Thursday, August 28, 2008

WHY ART IS THE BEST INVESTMENT YOU WILL EVER MAKE - PART III

"Non-financial assets form the greater part of world wealth and have been more stable in value during periods of financial and social turbulence." Roger Ibbotson and Gary Brinson, "Global Investing"

The devolution of confidence in traditional investment alternatives, in concert with the elevation of the importance of design and aesthetic throughout the world, points to a renaissance in the value of art to a degree never before witnessed. After all, the art auction market is fair and transparent with a degree of stability that many financial institutions, and even some AAA-rated U.S. government debt, can only dream about.

The Inflation Problem
Economies around the world are experiencing slower growth. However, the imported inflation in those countries where the currency is tied to the U.S. dollar has eliminated central banks' option of reducing interest rates in order to generate growth. Growth has been further stymied by those countries' losses from their dollar-denominated assets. Of all the maladies around the globe however, it is dollar-driven food price inflation which poses the gravest danger to the sustainability of the dollar peg. To reduce inflation, Thailand and the Philippine central bank increased intereste rates this week. South Korea has been selling dollars in an effort to revalue the Won. To address inflation, the Indian central government recently decided took steps allowing the rupee to rise in value against the dollar, sparking a rally in the stock market. For example, Pakistan experienced riots at its stock exchanges as a result of continued movements downward, on top of rapidly rising commodity price inflation. A recent survey there highlighted the fact that 71% of respondents see inflation as a problem. This situation has been pointing many decision-makers toward the necessity of de-coupling from the dollar, revaluing their currencies higher, accelerating the movement away from U.S. investment vehicles, including the AAA variety, and hence, the vulnerable position that the dollar now finds itself in.

Bank Failures.
It doesn't end at IndyMac, the U.S.' third largest bank failure ever. Bank regulators, due to their increased expectations for greater numbers of bank failures, has for months been bringing bank examiners out of retirement in order to handle the anticipated workout workload. Many more banks are expected to fail.Interestingly, IndyMac wasn't even on the regulators' watch list when it failed, indicating that other banks are almost certainly as vulnerable. In its call upon depositor insurance to consumers, IndyMac alone will exhaust 10% of the FDIC's total warchest.
Not all things with high prices are in a bubble/Art Market will not implode.

The most well-known of the art indexes was developed by economists from NYU's Stern School of Business Jianping Mei, and Michael Moses. The Mei/Moses Fine Art index exist for seven different categories of art including Old Masters, 19th century, Impressionist, Modern, postwar and contemporary, and American before 1950. It is based on repeat sales of paintings, sculpture, ect. and captures almost 95% of all auction data. The index indicates that art had a compound annual growth rate of 12.05% between 1953 and 2003 versus 11.65% for the S&P500 index, with reinvested dividends.

Tuesday, August 26, 2008

WHY ART IS THE BEST INVESTMENT YOU'LL EVER MAKE - PART II

"Non-financial assets form the greater part of world wealth and have been more stable in value during periods of financial and social turbulence." Roger Ibbotson and Gary Brinson, "Global Investing"


The devolution of confidence in traditional investment alternatives, in concert with the elevation of the importance of design and aesthetic throughout the world, points to a renaissance in the value of art to a degree never before witnessed.After all, the art auction market is fair and transparent with a degree of stability that many financial institutions, and even some AAA-rated U.S. government debt, can only dream about.

Foreign Investors Reducing Their Exposure to the Dollar because sovereign wealth funds have begun to more aggressively reduce their exposure to the dollar. With over $3 trillion in investable assets, Foreign governments already own a whopping $1 trillion of Fannie and Freddie debt. Having watched as their investments in faltering U.S. banks such as Citibank (down 71% past 12-months) have cost them huge losses, Gulf state funds as well as China's primary investment fund (SAFE) are increasingly diversifying out of dollar assets. China's State Administration of Foreign Exchange (SAFE), which holds most of China's $1.8 trillion in foreign currency reserves in dollar-denominated investments, is evaluating investments outside of the U.S. Their move follows moves by Kuwait which cut its ties to the dollar in 2007 and their statements this week that they will not buy any additional Fannie or Freddie debt, and Singapore which has also reduced its exposure after watching its $5 billion stake in Merrill Lynch fall by almost 40% so far. The $200 billion in funds managed by the China Investment Corporation have taken huge negative hits as a result of their $3 billion investment in Blackstone Group in 2007 followed by a $5 billion infusion into Morgan Stanley earlier this year.

The largest sovereign wealth fund, the Abu Dhabi Investment Authority, is growing increasingly sensitive as its population shoulders the pain of inflation imported as a result of the countries' tie to the dollar. And while the desire to diversify currency exposure is gaining strength, most sovereign funds, due to their own significant dollar holdings, are concerned with doing so in a measured way that is unlikely to cause an accelerated dollar plunge.

What is left then for those banks and investment banks in need of capital infusions, who don't have the benefit of being Government Sponsored Entities, and can no longer rely on sovereign wealth funds to lend a hand? They, like Merrill Lynch announced this week, are reduced to selling assets. Having raised $15 billion in capital year-to-date from hedge and sovereign funds from Singapore, Thailand, Kuwait, and South Korea, the investment bank announced that it will sell its stake in Bloomberg.Foreign investors currently hold around $2.6 trillion of U.S. Treasury Securities. Unfortunately, foreign investors' questions about the strength of our assets don't end with Fannie and Freddie. A clear indication of this latest statement comes in the form of credit insurance costs for AAA-rated U.S. Treasuries which in July rose to 16-20 basis points, higher than other nations for the first time ever.


