Issue #238  1/12/2018
A Look Back and a Look Forward: 2017 and 2018 Photo Market in Perspective, Especially in an Inflationary Market

By Alex Novak

Last year I predicted that we would be entering an inflationary period, which would be supportive of the photography market. While I have to admit that inflation has hardly budged to this point, it's mostly because the factors that I, and many top economists, felt would cause this simply have been greatly delayed. Plus the crash in the energy market did a lot to restrain costs.

The Republican tax cuts and proposed infrastructure spending were delayed and haven't hit yet, although at least the former has been finally passed. The latter is more up in the air.

It's also taken the labor market longer than anticipated to boost salary levels, largely due in my opinion to the excess unemployed who had left the market and weren't being counted anymore in such figures. They still had impact though when they were tempted back by stronger employment opportunities. Their influx has kept down labor costs while the employment market seemed to reach full employment. But labor costs are going up as the markets begin to sop up this excess labor on the sidelines. In fact the tax cuts are prompting many large companies to raise their minimum wages and give bonuses to their workers, so wage inflation is inevitable and coming quickly.

There are additional forces pushing inflation in different directions, although most are pushing it upward:

1. The dollar has lost nearly 10% of its value from the point when it has soared after President Trump's election. That initial strengthening helped tamp down inflation here, but the weakening dollar will definitely add to inflationary forces here in the U.S.

2. As I noted, the huge jump in oil supplies and consequent major drop in energy pricing have to date kept inflation in check. But now that energy prices have not only bottomed out, but are continuing to rise—albeit moderately, this will also raise inflationary pressures. With the U.S. and Canadian shale reserves, it is not likely though that we'll see a return to triple digit oil prices soon, even with some upward movement. We just can't depend on energy to stave off inflation in the future, especially with a weaker dollar.

3. The Federal Reserve and other central banks seem intent on reducing their asset buying and reducing the asset portfolio that they have already. With the selection of Jay Powell to replace Chairman Yellen, the Fed is on course for slow but determined tighter monetary policy and higher interest rates. While that usually is considered anti-inflationary, there is the distinct possibility that it might result in more short-term inflation, as these interest rates are passed on to various consumers—both in business and retail markets.

4. The Republican tax cuts will add to inflationary pressures, as well as to national debt, although perhaps less so than some more hysterical critics make it out, considering that the Obama Healthcare bill has a slightly greater impact on long-term debt over the same term (see: https://www.thebalance.com/cost-of-obamacare-3306050, for a good analysis of the costs). Not surprisingly neither Republican tax legislation nor Democratic healthcare legislation were particularly well written, and both were designed to help each of those political parties donors the most. Both will add to the national debt and to inflation without having the "reform" that both pretended to encourage. Poor and rushed policies rarely result in good outcomes, and legislators are not known for their care. The tax cuts will indeed result in a limited and overheated buying spree for business and consumers alike. Whether they will use the funds to retire debt will have to be seen, but historically that hasn't been the case.

5. U.S. treasury debt is not only going up, but also the interest rate for such debt, which has been extremely low and resistant to increased yields, is finally moving to the upside. Pronouncements by the Chinese to lower their U.S. treasury purchases, despite a lack of alternatives for them, still have pushed this market upward as has tax cuts. Higher government debt and costs usually result in higher inflationary pressure.

6. As a consequence of the tax cuts, mergers and acquisitions seemed poised to grow significantly over the next year or two. These M&A impacts will both increase and decrease consumer and business costs, so it's a bit hard to predict their inflationary impacts.

7. Markets are up internationally, quickly moving from recession to full recovery. When virtually all areas of the globe are hitting on all cylinders, so to speak, it is easy to assume that competition for vital resources—financial and physical—will push inflation up worldwide. And a weak dollar will only make such inflationary moves all the more evident.

8. The President is pushing for greater spending on infrastructure and defense—and he is likely to get at least some of it. That spending will further accelerate inflation and increase the national debt, again weakening the dollar, and furthering the inflationary cycle.

