See show notes and transcript: https://riskreversal.com/podcasts/on-the-tape-podcast-preview-of-the-markets-week-ahead-and-an-interview-with-allen-sukholitsky-of-masterworks/
On this bonus episode of “On The Tape,” Guy, Dan, and Danny preview the big events happening in the stock market this week (0:35). Later, they go “Off The Tape” with Allen Sukholitsky, CIO of Masterworks, and discuss his transition from Goldman Sachs to Masterworks (16:07), democratizing art (21:05), liquidity in the asset class (28:10), art vs. gold in inflationary environments (30:30), digital art (38:15), inserting art into asset allocation models (40:24), and investment performance (42:52).
On this bonus episode of “On The Tape,” Guy, Dan, and Danny preview the big events happening in the stock market this week (0:35). Later, they go “Off The Tape” with Allen Sukholitsky, CIO of Masterworks, and discuss his transition from Goldman Sachs to Masterworks (16:07), democratizing art (21:05), liquidity in the asset class (28:10), art vs. gold in inflationary environments (30:30), digital art (38:15), inserting art into asset allocation models (40:24), and investment performance (42:52).
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NewsTranscript
00:00 iConnections is the world's largest capital introduction platform in the alternative investment industry.
00:05 They bring the asset management community together through a membership platform that lets allocators and managers meet and connect both physically and virtually.
00:14 Over 3,000 allocators and 600 managers are part of the iConnections community, overseeing nearly $48 trillion and $16 trillion in assets, respectively.
00:24 iConnections first came to our attention in 2020 during the first wave of the pandemic.
00:29 That's when their first event, Funds for Food, became the largest virtual cap intro event in history.
00:34 To date, they've donated nearly $2.5 million to charities.
00:38 They are also the people behind the alternative investment industry's largest and most exciting in-person events.
00:43 To find out more about iConnections events and members-only platform, visit iConnections.io.
00:50 As part of our Off the Tape series sponsored by iConnections, you're listening to a bonus episode of On the Tape with the extraordinarily handsome Danny Moses and equally sexy Dan Nathan.
01:05 In just a few minutes, we'll be speaking with Alan Cicholitsky, the chief investment officer of Masterworks.
01:12 But first, data coming out fast and furious to hear. Danny, how are you?
01:17 Good. Hope you had a nice weekend. Got to recover from the bull market rally last week and see what we're dealing with today.
01:23 Yeah, I woke up this morning to some bad data in China to some horrible data in New York.
01:29 The Empire Survey, I believe we call that. And then watching the NAHB, which is coming out in real time with a housing sentiment, continues to be negative.
01:36 But just buy stocks, I guess, guys.
01:38 Well, hold on. Danny, you just called it a bull market rally. Did you misspeak? Did you mean to say it's a new bull market in a bear? What are you saying here?
01:46 No. Is that what I said?
01:48 Yeah, you did.
01:49 That's Monday hangover. No, that's not what I meant to say at all.
01:51 Bear market rally. That's what we had last week. The data, the Fed's going to be data dependent.
01:56 They're only going to go 50 basis points in the September meeting. Buy stocks. That's your point.
02:01 But I guess what you're saying right now is like, look at these two data points we have this morning.
02:05 I think that Empire manufacturing number, what, second worst on record?
02:09 And so let's just kind of break this down. What does it mean? A lot of investors are going to be trying to read every little tea leaf, right?
02:15 As we go into, we're going to have the minutes this week, like you just said. And then we have Jackson Hole at the end of next week.
02:21 What is weak economic data do? Does it give them cover to pull back? I guess is the question, Guy.
02:26 Well, no, I don't think it does at all. And if you listen to some of these Fed officials over the last few days, I think they would submit.
02:32 Listen, yeah, we're data dependent, but the data that matters still continues to be a CPI that's running three times, three and a half times what we're trying to get to.
02:41 And despite the fact that the economy is clearly slowing, inflation is still a problem.
02:49 So we need to stay the course. By the way, Danny, when you said woke up this morning, I thought you were going to break into a Bruce Springsteen song.
02:56 As Dan knows, woke up this morning, the house was cold, check the furnace, she wasn't burning, but I'll give it back to you.
