Friday, January 13, 2012

The "SWAG" Economy of the 1%

What's on your wall?

Andy Warhol once said, "'Say you were going to buy a $200,000 painting. I think you should take that money, tie it up, and hang it on the wall. Then when someone visited you, the first thing they would see is the money on the wall.”

Today's swaggering rich are increasingly stuffing their dollars into SWAG investments that do America's 99 percent not one whit of good. The profits generated from the selling of SWAG assets (silver, wine, art, and gold) count as capital gains and receive preferential tax treatment over ordinary income.

Michael Plummer and Jeff Rabin, the two principals behind the midtown Manhattan-based Artvest Partners LLC (a limited liability company) defines "art" as an asset class. ArtVest, the trendy financial firm that Plummer and Rabin run, helps wealthy people invest in works of fine art. The firm is doing a bang-up business.

Art has not only been a good tax shelter, but it is also the ultimate status symbol for the uber-wealthy. Paintings may exalt the soul, but they are also luxury objects. Whatever other value it may have, art is a commodity, coveted and traded by the rich and powerful, for status and prestige.

America’s wealthy have been pouring epic sums into artwork. Christie's and Sotheby's, the two big fine art auction houses, are reporting a 35 percent gain in the prices paid for Gainsboroughs, Picassos, and other blue-chippers over the past 12 months.

Tania Pos is an art adviser who, on behalf of an anonymous client, bought a picture of Waterlilies by Monet that was sold at auction, which went for almost $80.4 million at Christie’s in London in 2008. She says, “The people that I work with are surrounded by quality in their lives, so why would it stop in their art collecting? They wish to have the very best — whether it’s their home, their car or their planes. It’s just the way they live their lives.” 

Private transactions constitute an essential and increasingly profitable and secretive business segment at both Christie’s and Sotheby’s. In 2010 such sales accounted for 10 percent of the houses’ $10 billion in combined art sales.

Las Vegas casino magnate Steve Wynn, who had publicly amassed a $285 million collection of paintings, explained how easy it was to negotiate the sales tax on art that's lower than other places in the country.

The Artprice Global Index, a broader tally of the prices works of fine art are fetching, has art values up 120 percent over the last decade.

Why the surge? Higher prices reflect no greater appreciation — on the part of the wealthy — for the aesthetically pleasing. They do reflect a greater appreciation of art, within high-income circles, as a high-return investment. And bankers appreciate art too. Financial institutions are making art-based loans. They're letting mega millionaires use their artwork as collateral for business deals.

Michael Steinhardt, the former hedge-fund manager who has spent at least $200 million on fine art, is using part of the collection to secure low-cost funding for his latest real estate venture. He pledged 20 paintings and drawings, including five by Pablo Picasso as collateral for a loan from JPMorgan Chase Bank.

An arm of Deloitte, the global consultancy firm, reported last month, “We now can start talking about the early stages of an Art and Finance industry.”

Analysts at ArtInfo explained last week that the continuing Great Recession is helping this new art-and-finance combo along. “International high-net-worth individuals,” the analysts point out, “are looking for somewhere to put their money besides the anemic stock market.”

But the art world hasn’t been the only “asset class” to benefit from this yearning for larger and safer returns. Dollars and Euros and Pounds are also flowing to other “hard” assets that share all the attractions that fine art offers. Silver, wine, and gold have all been ratcheting up steadily over recent years.

This past September, Investment Week’s Joe Roseman gave all these hot asset classes a memorable new handle. “Everyone,” Roseman advised his well-heeled readers, “needs some SWAG.” (silver, wine, art, and gold)

The elements of SWAG have “all appreciated quite sharply” over the past decade, notes Roseman, despite “two global recessions, a severe global banking crisis, a credit crunch, and (generally speaking) highly volatile and mostly negative equity market performance.”

Fine wines, the Liv-Ex wine index shows, have jumped about 300 percent since 2000. Apparently, the best performing wine over the last 20 years when held for a five-year period was a 2004 Carruades de Lafite. This wine had appreciated by an astounding 3000-4000% over the defined five-year holding period.

Gold has appreciated at an even higher rate, as has silver. The Standard & Poor’s 500 stock index, by contrast, rose just 0.04 percent in 2011, returning only 2.1 percent with stock dividends included.