9. Recession seems unlikely in the short term, although the stock market will inevitably see more volatility and lower overall growth than it's seen over the last several years.

All of these factors should push inflation up past the Fed's imaginary line of 2%. Whether adding on further interest rate hikes and making them steeper will make the overall economic picture better or not is the $64 million question (or should we say trillion on that now). It appears highly doubtful. Moderate inflation, which had been considered as 3-4% in a more robust economy, is actually a necessary component of economic health. While I expect the Fed to try to continue to reduce its asset purchases, I don't see them trying to knock back inflation with a more aggressive interest rate policy unless inflation looks like it will go well over 3-4%.

So why all this analysis of inflation? Because the art and photography markets have always done significantly better under inflationary economic conditions, which appear to be coming back in a significant way for the first time since 2008. Even for those collectors who say that they only collect for the love of it, they are still influenced in their buying decisions by market conditions. Most will want to eventually sell or gift their collections in the future. They would, of course, greatly prefer that their collection go up in value than down. Photography has rarely lost significant value and none broadly speaking, even during recessional periods. It's what makes it attractive for some major collectors. But without upside, there is less pressure to buy.

The housing market and the stock market crash reduced the money supply, creating a liquidity crisis thus plunging us into a period of deflation where prices were actually lower than the year before, reaching a deflationary low of -2.1% in July of 2009.

Since then inflation blipped up as a result of the multiple trillion dollars of stimulus, but then began slowly falling. Along came QE2 the second of Bernanke's monetary stimuli and inflation picked up again and crossed above its moving average and began heading upward again briefly for 2011 when it hit 3.2%. In 2015 the big drop in energy prices triggered a temporary decline again in overall inflationary rates, and there was virtually no inflation reported that year at .01%. So July 2009 at -2.10% may have been the real turning point and the bottom of the downtrend.

We haven't yet seen consistent inflation at that 3%+ mark, but may soon. While there have been modest ups and downs, photographs haven't seen a steady, healthy upward push in overall prices that were a hallmark prior to the Great Recession. That may start to change.

Of course, there are always outside influences that can make a huge difference to the micro-market of photography (and art) besides the macro economic impacts. Witness Qatar's and Prince Al-Thani's impact on the photography market, particularly on top 19th-century work. But often macro economic forces are the trigger for exactly those outside and out-sized influences. Some of the biggest market makers and collectors are highly susceptible to changes in their own economic situations and markets in general.

Several further indicators of a stronger photography market and prices this year than over the last two years:

1. Momentum and direction. Most photography dealers and galleries had a miserable first half of 2017 or so, as their buyers (mostly those on the left side of politics) absorbed the U.S. political upheaval wrought by the 2016 Presidential election, after already experiencing a typically slow election year impact. An anxious and distracted customer is not a particularly good one. While that impact is still weighing on the market somewhat, the second half of 2017 was considerably better than most of us expected, given the previous 7-8 months. This year's Paris Photo returned nearly to normal in terms of sales activity, especially from American buyers, who bought virtually nothing at the November 2016 show, so shocked were they by the election results, which were announced just six hours before the show opening. Institutions also returned to more normal buying patterns.

2. Auctions have continued to maintain relatively strong results with new records being made.

3. The Republican tax plan didn't touch key charitable deductions, and most big buyers--despite Democratic grumblings--will see benefits from the tax legislation, giving them more discretionary money in their pockets to buy photographs and to support museum purchases.

4. Most countries worldwide are experiencing expanding economies. All markets, including photography, have become more global and less dependent on just the U.S. But when all are doing well, including the U.S., then the stronger the results.

We'll have to see how all this impacts locally and in particular how it effects results at several of the major photography shows, such as AIPAD's New York show in April and Paris Photo's show in November. The overall trends should help the shows and galleries, but there are always individual events that can still pose negative issues, despite overall favorable trends.