03:03 So two other things which became evident, which you could feel last week, which became evident from the data presented over the weekend was that individual investors were obviously very active last week.
03:13 The most active that they've been since January. And then hedge funds were covering, according to Goldman Sachs' prime book, which really keeps track of that stuff at an incredible pace.
03:22 And I think hedge funds are running scared a little bit here. There's an ode to Billy Crystal, Gregory Hines, I'm sure you love that movie guy, running scared here a little bit.
03:31 And their patience is actually wearing thin, which is shocking to me because maybe I'm too patient as a bear, but that's really what fed on itself on this bear market rally last week.
03:41 And I don't know if it continues today or not, but it still feels like the proof is in the pudding to show the bears, not the bulls at this point.
03:48 And that's what I'm a little shocked by. Let me just round out by saying we're going to have a, I'll call it a death cross, as you would call it on the charts.
03:55 I don't know what the charts look like, but I'm not even really referring to charts.
03:58 You're going to have this point in time where economic data worsening and the fear of stagflation and things slowing outweighs whatever the Fed may or may not do.
04:07 And I think, unfortunately, I think we're going to cross that in the next few weeks, if not this week.
04:12 If you want to talk charts, our friend Carter Braxton of Worth Charting, he went out with some S&P charts overnight on his service.
04:20 And he was drawing a line from the all-time highs in the SPX on January 2nd.
04:25 He connected it with that bear market rally that we saw in late March.
04:30 And we're almost there to the high after this, what, 13%, 14% rally, I guess maybe 15% rally in the S&P 500.
04:38 The quarterly moving average in the S&P is 43.27, so we're not far from that here.
04:45 You know, Danny, your point about that data death cross that we might start to see, I think you just coined something there.
04:50 Lizanne Saunders from Schwab tweeted this this morning.
04:54 Strong rally, not yet deterring hedge funds as they continue to increase short positions in S&P 500 futures.
05:00 Positioning is the most net short since the summer of 2020.
05:04 And I do think that's kind of interesting, because your point, Danny, you've been mentioning.
05:08 And just so you know, remember we said on Friday's pod, please email us, please tweet at us if you are a listener of On The Tape and you trade mean stocks.
05:17 And just so you know, we did have a few that seemed like very smart market participants, Danny, to your point, who are trading them.
05:24 OK, so that is what it is. But that activity that you're talking about last week in the markets, the fact that hedge funds are increasing short futures positions.
05:32 Guy, does that mean that maybe for hedges, you know, I mean, who knows?
05:35 That's one of the things I think is really important to kind of decipher.
05:38 It's like just to say, oh, hedge funds are getting really short.
05:41 They make getting really long the freakiest stuff in the stock market and using futures, which are very liquid and using stops to kind of stop out some of those positions.
05:51 Right. It's really hard to gauge what they're up to.
05:53 I think that's a wonderful point.
05:55 But I think the collective point is as follows. Despite the fact that the S&P 500 is effectively retraced 50 percent from the recent low, we saw thirty six hundred and change from that prior all time high.
06:09 People are still, I think, overwhelmingly bearish and think this is just another bear market rally.
06:15 And we've seen some data over the last week that would, I would think, reinforce exactly that, Danny Moses.
06:21 Yeah, I was just going to say the exact quote was the prime book at Goldman Sachs has seen short covers for four straight weeks, 17 of the last 20 sessions.
06:29 And this week, which was last week, saw the largest dollar covers since December 2021 in cumulative terms.
06:35 Short covers over the past month were among the largest over the past decade.
06:38 So, Dan, your point about going to futures and not doing individual stocks, it's really interesting.
06:42 I think this is a time period where hedge funds have Melvin capitalitis or get worried about being exposed here.
06:48 And this is just a year to kind of stay alive. Right. As a hedge fund.
06:51 And I think that's what's going on here. It's more marketing than it is fundamental analysis here.
06:55 And that's what's taking the lead here. So you can kind of feel it. And having run a hedge fund in the past, I get the feeling it's not worth it.
07:00 So people aren't going to take those shots. So you're right. That's a great point you bring up before about using futures instead of individual stock.
07:06 Yeah, but that's a great stat also, because when you say prime, you're talking about prime brokerages.
07:10 These are the big investment houses that hold the balances of these hedge funds. Right.
