Meanwhile, The Daily Telegraph came to succor the poor, offering to give its readers a glossy reproduction of said painting for free. This gave rise to a question. We didn't know whether it was an existential question...an aesthetic question...or a financial one...but it haunted our sleep: What is the difference between a genuine Monet and copy of it?

The answer, of course, was established to the penny...at auction - the aforementioned $36 million. Mr. Market expressed himself in no uncertain terms. Still, we question his judgment. From a distance, you can barely tell the difference between a print and the painting. You have to get up close. The closer you get, the more apparent the difference is. As you approach the painting you see the texture...brush strokes...and subtle colors.

Paintings are visual things. Poke your eyes out and you will get no pleasure from a Monet at all, except perhaps a vicarious pleasure from letting your seeing-eye dog look at it. Even if you have eyes, the benefit you get diminishes with distance. Logically, at a certain range, the real thing must be equal in value to the print, which we now know, thanks to the Telegraph, has a value of zero. At what range, then, is the view of Waterloo Bridge worth $36 million? We, who see the bridge everyday, want to know.

Unlike so many contemporary "artists" Monet could turn out something that was not unpleasant to look at. As a painter, we have no quarrel with him. We are just wondering.

Bill Bonner
The Daily Reckoning Australia

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We don't know. We watch it for amusement, not for trading signals. And next week, another big art auction should set off giggles.

Would you like to spend millions for a big picture of a dollar sign? How about a big, telescoping geometric pattern? Well, then, get out your wallet, dear reader, because next week both Sotheby's and Christie's are set to make history - competing auctions will tell us not only how big bonuses in the financial industry have become, but how batty buyers in the art market can be.

Damien Hirst has a steel cabinet with 6,000 painted pills in it. He calls it Lullaby Spring. Don't miss that one, dear reader. It's expected to fetch US$8 million. Bacon, Freud - all of the hustlers of the art world will be on display. And it's too bad Andy Warhol is dead. Wouldn't he get a laugh out of seeing his portraits of Marilyn Monroe go on the block! His three prints of Marilyn - cleverly entitled "Three Marilyns" - are expected to bring in US$14 million.

It is merely laughable that someone would judge this kind of stuff so highly. But it is intriguing that they judge it so much more valuable than it was a few years ago. The inflation in contemporary art is breathtaking; it illustrates how nouveau and how riche the nouveau riche really are.

Indians, Russians, Chinese - not to mention Americans and Englishmen - they are all throwing their money around like people who just got rich...and got rich so easily they don't know the value of it. What to make of it?

Cash and credit is incredibly easy to come by, we conclude. There's so much of it around, people seem desperate to get rid of it.

We have a suggestion for them. Just hold on. A credit expansion is always followed by a credit contraction. And this credit expansion has led to the world's first, and biggest, planetary bubble.

When it corrects, it will be the world's first, and biggest, planetary bust. So keep your eyes on our Crash Alert flag, dear reader. We may be early. But we won't be wrong.

Bill Bonner
The Daily Reckoning Australia

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We have noticed how one bubble has led to another...in stocks...in real estate...in art...in watches and collectibles...in one market...then in another...until the whole financial world is expanding at an alarming rate. We read in the paper just yesterday that the celebrated art promoter Damien Hirst has created a diamond-encrusted skull now apparently offered for sale at US$100 million. Pity the poor dope who buys it! But what do we know? It will probably go up! And now you can buy stocks in China for 40 times earnings...and houses priced over US$100 million too.

We have noticed also how reckless spending, borrowing and money printing in the United States now leads to reckless investing, borrowing and money printing in other countries, as each central bank tries to keep its own currency from going down faster than the dollar...and how the financial industry has invented new ways to increase liquidity and leverage, effectively reducing central bankers' control over the marketplace.

And now it seems that the whole world is enjoying a Super Bubble...unlike anything ever seen before. It really is a New Era, in other words. How big will it get? How long will it last? We wish we could tell you...

Everyday is a new day...and every day is just like the one before. Every market is completely new...and not so different from ones that came before. Every generation prepares the way for the next one.

Bill Bonner
The Daily Reckoning Australia

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But it is we who must have been born yesterday. We open our eyes, look around
- the more we see the less we've seen anything like it. More details on last week's art auctions have come our way...each one increasing our puzzlement.

Mao to the left of us...Mao to the right...he's almost as big as Che!

Only seven months ago, art lovers took a look at one of Andy Warhol's concoctions and judged it to be worth USD$17.37 million. It was a photographic portrait of Mao Tse Tung, taken out of a 1963 edition of Newsweek magazine, and then silk-screened, multiple times, over a green background. Warhol was an adman. He knew a good image when he saw it.

