Writing in the midst of turmoil, one is always at risk of being overtaken by events, but I have found myself vaguely approving of the recent market panic. The American housing slump has made fools only of those who thought house prices could go on rising steeply for ever; the resultant sub-prime lending crisis reminds us that you shouldn’t be lending money to people who shouldn’t be borrowing it; a few big painful reversals among hedge funds should curb the general arrogance of that industry; tighter credit is forcing the new blowhards of private equity to draw breath; and the Fed has been following Walter Bagehot’s admirable 19th-century advice that central banks should counter panic by lending willingly but expensively.
My touchstone at such times is my friend David, who runs a smallish hedge fund on Park Avenue. He has kept his distance from sub-prime mortgages, and was ‘down one per cent on the month, up five per cent on the year’, when I talked to him at the weekend. He was in France, and interrupting his holiday only to the extent of continuing to read the Wall Street Journal, where he derived particular enjoyment from a round-up of letters sent out by unluckier managers explaining their losses to investors. ‘The quantitative funds run by Goldman Sachs Asset Management have not been spared in this difficult environment,’ said Goldman — as if, the Journal commented, Goldman’s funds were ‘innocent bystanders caught up in a violent market’. Renaissance Technologies, a hedge-fund firm much given to higher mathematics, reassured investors that ‘the culprit is not the Basic System but our predictive overlay’. Which I take to be a reassuring admission of human frailty: the computers were working, but the managers guessed wrong.
I spent much of June writing an article about the art market for Intelligent Life, a sister publication of the Economist which relaunches this week. Prices for contemporary art were hitting new highs with each major sale in New York and London. They were bid up by young American financiers with huge new fortunes who had already bought a fourth house and a private jet. I found myself asking not why trophy paintings were so dear, but why they were, relatively speaking, so cheap. If you had $5 billion and a desperate desire to own a Rothko, why would you stop bidding at, say, $70 million — rather than $80 million, or $150 million?
The answer seemed to be that you accepted the judgment of your peers about what a Rothko was worth, however arbitrary that judgment might be. You feared to be judged a fool by bidding too much. But I have a funny feeling that almost every top price paid for contemporary art this year is going to start looking pretty foolish with hindsight when the big sales restart next month after the summer break and the effects of the financial-market contagion can be felt. The fundamentals have not changed: the rich are still rich. But expectations have changed: guess what, asset prices go down as well as up.
Eli Broad, a California property tycoon who counts among the world’s ten biggest private art collectors, says he expects the art market to turn down, not immediately, but in six months or so. Mr Broad buys art for the long term, so his judgment is disinterested. But if I were a hedge-fund manager with a wall full of recently bought vivid daubs, I would say exactly the same thing — and then rush to sell, in the hope of getting out before the crash.
The beach book for bankers early this summer was The Black Swan, by Nicholas Nassim Taleb, which has proved dazzlingly right in its prediction that the only certainty in financial markets is unpredictability (if you follow me). The new favourite is Discover Your Inner Economist by Tyler Cowen, a cult figure in the economics world who suggests ways of applying the principles of the dismal science in everyday life. The book is full of those jolting little ideas in which popular economics specialises. For example, why are sightings of UFOs down dramatically in recent years? Mr Cowen points to the spread of the mobile-phone camera. It is hard now to explain how you came to see a flying saucer without taking a picture of it.
His main pitch to readers is that they can usually get more of whatever it is they want by understanding their own motives better. I particularly like his advice on self-deception: it is essential to happiness, especially in marriage. Economists have a term of art, ‘marital aggrandisement’, for an ‘unrealistically positive assessment of one’s spouse and marriage’, which is invaluable when rubbing along happily for decades. Oh, and by the way, if you want to spend less money, but you still enjoy shopping, buy yourself something vain and extravagant right upfront. That way, you’ll feel so guilty that you won’t buy anything else for a while.
No matter how hard I deceive myself, I know I can’t afford what NetJets has to offer, which is fractional ownership of private jets. But as a resident of Manhattan working long hours and living near Central Park I’m going to be tempted by what Flexpetz has to offer: fractional ownership of private dogs. The Flexpetz website promises that ‘dogs are available in varied breed sizes to ensure compatibility with our member’s individual lifestyles and unique circumstances.’ I hope that means varying degrees of lovingness and fluffiness. Pit bulls for drug dealers needs to be a separate market.
Flexpetz is up and running in California, and plans to open soon in New York and London. But beware: the charges stack up like an American phone bill. You pay $99.95 a year, plus $49.95 a month, plus ‘Doggy Time Charges’ of $24.95 per dog per day ($34.95 at weekends), plus tax, plus a $35 delivery and collection fee, plus a $150 one-time introduction fee, and woe betide the feckless: ‘Member agrees to pay an Inconvenience Fee of $75.00 per day, in addition to any Doggy Time Charges, if the Flexpetz dog is not returned on the last day of the reservation period,’ says the website. Without any scratches or dents, I trust, and with a full tummy.
Robert Cottrell is the deputy editor of Economist.com.