07:14 So they see they know what it's a buy initiating along or a buy to cover.
07:19 Why do they know it's a buy to cover? Well, when they're short, there's all these implications about having margin dedicated to short positions.
07:26 So that's a really interesting fact, especially when you see the future positioning dialed up to the downside.
07:32 All right. We got to talk about this. The China data over the weekend here, they're easing.
07:37 I think there was some interest rate that they lowered by 10 basis points.
07:41 Danny, you brought this point up. I mean, it's not just that they do zero covid and there's some geopolitical stuff going on over there.
07:47 But I mean, they have a housing crisis. You and Chinos have been talking about this a little bit.
07:52 She's got his meeting coming up this fall, not feeling particularly that safe, if you will.
07:58 But I'll just tell you this. That instance of the data has caused crude oil to drop 5 percent.
08:04 I think that's a pretty interesting move. And if you look at crude, we are basically right back to those highs in November when the Fed started their pivot.
08:13 And when the administration tapped the Strategic Petroleum Reserve, they were already getting worried about higher oil prices.
08:20 This is before Russia, Ukraine thoughts there, Guy D'Amy.
08:23 Well, I mean, the crude market, I think, controls everything in terms of the lens through which people look at inflation.
08:29 And obviously you make a great point. I mean, it continues to do exactly what the Federal Reserve and to a certain extent this administration needs it to do.
08:37 The question is, at what point does crude oil going lower become actually a bearish thing and speaks of economies that are getting really beat up and slowing considerably?
08:47 That's something that Danny's mentioned for a while.
08:49 So I do think you hit this point of diminishing marginal returns when crude going down is a good thing until it's not.
08:56 And I don't think we're there yet. I don't think we're close to being there.
08:59 But if crude, let's say, were to go below 85 in a meaningful way, then you have to say, you know what?
09:05 It's a great thing for the consumer, but it speaks to a much larger problem.
09:09 This is exactly what Dan just coined the debt data cross or whatever you want to call it, because at some point, yes, it's great when oil comes down because people can do the inputs into their inflation numbers and decide, well, that's great.
09:20 Because you'll start to see the August inflation data.
09:23 Oh, look, that'll come out before the Fed goes again.
09:26 And then the Fed won't go. You know, so those all feed in.
09:28 That works to a point until it doesn't, until the real reason that oil is creating like that is real demand destruction.
09:34 At what point does the economic impact of that work its way into equities versus the insatiable appetite to obviously call out the Fed for potentially pivoting or whatever it may be?
09:45 So that's pretty much sums up where I think we are.
09:48 And you're at this crossroads right now.
09:50 I was looking at the data coming out and yes, it's going to be a quiet period here with exception of some of these earnings, which we can talk about the Walmart Home Depot targeted lows, which are going to be coming out, which are going to give us kind of a real time look into what's going on.
10:02 And I just don't think there's a scenario where the Fed kind of goes below 50 basis points in September.
10:08 Right now, it's 66 and 33 percent chance of 50 is 66 and 75 is 33.
10:14 And I'm looking out to year end right now, we're still sitting up at kind of the 350, 375 Fed funds target for end of year.
10:21 And I think we're still sitting at 225 right here.
10:23 So I don't think there's going to be six rate hikes that are coming here.
10:26 But I also think that the reason that there's not going to be six rate hikes is the data that we're going to see come out over the next several weeks.
10:32 So, you know, Guy often says that this week or this day or whatever, reversal in the market could be a really important footnote for a broader move.
10:40 And I actually think this week could be a really important week, especially when, OK, most of S&P earnings are done for the Q2 period.
10:47 But you just mentioned Walmart target.
10:49 We know that the both of those companies not only had disappointing results when they last reported, but also had some guides intra quarter.
10:56 And that Walmart one, which we covered, the fact that Walmart is above where it just pre announced that last week of July, the gap down close to 10 percent filled in the whole gap and is higher.
11:07 And then if you look at Target and I know we have to go back to that May disappointing quarter, it was a huge gap.
11:13 I think the stock was 215 and it opened just above 165.
11:17 It went as low as 140.
11:19 Well, here we are. It's starting to fill in that gap, despite the fact that we have had another pre announcement.