But how he transformed his slick images into collectible 'art' is one of the greatest triumphs of mass marketing and mass delirium in history. The International Herald Tribune struggled to explain it: Of the Mao confection, "the uneven repetition conveys the impression of a recurring obsession that the viewer in vain seeks to shake off," it says. Or the impression that Warhol didn't apply the ink very well.

But now, in May of 2007, a group of bidders - everyone of them apparently of sound mind - ran up another of Warhol's works toUSD$71.7 million, a new record, and more than four times the previous record. This second Warhol masterpiece is reproduced for us in Friday's IHT. It is a photo of a burning car tinted all in green. Warhol, stretching the limits of his creative genius, called it "Green Car Crash (or Green Burning Car)." It was last seen at auction in 1978, when it went for just USD$70,000. In 30 years, it has gone up 100,000%.

What else has gone up 1,000 times in 30 years...or more than 300% since last November? We can't think of anything. Which must mean that these art buyers are even smarter than the Chinese lining up to open brokerage accounts in Shanghai...or luckier.

Chinese shares hit another record high yesterday, after a sharp drop Friday. The market shuddered at the end of last week because the People's Bank of China said it was raising interest rates - to try to sop up some of the speculative juice in the market. But it's a bubble; and in a bubble all news is good news. And so, Monday, the Middle Kingdom rocked and rolled, ending the day with stock prices more than 1% higher than the previous high.

Meanwhile back to the world of art...

The auction at Christie's "exceeded the experts' highest expectations, [and] revealed a hitherto unparalleled urge to buy," IHT concluded.

We conclude something a little different.

First, we look at the paintings. Some are cute. Some are clever. Some are decorative enough for a laundry room. But who would spend serious money to buy them? We don't know.

But what we do know is that whatever value buyers saw in Warhol and similar artists a few years ago, they see a lot more of it now. Prices have gone up dramatically in the last few years. Remember, these are objects with no 'earnings' - save the pleasure owners get from looking at them. Since the paintings themselves have not changed, we have to conclude that the buyers have changed. For some reason, as yet unexplained, they want to own these paintings more than they did before...as evidenced by the fact that they bid against each other to see who is willing to pay the most to take them home.

So remarkable is this whole phenomenon to us that we decided to spend the whole of last night in meditation and prayer, trying to make sense of it. Unfortunately, the whiskey ran out by 11 PM...so we went to bed without getting to the bottom of it.

But even in our few hours of contemplation we were able to realise that OECD is probably right. Cheap money is making a lot of things a lot dearer than they used to be - especially status. Landmark buildings all over the world are being sold at prices that were unheard of a few years ago. Rent yields are so low...it looks as though the buyers want to lose money. Luxury yachts are crowding harbours from St. Tropez to Santa Monica.

Stocks, too, are hitting records - and not only in China. The S&P 500 hit a new high yesterday too - breaking a record set seven years ago. Meanwhile, oil has climbed over USD$70 a barrel...but still, at the top end, gas-swilling private planes are becoming much more fashionable. "The popularity of executive jets has never been stronger," says today's Financial Times. But pity the poor status-hungry hedge fund manager. He puts in his order for one of the leading models, and then discovers he has to wait a couple of years to get delivery. What's he going to do? Go to Christie’s and buy a Warhol?

Bill Bonner
for The Daily Reckoning Australia

Is an Andy Warhol piece worth more than USD$70 million? Leave a comment below.

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Somewhere...the gods are laughing.

We observed yesterday that Richard Russell has changed his tune. Now he warbles an almost up-beat melody; the Dow is entering the third and final stage of its great bull market, he says. A top is yet to come.

Russell is one of the great old-timers of the guru trade. He has been interpreting Dow Theory for 40 years.

The theory can be described so simply that it sounds ridiculous:

The stock market runs in big, long trends...it goes up, up and up - until it reaches the top. Then it goes down, down, down - until it reaches the bottom.

In theory, that makes it easy to invest. You just have to identify the primary trend. In practice, you are still stumbling around in the same fog as everyone else, because you can never know for sure which direction the trend is really going or when you have hit the extremes.

We have followed Russell for many years. What we find useful about his analysis is that it emphasises the long-term trends, which are visible, at least, in retrospect. And it focuses on values. How do you know when stock prices have reached a peak? Just look at the values. Major peaks come when you don't get much value for your money. At major bottoms, you can buy a share for 5-10 times earnings. At major tops, you have to pay much more - three to five times more. At bottoms, it's not hard to find stocks paying dividend yields of 5%-8%. At bottoms, you're lucky to get 2%.

Based on values alone, we judge the US stock market - and the worldwide art market - to be at peaks, or dangerously close to them.

