The Ultra Rich Dumb Money Bubble

“Never confuse the size of your paycheck with the size of your talent.” – Marlon Brando

balloon dog(Photo: Charles Nouÿrit )

Over the last 5 years while most of Americans have struggled, the wealth and lives of the ultra rich have gotten better and better. For example the Knight Frank Luxury Investment Index (which should really be renamed “Dumb Stuff the Ultra Rich spend their Money on Index”) is up over 40%. If we dive deeper into the numbers we will find that over the last 5 years expensive watches are up 33%, Chinese Ceramics are up 43%, Collective stamps are up 83%, Art is up 12% and classic cars are up 115%. The problem with all of the items is that their price is not determined by any intrinsic value but rather by what someone else is willing to pay for it. If someone wants to spend millions of dollars for a small ceramic bowl they have all the right to do as they wish, but what is interesting to me is at what point does this ego fueled party come to an end?

I believe what we are witnessing now is rather unique time in history. Just like during the dot com bubble when the newly made rich day traders all thought they were geniuses we now have hubris bubble among the ultra rich. There are now a great many newly made billionaires who all believe they are geniuses, failing to see that the rising tide of liquidity has been lifting all the boats for the ultra rich.

Nothing signifies this more than the art market. I find it so amazing that the same people who would never venture into penny stocks, for the fear of losing due to market manipulation, would not think twice about spending millions in the art market, which is tremendously more corrupt and manipulated than the stock market ever was.

I fail to see any intrinsic reason besides ego to spend tens of millions of dollars on a painting or over 50 million on a stainless steel balloon dog. Now you might call me a simpleton who does not understand high art, and you may be right. But if I do not understand art I find it hard to believe that some newly made Russian oligarch who owns a coal mine is that much more knowledgeable in it than me.

The rich buy art for the same reason hip hop artists buy expensive champagne. How many people would actually buy Cristal if the bottle said Yellow Tail or if there were no other people there to see them buy it and drink it? Just like I am certain that most people would not be able to tell the difference between a $2000 bottle of champagne and $50 bottle, I am more than willing to bet that some newly made Chinese billionaire can’t tell the difference between a $5,000,000 painting of blotches and squiggly lines from a $500 painting of blotches and squiggly lines.

The ultra rich have been bidding up prices among themselves for a while now, and sooner or later the party will come to an end. Make no mistake, the super rich have always overpaid for items that enhance their status and stroke their ego, this has been going on since the beginning of time. The only difference now is that there is a lot more self delusion as to why this is actually a good investment option.

This might be one of those rare times where a constantly rising stock market, low return on cash, tremendous liquidity and old fashion hubris is causing a lot of the onetime smart money of the ultra rich to become dumb money. And like all dumb money in the long run, it usually does not stay with its owners for very long.

Here is a great piece 60 Minutes did on the art world from a few years ago; the situation has become even worse since then.

Michael Page

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