11:25 And when you think about where crude oil has gone and where gas at the pump a month and a half ago, gas at the pump national average was five bucks.
11:33 And now it just crossed below four. Might things be coming around for the consumer?
11:38 And I'll just tell you this, that if Walmart and Target were some of the first to kind of blow the warnings about the U.S. consumer, if they suggest that the consumer is getting into better shape, entering into the fall, Target's filling in that gap.
11:53 Target's going to be back at 200. Walmart will be back at 150.
11:56 Thoughts there, Guy?
11:57 No, it's fair. If they do suggest that, I think that would give definite tailwinds not only to the retailers, but probably to the broader market as well.
12:05 I think the market would take its cues from that. I don't think they're going to say that, though.
12:08 And you're right. It's gone from five to four. But let's not pretend.
12:12 I mean, things are still sort of difficult for the U.S. consumer.
12:15 And I would submit and I think Danny would agree with this.
12:18 Things don't turn on a dime for retailers of this magnitude, and it takes a quarter, if not quarters, probably the latter, to sort out an inventory problem that is catastrophic.
12:31 That's not my word. That's word used by people that actually analyze the space, Danny.
12:36 Yeah, listen, again, energy prices going down here does not help what's going on right now in Central Europe, Germany, with inability to get natural gas and other things coming through from Russia.
12:46 Right. That's an issue. And then, like you mentioned before, in China, those things with Taiwan, massive geopolitical risk.
12:52 We just sent more politicians over over the weekend.
12:54 So when China obviously gets into their claws come out, I guess, so to speak, right now, and now obviously with the economy retrenching, that's a dangerous setup geopolitically as well.
13:05 And again, not being priced in. We are so focused here, hyper focused on every data point here.
13:10 We're really not paying attention, I think, to the broader issue.
13:13 So I kind of take a step back and look at the broader issues that are facing the markets here.
13:18 And that makes me even more bearish than I have been.
13:20 So Home Depot and Target tomorrow before the bell, Lowe's and Walmart Wednesday before the bell.
13:28 I mean, you talk about four huge earnings releases over the course of a 48 hour period.
13:33 You got it. Throw in a TJX, which everybody looks at.
13:37 Oh, by the way, a Cisco systems that Dan Nathan knows extraordinarily well on Wednesday.
13:43 And you've got a pretty interesting week for earnings.
13:46 So, again, earnings obviously matter. The markets rallied considerably.
13:50 I think the reversal I saw last week in H.Y.G. on Thursday is interesting, something we should continue to watch.
13:57 I do think this forty two hundred level we're sort of tapping out on the upside.
14:02 And I think any further upside is limited. But that's as they say, what makes markets.
14:07 All right. So let me just end with this. One of the dumbest things I saw on the weekend was Max Leftkin,
14:11 who is not a dumb person, obviously, from a firm which is the buy now pay later company,
14:16 said he can't wait to silence his critics and his doubters when actually the recession hits.
14:22 So he's so hell bent on believing that he can offer rates that no one else can during a recession,
14:28 that his model is going to prove to be effective. Everyone should read that article.
14:31 You cannot commoditize lending. As my good friend Vincent Daniel always says,
14:35 if you grow your lending book more than GDP, you're going to have an underwriting problem.
14:39 So everyone should read that article. That stock has rallied a lot of firm off the lows.
14:43 It's down a lot from the highs. But I think it's one of the most nonsensical things I read all weekend.
14:47 I just wanted to throw that in there.
14:48 Before we go to our guest, Vinnie and Porter are feeling extraordinarily well on this Monday
14:55 as their New York Mets just continue to defy logic and beat the shit out of everybody.
15:02 In a minute, a conversation with Alan Sokolitsky, the chief investment officer of Masterworks.
15:09 iConnections is the world's largest capital introduction platform in the alternative investment industry.
15:17 They bring the asset management community together through a membership platform
15:20 that lets allocators and managers meet and connect both physically and virtually.
15:25 Over 3,000 allocators and 600 managers are part of the iConnections community,
15:30 overseeing nearly $48 trillion and $16 trillion in assets, respectively.
15:35 iConnections first came to our attention in 2020 during the first wave of the pandemic.
15:40 That's when their first event, Funds for Food, became the largest virtual cap intro event in history.
