“When a global bank fails that can lead to a massive liquidation of assets” is pretty uncontroversial when you are talking about, like, bonds, but it might also be roughly true — with a lag — about art."
This story is insanely fun.
Last week, Levine's newsletter took me to a paper on luxury watches as portfolio hedges: their prices don't correlated with stock or bond markets, and they have decent return (well, "return"; the money itself losing value) so their uncorrelated risk makes for good additions in portfolio according to modern portfolio theory.
In the newsletter, Levine amused that no, this is just an artificial outcome of illiquidity: if something doesn't trade often, as for example when the market dies during a crash or everyone panicking, that's gonna look like uncorrelated risk. If something isn't traded, then it can't change market prices and it can't be correlated; and nobody would collateralize it because the lender can't observe the current market price.
A famous stylized fact about finance is that “in a crisis all correlations go to one.” Part of this is psychological — if you are very worried, you’ll be worried about everything, so you’ll sell all your risky assets — but a lot of it has to do with leverage: If you are a levered investor and some assets go down, you will get margin calls requiring you to repay some of your loans, and you will sell your other, better assets to raise cash to meet the margin calls, and that will drag down the prices of the good assets too.
And one reason to think that a lot of illiquid alternative investments aren’t correlated to the stock market is that they are less susceptible to that dynamic. If your stocks go down and you get margin calls, you probably don’t sell your watch to meet them.
Can't margin call me, huh?
Enter art:
"Lenders said margin calls in the art finance sector were relatively rare."
FT headline today: "Art lenders issue margin calls as painting prices fall." Turns out you can get margin-called on your non-observed market price of illiquid art:
Also, there were fire sales from the Credit Suisse-UBS forced-marriage two years ago:
Fun times, fun times.
non-paywalled: https://newsletterhunt.com/emails/173574