If the country is called upon to write the check to Fannie and Freddie, our increased debt burden will only serve to call into further question the health and reliability of the dollar, which exacerbates oil and food price inflation, and further threatens the dollar in an endless, macabre loop.

Friday, August 22, 2008

WHY ART IS THE BEST INVESTMENT YOU'LL EVER MAKE - PART I

WHY ART IS THE BEST INVESTMENT YOU'LL EVER MAKE ART: HOW TO PRESERVE WEALTH AND MAKE MONEY IN VOLATILE FINANCIAL TIMES

IT'S TIME TO PUT YOUR ASSETS ON YOUR WALLS
"Non-financial assets form the greater part of world wealth and have been more stable in value during periods of financial and social turbulence." Roger Ibbotson and Gary Brinson, "Global Investing"The devolution of confidence in traditional investment alternatives, in concert with the elevation of the importance of design and aesthetic throughout the world, points to a renaissance in the value of art to a degree never before witnessed.After all, the art auction market is fair and transparent with a degree of stability that many financial institutions, and even some AAA-rated U.S. government debt, can only dream about.


THE CURRENT STATE OF THINGS

The U.S. has experienced many decades of economic growth facilitated by technological innovation and ongoing reductions in the cost of labor. As a result, it has enjoyed one of the highest rates of consumption in the world, bolstered by low interest rates and record rates of liquidity, all courtesy of the rest of the world's willingness to buy U.S. debt. The DJIA is down 13.1% year to date and the S&P has fallen 12.4% in that time. The U.S. dollar has lost 10% against a basket of six currencies over the past year, 40% over the past six years, a time when the price of oil is up seven-fold. The Chinese Yuan is up 7% year-to-date versus the dollar after having gained 7% in all of 2007.The U.S. money supply is growing at the rate of 16% per year, the highest rate of growth since 1971 and, correspondingly, Gold is up 283% against the dollar since June 2001. The real source of many consumers' wealth, their homes, have already lost 16% of their value since the peak in 2006.

Writeoffs related to the credit crisis have already passed the $450 billion mark. Keep in mind that this still only reflects sub-prime losses, as no commercial or Alt-A losses have been taken as of yet. After assuring in June that economic risks had diminished, Fed Chair Ben Bernanke testified in mid-July that "there's no doubt there's further deterioration in the cards for bank earnings and we'll continue to see financial sector woes play themselves out." Despite inflation in the form of rising consumer prices, currently at an annual 5.6% rate, the highest since 1991, the stresses in the financial system negate almost any efforts by the Fed to tackle inflation. That does not bode well for the dollar.Fannie Mae and Freddie Mac:The liquidity and capital crisis at these two mortgage behemoths is set against their guarantee of a whopping $5.3 trillion in mortgage credit, or half the total of all U.S. mortgages. The main issue however, revolves around their relative under-capitalization; the two have only a combined $81 billion in capital and that inadequacy means that raising capital has become a priority in this era of mortgage crisis. That roughly 2% of liabilities in the form of capital means that the danger exists that if the value of the mortgages that they guarantee declines by a small percentage......From where that capital will come is the big question, and it is increasingly likely that it will be the U.S. taxpayer who will have to shoulder the burden once again. Why? Absent their ability to raise additional capital in the public market they will almost certainly be rescued by the federal government because they are at least implicitly, if not so stated in their prospecti, guaranteed by the federal government, meaning that their failure would send a pronounced negative signal to the nations' creditors were they allowed to fail. Hence, their bailout could cost as much as 10% of GDP, the rating agency S&P has said and "could create a material fiscal burden to the government that would lead to downward pressure on its rating."

Thursday, August 7, 2008

International Art Day

Did you know that official international Art Day is celebrated every year on the 2nd Friday in August and that this year it is actually TOMORROW, 8/8/8? I learnt about this special day just today (do you believe in luck? :-) on Artists for A Better World website http://www.artistsforabetterworld.org/ :

It started out as a simple idea for people the world over to set aside a day for appreciating artists and for enjoying the kind of art they like. And it has now turned into a debate, not dissimilar to the conflicted international views about whether the arts deserve funding and where the arts fit into a technologically advancing culture.

Artists for A Better World member Becky Mate is the founder of an international holiday for artists of all disciplines called Art Day. For the past 10 years, she has let people around the world know that such a holiday exists. The idea has been met with both favor and controversy.

Art Day is the perfect time to celebrate creativity and bring joy to others. Draw a picture. Compose a song. Write a poem or story. Paint. Have a party! Additionally, give a card, photo, music CD, poem, story or anything creative to someone else (you can find a lot of wonderful art gifts in our gallery http://www.capucinesboulevard.com and in our gift shop http://www.cafepress.com/capucinesblvd)

In short, Art Day is about bringing a smile to others and forwarding the concept of creating a better world though aesthetics. Although Art Day was formulated around a particular date to celebrate creativity, ideally, one would forward creativity all year round. Art Day helps to call attention to its importance.
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