15:46 To date, they've donated nearly $2.5 million to charities.
15:49 They are also the people behind the alternative investment industry's largest and most exciting in-person events.
15:55 To find out more about iConnections events and members-only platform, visit iConnections.io.
16:01 Alan Sokolitsky is the chief investment officer of Masterworks and MWC Group.
16:09 Masterworks, the leading art investment platform for self-directed investors,
16:13 launched MW Capital Group to deliver diversified art investment solutions to financial advisors and institutional investors.
16:22 Prior to MW Capital Group, Alan was a senior market strategist at Goldman Sachs
16:27 focused on investment strategy, portfolio construction, and investment implementation.
16:33 He has almost two decades of global economic and investment experience.
16:37 Alan, we just heard your bio, which is fascinating,
16:40 but it's a long way from Goldman Sachs to where you are now.
16:43 Talk about that journey because I think it's really interesting.
16:46 Yeah. So, I have to tell you that if somebody asked me years ago
16:51 if I ever thought I was going to take my career in any direction related to art,
16:56 I would have looked at them like they were crazy.
16:58 But there is actually sort of a natural explanation.
17:01 I mean, in my capacity at Goldman, I basically was doing macroeconomic research,
17:06 researching different asset classes, publishing on them, traveling around,
17:09 talking about what we thought was more attractive, less attractive,
17:12 asset allocation modeling, all of that stuff.
17:14 So, it was one of those things where you spend enough time doing it
17:18 and you think you've kind of seen probably everything under the sun at that point.
17:22 And all of a sudden, I had a little bit of a, call it a light bulb moment,
17:26 where I came across this company called Masterworks that was investing in the art market.
17:32 And it was kind of jarring when I first thought about it because at no point did I ever think about
17:36 art investing as something you could even do. It just never crossed my mind.
17:40 And so, then what ended up happening is I actually started doing, quite honestly,
17:44 some of my own research before I even started talking to Masterworks in the first place.
17:48 And, you know, honestly, I couldn't believe my eyes in terms of the characteristics
17:53 of the asset class itself. I had not seen any characteristics like that before.
17:59 And so, that's what kind of ultimately sold me the idea of bringing art as an asset class
18:03 to investors and ultimately Masterworks.
18:05 So, Alan, when you were at Goldman and doing this research, I mean, you're serving GSAM clients.
18:11 I mean, was there demand for these sorts of assets? And we're going to talk about correlations.
18:16 And I know that you spent a lot of time doing that sort of work.
18:19 But, like, again, you know, let's put some context to the size of this and sort of
18:23 what was the threshold at GSAM when you're thinking about investable alternative asset classes
18:28 and how did art fit into that framework back then?
18:31 Well, art, to put it simply, did not fit into that framework.
18:35 And that's what was so much of that light bulb moment for me.
18:38 The fact that, let's start with the size of the asset class.
18:40 I feel like it's kind of informative for everything we're talking about here.
18:43 The asset class is basically estimated to be $1.7 trillion in size.
18:48 That is, for context, about half the size of private equity in the United States.
18:53 So the reason I'm saying that is because, you know, going back to your question about
18:58 what was the coverage of art as an asset class at Goldman, it's one of these things where
19:02 you would imagine there are probably a lot of investment opportunities that are maybe
19:06 very small that would fall under the radar and it's understandable why they wouldn't
19:10 necessarily be covered, right? They might be small, very niche-y opportunities.
19:14 They don't get coverage. Okay.
19:16 But it's just extraordinary that you have an asset class that's about half the size
19:20 of the U.S. private equity industry, and yet, as I always say, 99.9% of investors
19:26 have never for a second thought about investing in art.
19:29 And so for me, it was kind of this – it was really an opportunity that I saw in my
19:34 career where it's taking such a unique asset class.
19:38 So if you think about this, you know, think about all the different asset classes that
19:42 there are in the world. I'm going to use the word "popular," the ones that everybody
19:45 knows about and invests in – stock, bonds, commodities, hedge funds, all of those.
19:49 Okay. So if you think about all the asset classes we're familiar with, they usually
19:54 fall into two buckets, broadly speaking.
19:56 One bucket is the asset class has existed for a really long time and investors have
20:02 invested in it for a really long time.