The SWAG elements have plenty in common. Silver, wine, art, and gold all rate as scarce, transportable, long-lasting physical assets. They also make for wonderful tax shelters. They throw off no income stream and, consequently, create no annual tax liability for wealthy investors.

The profits SWAG assets generate at sale, meanwhile, count as capital gains and receive preferential tax treatment over ordinary income (Every single Republican candidate wants to eliminate this tax completely). These tax benefits from SWAG ought to create obvious concerns for those of us in America’s 99 percent. The less the nation’s wealthy pay in taxes, after all, the greater the tax burden on everyone else.

But our cause for concern ought to go deeper than the tax games the swaggering rich can play with SWAG assets. SWAG just may symbolize the ultimate folly — and sheer irrationality — of our staggeringly unequal, top-heavy economy.

In today's troubled economic times, we desperately need investments in products and services that translate into jobs and paychecks. We need dollars for renewing our society. We need dollars for everything from replacing crumbling infrastructure to developing sustainable new energy technologies.

The last thing we need? We don’t need billions of valuable dollars sunk into SWAG that hangs on the walls of mansions or ages in high-tech wine cellars or sits in locked safes. But in a deeply unequal United States, where wealth remains concentrated in a precious few pockets, that’s exactly what we have.

Many of those dollars pouring into SWAG today would have gone to Uncle Sam yesterday. In the middle decades of the 20th century, America’s wealthiest faced income tax rates that reached up over 90 percent on income over $400,000.

In that high-tax-on-high-income environment, besides just SWAG, wealthy Americans use to routinely plow their wealth into tax-free municipal bonds. In the 1950s, for instance, the widow of automaker Horace Dodge invested her entire $56 million legacy from the Dodge auto fortune in municipals.

Those municipals didn't help Anna Dodge much. They paid only 3 percent in interest. But the dollars invested in municipals paid off handsomely for the mid-century 99 percent. Those dollars financed the schools and sewage plants and waterworks that created the foundation for the classic American middle class.

Those mid-20th century days did, to be sure, hold certain charms for America’s deepest pockets. They could pick up works of art being sold for a song. In 1960, Mark Rothko’s painting White Center (pictured below) was bought for $10,000 by David Rockefeller, a scion of one of the wealthiest dynasties in America.

For almost half a century, it hung on his office wall on the 56th floor of the Rockefeller Center. It even became known informally as the “Rockefeller Rothko”. Today in the one percent's SWAG world, White Center now carries a $72 million price-tag.

What's on your wall?

What is it about the SWAGs that has allowed its investment performance to be so strong? One way of looking at this question is to identify the common traits of each of these assets. What do they all have in common?

1) They are all physical assets.
2) They all have longevity – Lafite will last for 50 to 100 years.
3) There is no incumbent debt associated with the asset.
4) They are transportable and relatively easy to store/hold.
5) There is scarcity – a finite supply.
6) There is no income stream – so no income tax liability.
7) Asset performance seems relatively uncorrelated to equity markets.
8) A sovereign default would not alter any of the above traits.

The 1% bilks the 99% with low-to-no taxes on estates, dividends, annuities, gifts, trust funds, corporate stock buy-backs, stock-options, off-shore bank accounts, capital gains, "prepaid forward” deals, SWAG, and many other financial vehicles that the 99% generally doesn't or can't benefit from...which only exponentially widens the income gap further and faster between the uber-rich and abject poor...just like between the kings and peons.

1 comment:

  1. UPDATE November 2014:

    Washington Post -- This billionaire thinks the Fed is missing the hyperinflation in the Hamptons: The prices of houses in the Hamptons and high-end art are the leading edge of hyperinflation. "If this is the best the inflation truthers can do, they should probably follow Mark Twain's advice and keep their mouths shut for now. Somehow I don't think Janet Yellen is losing sleep over what people are paying for Picassos."

    Paul Krugman (in response) -- Rage of the Traders: "Really rich people often have no idea when they look ridiculous. After all, who in their entourage is going to tell them?"

    Hedge Fund Honcho Steve A. Cohen is Buyer of $101 Million Giacometti