Russell may be right about the exact position of the major trend...and the coming Third Phase. But we will stick to the values.

The trouble with investors, if we may steal a line from a dead man, is they know the price of everything and the value of nothing. What is the value of a Rothko painting? We don't have any idea. We just have an opinion. And in our opinion, whoever spent USD$72 million for it should seek treatment...immediately.

But, at least in the world of real investments, there are numbers to help. We have Return On Investment (ROI) numbers, for instance, to guide us. An investment that gives us a 10% return is a better investment, we figure, than one that gives us only 5%. Since you can't really know which way the market is going, you shouldn't count on capital gains. Even Russell, with his formulae and his long experience, has often been wrong; anyone who stays in the business is proven wrong sooner or later. It is simply not given to man to know his fate. Look at earnings. Or the yield. If you're lucky enough to get anything more than that, well...bully for you.

Betting on the direction of the market is a mug's game that violates our most obstinate prejudice, announced in this space as Bonner's Law:

The quality of information declines by the square of the distance from the source.

When you buy a company - especially one that is next door to you - you can study it in detail and make a fair guess about its earnings. But when you are merely 'in the market,' you are nothing more than a patsy for the financial industry. You are buying something you don't understand from someone you shouldn't trust. And if you make any money at all, you don't deserve to.

You are better off studying your investments carefully...individually...and focusing on value. At least then when you lose money, it's your own damned fault.

Bill Bonner
The Daily Reckoning Australia

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Sotheby's (NYSE: BID) [Analysis: BID] midweek sale of contemporary art in London netted £45.7 million all told – some US$90 million. Indeed, it was "the most successful contemporary sale ever staged in Europe," as the auction house gasped in its press release. Doig's "early masterpiece" set a new cash record for a work by a living European artist, bagging five times its reserve.

Altogether the evening's sales ran up to 60% higher than the pre-auction estimates of only four weeks before. How's that for art appreciation!

It proved quite a week for London's wealthiest art lovers and their dealers, in fact. Last Monday, Sotheby’s achieved its highest value auction ever in Europe, knocking down Impressionist & Modern Art for a total of $173 million. On Tuesday night, Christie's achieved $177 million with its own Impressionist and Modern auction. Wednesday brought Sotheby's Contemporary sale, followed by Christie's auction of Post-War and Contemporary art on Thursday.

That netted $138 million, including a new Francis Bacon record, nearly double the previous high of $30 million hit in November.

Four days...one city...$578 million. That's more than gross inflows for the entire UK mutual fund industry over the same period. But don't forget Sotheby's commission on top!

Sotheby's and its only serious rival – the privately-owned Christie's – both bill their vendors 5% of the hammer price. They also charge successful bidders for the pleasure of watching the gavel come down, an innovation begun more than three decades ago. And in the last month both auction houses have hiked their buyer commission rates to 20% of the first $500,000 – up from $200,000 previously – plus 12% of the remaining hammer price.

Caveat emptor applies, in other words, even if the art is to your taste. Doig's White Canoe isn't all that bad, but you wouldn't know it from the Saatchi Gallery's description:

"[Doig] paints white like it’s got every colour in it; he paints dark like it’s got every colour on it. A mirrored image of a lake at night, White Canoe is a wishful infeasibility where the reflection is more detailed than the landscape itself. The boat is aberrantly glowing. The landscape has the all-consuming blackness of an oil slick, deafening and motionless; all other colours seem to slide across it in a rustic laser show. The blue stains of tranquil moonlight have the eerie effect of erasing; Peter Doig’s perfect night seems to be melting like celluloid stuck in the projector..."

This bubble has got nothing to do with the paintings, of course. "Good business is the best art," as Warhol said, and the sharpest business minds in the auction room only come to look foolish if they can't settle up afterwards. Sotheby's and Christie's between them control nine-tenths of the world market in art, furniture and jewellery investment via live auctions.

But even the business of helping Russian billionaires make newspaper headlines with their disdain for cash can be tough. That's why, following the slump in fine art sales that came with the collapse of Japanese real estate and equity prices in the early '90s, Christie's and Sotheby's colluded in what the European courts called "secretive meetings" to rig commission rates in their favour, replacing competition with inflated fees that defrauded vendors out of an estimated $450 million.

Fair's fair, we all need to scratch a living, and between 1989 and 1991 – when Tokyo's various asset bubbles burst and began dragging the whole Japanese nation into deflation –the turnover in fine-art auctions worldwide sank by three-fifths. Things steadily improved as the S&P and then Nasdaq picked up where the Nikkei had left off. But gross sales slipped again as equity prices declined, down more than 25% between 1999 and 2003.

