unemployed don’t feel any reason to take what jobs are available. If they are making more money on unemployment, why should they bother to get a job? Furthermore, if inflation is going to eat away at real wages, why should workers throw themselves into the grind of the 9 to 5?
Of course, on the surface, things are going well for the current government. Most polls show President Joe Biden remains broadly popular. If the Republican Party re-nominated former president Donald Trump, President Biden would easily defeat him. Polls may be biased, but they aren’t that biased.
However, there is no guarantee President Biden, let alone former president Trump, will be on the ticket in 2024. What’s more, President Biden may be at the peak of his popularity right now.
In short, the “easy part” of his Administration is done. President Biden needed to deliver stimulus payments to the American people. In an act of almost deliberate self-sabotage, the GOP Senate refused to do this before the presidential election and the Georgia Senate runoffs. President Biden got it done and reaped the rewards.
President Biden then needed to preside over a gradual victory over the pandemic. As of this writing, Texas has reported no COVID-19 deaths for the first time since they started tracking the figures. You can say President Biden does or does not deserve credit, but the buck stops with him. With America seemingly triumphing over COVID-19, President Biden is in charge. He becomes the hero, whether that’s fair or not.
Now comes the hard part.
The president faces gas shortages, a Middle East crisis that could split his party, and economic problems. I suspect that inflation is going to be a bigger factor than most talking heads believe. One reason for my concern is because we’re seeing a bull market not just in commodities, but art.
Art is considered by many to be one of the best ways to shield your assets from the taxman and from inflation. The New York Times reported in 2009 that the Art 100 Index rose by 130 percent from 1977 to 1982, at a time when prices went up by 80 percent. In a recent note, Bank of America strategist Michael Hartnett advised investors to move into real assets, not just art, but items such as wine, diamonds and expensive cars. It’s also well known that elite collectors can also use the proceeds from selling art to buy more art – and avoid paying some taxes on the proceeds via “1031 exchanges.”
There is some controversy about whether investing in art is really a good strategy at all times. For example, while one index of fine art sales shows impressive average returns of 10% over the past few decades, research from Stanford Business suggests that annual returns were closer to just 6.5% between 1972 and 2010.
Still, what are the wealthy doing now? Just a few days ago, an auction from Sotheby’s that was expected to raise $436.8 million raised $597 million. The top sale came from Claude Monet’s Le Bassin aux Nymphéas, which sold for $70.4 million with premium.
However, the real action is in an entirely new class of investments. These are Non-Fungible Tokens (NFTs). NFTs run on the blockchain and thus represent ownership of a digital work of art. The whole point of the blockchain is that data can be verified by anyone. Thus, NFTs provide a possible solution to one of the great problems of fine art investing – how to avoid fraud.
A man named Pablo Rodriguez-Fraile purchased a piece of anti-Trump digital artwork for $67,000. Just four months later, he was able to sell it for $6.6 million. Artist Mike Winkelmann, known as “Beeple,” sold an NFT for $69.3 million two months ago. The Fox network and showrunner Dan Harmon, creator of the television show “Rick & Morty,” are creating a program that will reportedly be the first ever “curated entirely on the blockchain.” This will include selling NFTs that are associated with the show.
You may have an obvious question. Why in the world would someone pay hundreds of thousands of dollars to “own” something that people can view on the computer for free? If this popped into your head, congratulate yourself. You are still sane.
The entire thing seems ridiculous. You can “see” the Mona Lisa on Wikipedia but it’s not the same thing as going to the Louvre and seeing it. The same can’t really be said of digital art.
However, much like we’ve learned to understand why the blockchain has value, we will gradually learn NFTs do too. NFTs solve a problem. They allow digital creators to monetize their art. This is important because artists don’t just create out of some inherent need or prompting by a muse. They have to survive and most want compensation. Even Michelangelo needed Pope Julius II, and today’s digital artists need patrons too. NFTs allow a way for ownership to be determined and artists to be compensated.
The blockchain even makes them more reliable than old fashioned paintings. After all, there’s an entire industry of special investigators who use painstaking techniques and research to determine if a famous artist “really” created one piece of art or another. The blockchain allows you to solve this problem without calling in the Fine Art CSI.
The idea of digital ownership also shouldn’t seem ridiculous. Consider how many video games become profitable not just because of sales, but because of in-game purchases for special avatars, weapons, or gear. Consider what some people might want to pay to have something in the digital world that is truly one-of-a-kind. Furthermore, it wouldn’t just be one-of-a-kind, it would be something that you could prove is utterly unique.
All this suddenly doesn’t seem so irrational.
That said, I think the NFT boom shows something deeper at work. I can’t help but see the creation of this entirely new market as related to the commodities boom and the rise in cryptocurrency. Though Elon Musk’s recent comments may have tanked Bitcoin over the last week, its value is still staggeringly high compared to where it was just one year ago (less than $10,000 per BTC). NFTs are a way of making an intangible asset into something “real” that has value – and can be used as a hedge against inflation. That’s what many people are looking for right now.
NFTs are still in their infancy and there is much more to say about this emerging marketplace. That’s an article for another time. For now, suffice to say investors should explore Ethereum and coins that work off the Ethereum protocol, which sustains most high-level NFTs. This gives a certain value to these cryptocurrencies themselves. I would be in no hurry to begin speculating in NFTs without far more research (unless, of course, you really feel that you need to own a certain piece you saw online).
The NFT marketplace, though fascinating, is really important to us for a simple reason. The very fact so much money is flowing into it shows that the wealthy are fearful. More than $2 billion was already spent on NFTs in the first quarter of 2021. Capital flow of that magnitude shows that the smart set is nervous about where they are putting their money.
Wealthy investors don’t want to spark a panic by saying that there is inflation underway or that it could spiral out of control. Such declarations have a way of becoming self-fulfilling prophecies. But that doesn’t mean they won’t quietly protect themselves even while they tell us everything is fine.
At an almost comically stereotypical cocktail party I once attended, someone who would know casually and cynically told me that he thought all modern art was a tax dodge. He emphasized this claim by pointing at an expensive painting that looks like something a toddler put together in an afternoon. I’d put this man’s argument more charitably. Fine art (however the “experts” define it) and other real assets are a hedge against inflation and taxation.
If digital ownership of a meme is apparently worth millions of dollars to the elite, Main Street investors should take notice. Inflation and the prospect of confiscatory taxation are worrying the wealthy. Watch what they do, ignore what they say, and get back to basics with real assets (and underlying equities that reflect their prices) during these uncertain times.