20:04 And the other category is you've got newer, more up-and-coming asset classes, and by
20:09 definition, investors have not invested in them for that long.
20:12 The second category would be things like, you know, crypto, let's say NFTs, things
20:17 along those lines. Well, now if you think about art, it doesn't even fit into either
20:22 category because that asset class has existed for centuries, in fact, predating most other
20:28 major asset classes, and yet almost no investors have ever thought about investing in it.
20:34 That's why I thought it was such an extraordinary opportunity.
20:37 Well, yeah. Well, talk to us a little bit – you know, I've gotten to know Scott
20:39 Lin. He's become a friend over the last couple of years, the CEO of Masterworks, and
20:43 it's kind of interesting. He's been on OK Computer, one of our other podcasts over
20:46 the last year, and it seems like there's a light bulb moment here because the first
20:51 time he came on, I think a little more than a year ago, maybe Masterworks had, I don't
20:57 know, 350,000 registered users. The second time he came on, 400,000. I think the number
21:03 now is north of 450,000, and I suspect these are smaller sorts of investors, right, like
21:10 who are looking at this as like – they're just basically saying something's been
21:14 democratized here, and now I have access to it. So speak a little bit to the user growth
21:20 that you have, and then now just the ability – it's one thing to think of like a high-minded
21:26 $1.7 trillion asset class that usually only people with certain means or access have the
21:33 ability to invest in, but now it seems like anybody can invest in it, and you don't
21:37 have to buy a whole piece of art to put on your wall. You can buy a portion of it.
21:42 Yeah. Well, first I'll have to respectfully correct your figure about 450,000. It's
21:47 now close to about 500,000. So those numbers are growing seemingly by the minute, and yes,
21:53 we are basically democratizing the asset class. There's no question about that, but
21:57 what's interesting to note is actually that the individuals that are more often than
22:02 not coming to our platform to invest, they are very often financial services-oriented
22:08 individuals. They are very often investment-minded individuals. They are not necessarily what
22:15 you would ever think of as traditional art market background individuals. And so what
22:19 we're always trying to make clear is, yes, we are talking about an asset class that traditionally
22:25 has not really ever been thought about as an investment, but we are very much treating
22:30 it, approaching it, investing in it as if it is a true investment. So that's on sort
22:36 of the democratizing side of it. But the other element that I can't help but mention
22:41 is that we've also launched diversified strategies that are actually looking more
22:46 at the institutional investor community. And if you think about that evolution of our
22:50 business from initially catering to self-directed investors and now after several years moving
22:57 into institutional, that is actually the exact opposite of how most other private market
23:03 illiquid asset classes have ever worked. So who was accessing private equity and venture
23:08 capital decades ago? It was primarily institutional and ultra high net worth. Then eventually
23:14 enough time goes by and you have new vehicles that come about that allow access to those
23:18 asset classes at lower price points, which sort of ends up democratizing them in a way.
23:23 But that always happens after the fact. That's kind of the last stage of the process. With
23:27 us, we actually started democratizing the asset class first. And after we've been successful
23:33 doing that, we thought, you know, honestly, all of these attractive investment characteristics
23:38 that art has, there's no reason why we shouldn't be offering those to institutional investors
23:43 as well.
23:44 Alan, it's interesting you talk about democratization of art. I totally get it. But I've also seen
23:49 enough James Bond movies and seen enough footage from Sotheby's and Christie's to understand
23:54 this is a very unique audience. What kind of pushback, if any, did you get from the
24:01 art community on this?
24:03 They usually fall into two camps. Those two camps are probably described the way you would
24:08 expect them to be described. Some individuals in the art community do not at all like what
24:13 we are doing because we are bringing a financial element to something that historically has
24:18 not necessarily been financially oriented. And then you have other individuals in the
24:23 art community, including, by the way, artists who love what we are doing because for them,
24:30 the calculation is basically, yes, it's true that Masterworks is doing something financially
24:34 oriented with art. But at the same time, think about the number of individuals we are bringing
24:41 into the market, into the art market by virtue of what we're doing.
24:45 So for all of the hundreds of thousands of individuals who are signing up on our platform,
24:50 many of these individuals are those who might not have had much familiarity with art previously.