For Sotheby's in particular, the DotCom Crash proved expensive. It began losing money in 2000, even with the US anti-trust charges of that year ($203 million) excluded. Sotheby's finally recovered to report a profit for FY 2003, after the European and Tokyo stock markets had finally turned higher. But the Board only got round to re-instituting a dividend last August, after a gap of six years. The third quarter saw 10¢ per share declared – some rate of return for investors in a business that earned $81 million gross on revenues of $386 million in the first 9 months.

"After the [collusion] scandal died down, Christie's and Sotheby's quietly adjusted their commission rates, independently, so that there were discreet but not big differences," says art dealer and consultant Christopher Wood. "The whole collusion business was simply unnecessary...Christie's and Sotheby's are such close competitors and similar firms that whatever one firm did, the other was bound to follow. They didn’t need to collude."

Fast forward to February 2007, and there's no need to rip off the Russian oligarchs or City bankers behind this week's record sales. The "wishful infeasibility" of London's art market will do that all by itself. Nor is anybody accusing anyone of anything besides "depth and strength" in the bidding today – not even exploitation of a duopoly. Even before last month's commission hike, the bubble in financial sector bonuses let Sotheby's gross $104,000 whenever the hammer came down for $500,000 or more.

Hedge funds get to take one-fifth of their clients' profits. Why not milk the bankers for another grand, too?

"Such incremental revenue dollars, with no associated costs, should drop entirely to the operating income line," according to a note from Wedbush Morgan Securities in January. It failed to use the words "rent seeking", but if you're the right side of the money bubble today, you don't want to moralize. Sotheby's expert valuation and auctioneer staff certainly won't. Their salary bill rose 22% in the four quarters to Sept.

And besides, "the percentage of [US] GDP attributable to corporate profits is near a multi-decade high," as Barron's recently reported. "Corporate gains tend to benefit the affluent through strong dividend growth, capital-gains income and high-salaried jobs, while restraining working-class wage growth. Ajay Kapur of Citigroup calls such economic trends Plutonomy – a global economy disproportionately geared to the rich."

The butlers and parlour-maid stocks serving today's global overlords have outperformed the S&P for the last 21 years, according to The Daily Telegraph in London. But Citigroup continues to recommend 24 firms set to cash in further as the über-rich throw their money around. Sotheby's is right up there with Four Seasons Hotel Inc. (NYSE: FS) [Analysis: FS], Tiffany & Co. (NYSE: TIF) [Analysis: TIF], Polo Ralph Lauren Corp. (RL) [Analysis: RL] and Coach Inc. (COH) [Analysis: COH].

For a sector apparently awash with high-spending clients, however, there's little sign of cash trickling down to investors. Sotheby's trades for 25 times trailing earnings, about average for this selection. And none of these stocks now yields more than 1%.

The only attraction, therefore, must be capital gains, inflated by the stock market buzz around yet further asset-price inflation in prime real estate, private jets and fine art. But there will only be fresh meat for the gavel to beat as long as Wall Street and the Square Mile keep paying ever more in bonuses. Ten of the 53 buyers in last Monday's auction were first-time purchasers of Contemporary Art at Sotheby’s, says the auction house. Analysts at Barclays Wealth Management reckon that, all told, one in ten City bonuses this New Year will be spent – in part – on investing in art and antiques.

So while the ultra-high-net worth buyers rely on strong energy prices to fund their collections – the Russian art market rose 2,365% in the five years to 2005 – the newbies in the art market are raising their hands straight after clocking off for the day at Goldmans, JPM and the rest. As the financial markets go, therefore, so goes the art market.

"Luxury spending is the first thing to fail when the oxygen goes out of the economy," wrote Robert Hughes for Time magazine in 1990. Air was still gushing out of Japan's asset-price bubbles, and "art [was] the canary in the mine shaft." The little bird stuffed by Tokyo's plutocrats croaked it on Tuesday, 6 Nov. at a Sotheby's sale in New York. The auctioneer – head of Sotheby's North America – choked as he cut the asking price for a Julien Schnabel piece made of broken plates from $650,000 to $210,000. Yet still there were no takers. It had sold in London the previous year for $225,000.

"The Japanese are awash in money," one New York dealer had said in 1989. Now their cheap money pump – flooding the bond, commodity and derivative markets with carry-trade Yen – is washing across Old Masters and New Pretenders alike yet again.

"All art," as Iris Murdoch also noted, "deals with the absurd." If you like your theatre absurd too, keep an eye on the art market.

Adrian Ash
for The Daily Reckoning Australia

City correspondent for The Daily Reckoning in London, Adrian Ash is head of research at BullionVault.com – giving you direct access to investment gold, vaulted in Zurich, on $3 spreads and 0.8% dealing fees.

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