24:55 And all of our pieces, for every piece that we bring to market, there's a process we go
25:01 through where we file the documentation with the SEC. All of this we do as a way to bring
25:06 transparency and education to a market that, if I had to be honest, I would say has not
25:11 traditionally been the most transparent. So we're bringing education to a whole slew of
25:17 the population that, quite honestly, probably never thought a whole lot about art in the
25:20 first place.
25:21 So in some, I'm certain of this, so the auction houses, the Christie's, Sotheby's,
25:26 they're actually, you're a client of theirs, I would imagine. You're not competing with
25:30 them necessarily. You're actually one of their clients.
25:33 We often do work with the auction houses, but I will also say that the overwhelming
25:38 majority of our transactions, I think the numbers are roughly 80%, they take place in
25:43 the private market. So we really only transact at auctions at probably 20% of the time.
25:48 It allows us to sort of improve the fees meaningfully. And it's just sort of an easier
25:53 process too, mostly because, so we have an entire acquisitions team that has all of the
25:59 traditional art market experience you would expect an acquisitions team in the art market
26:03 to have. And they have an enormous global network. We also just hired an individual
26:08 a few months ago who is now the former head of Bank of America's entire art lending
26:14 business. He's going to be in charge of the dispositions process. So he has an enormous
26:19 global network and all of this allows us to transact more directly with collectors
26:24 and investors.
26:25 So let's take a step back here and you just mentioned dispositions. Let's talk about
26:29 acquisitions. Let's talk about how, let's say if I am a registered user on the platform
26:34 and I have a balance with you and I have an interest in buying fractionalized art because
26:38 I see it as a diversified asset class. And we're going to talk about some of the other
26:43 characteristics about correlations and that sort of stuff in a second. But walk us through
26:47 a little bit how, let's say one of your registered users could invest in one of your
26:53 acquisitions. And you just mentioned transparency. I know a lot about the process, but
26:58 when you guys acquire a painting, what happens there? And then how does the user invest
27:03 in that?
27:04 Yep. So the way that it works is we buy a painting with balance sheet capital. We set
27:09 up an LLC, we file the LLC with the SEC. We put that one painting that we just bought
27:16 into the LLC and we take the LLC public. So since that LLC only owns one asset in it,
27:23 which is the painting we just bought, when investors are buying shares in that LLC, they
27:27 are effectively buying shares in the painting. So that's basically the process of how do
27:32 we ultimately securitize the painting in the first place. Once we do that, then we'll
27:37 make the paintings available on our website. You can sign up on our website. It's free
27:41 to sign up. You can see the paintings that we have available for investment. And once
27:45 individuals sign up on the website, then ultimately they have a call scheduled with a member of
27:50 our membership team here at Masterworks. And they kind of talk them through the different
27:55 opportunities that are available to them as an investor. They talk about what's ultimately
27:59 their investment time horizon, what's their tolerance for risk. They go through a suitability
28:04 checklist. I mean, even after being here for quite some time, it's still wild for me to
28:08 think about how we're doing all of the same things that any other financial advisor, let's
28:15 say, would do with their clients for all the other major asset classes that they've been
28:19 doing for who knows how long at this point. We're doing the exact same process for our
28:23 investors. So ultimately we can build a portfolio for them, discuss what the appropriate allocations
28:28 are, the different investment characteristics of those individual paintings that are available
28:33 for investment on the website. It's quite honestly very much the similar conversation
28:37 you would have with a financial advisor that you might work with.
28:40 Yeah. So talk to us a little bit about liquidity. I know because I've read about it and I've
28:44 talked to some people there. I mean, when you guys have a hot acquisition, they go pretty
28:48 quickly. So there's a lot of demand for them. What about the holding period for some investors?
28:53 Again, it's not thought to be a very liquid asset class, right? Are you guys creating
28:59 liquidity? I know there is some secondary market activity. How do you guys think about
29:04 that? And do you see that market evolving into something? Are Guy and I going to be
29:08 talking about this market on fast money on CNBC sometime in the next few years?
29:13 Yeah. So in terms of liquidity, it is an illiquid asset class like other illiquid asset classes.
29:19 The holding period that we typically tell investors, you should expect that we'll hold
29:24 each painting for, call it roughly three to 10 years. That's our anticipated hold period.
29:29 We haven't actually talked about this. We can get into that in a few minutes about this
29:33 database that we built, which is entirely proprietary. Nobody else to our knowledge
29:37 on the planet has it. And this informs a lot of our investment decisions. It informs why
29:42 we pick that three to 10 year time period among a lot of other things. So that's the
29:47 expected hold period. The additional thing that I would say though, and I feel like I
29:51 sort of hammered this point home a few minutes ago, but I'll repeat it, which is we are
29:55 very much approaching this asset class as an investment opportunity, which means that
30:00 we are going to treat it just like any other, let's say portfolio manager would treat the
30:05 investments in their asset class that they cover. So that is to say that if let's say
30:10 we buy a painting and two years later, we get an extremely attractive offer for that
30:15 painting, we are going to sell that painting. Just like an equity portfolio manager, let's
30:20 say you have a 12 month target going out, you hit that target in a month, you're very
30:24 seriously going to consider reducing your position if not closing it. So we are approaching
30:29 this the exact same way. And some of the irony I'll tell you is we keep repeating that the
30:34 anticipated hold period is three to 10 years. And yet most of the paintings we've sold
30:38 so far have actually been sold in under three years. But nevertheless, we do not want anyone
30:42 to expect that that's the norm.
30:44 Well, you mentioned liquidity and that timeframe sort of sets up my next question, which is
30:50 exactly that. We've been the last 10 to 12 years, specifically the last few years, unparalleled
30:57 liquidity in the system. Now, theoretically or seemingly, we have a Federal Reserve that's
31:02 trying to take it out of the system. I'm certain you all talk about that at Masterworks. Can
31:07 you speak to the role of inflation, liquidity, those types of things that everybody in the
31:13 markets we talked about at the beginning of this live in?
31:16 Yep. So the interesting thing is I feel like the liquidity conversation will be significantly
31:24 more relevant years from now if and when we considerably more democratize the asset class
31:31 than we already have in the first place. And the reason why is because if you think about
31:36 the primary participants in the art market for most of history, to be frank, they are
31:42 typically individuals who are very much at the upper, upper echelon of society. And almost
31:48 by definition, those individuals are probably at least on the margin, if not more so, less
31:54 impacted by general liquidity, whether it's generated by the Federal Reserve or otherwise.
31:58 They're just not that impacted by it in the first place. I mean, their balance sheets
32:01 are typically enormous to begin with. So for them, it's just a matter of they have the
32:06 means to transact in the art market. Now, if we do a good enough job of democratizing
32:10 the market and many years from now, every investor all over the world is investing in
32:14 art, people are trading shares left and right, then you can imagine that liquidity will start
32:18 to have more of an impact on the art market the way that it does for equities and a lot
32:22 of other asset classes for that matter. In terms of you brought up inflation, I mean,
32:26 this I always find interesting to talk about because you ask any investor who's invested
32:32 in multiple asset classes before, you ask them a simple question. When you think about
32:36 an inflationary environment, what should you consider investing in? I guarantee you just
32:40 about all the time, the answer is going to be gold. Now, here's the interesting thing.
32:45 Gold is absolutely not a bad investment during an inflationary environment. In fact, you
32:49 know, if you go back to the 70s and early 80s, when inflation was running at an average
32:54 of, let's say, 9% in any given calendar year, the performance of gold was 31%. I would argue
33:00 that is pretty attractive. But what the vast majority of investors absolutely do not know
33:06 is that the art market averaged 33% during that period of time. So it's one of these
33:11 things where the art market appears to have very attractive sort of inflationary characteristics.
33:17 But the one thing that I always like to make clear is if I get the question, is art an
33:23 inflation hedge? My answer is actually no. And here's the reason why. An inflation hedge
33:29 strictly speaking is something that will do exceptionally well when inflation is elevated,
33:35 but it's not going to really do that well when inflation is not elevated. I mean, that's
33:39 what a hedge is. And the reason why art is not an explicit inflation hedge is because
33:44 yes, it does very well when inflation is elevated. But when inflation is not elevated, it still
33:50 actually does quite well. And that's why I think it's important to make that distinction
33:54 there.
33:55 It's fascinating. So you answered the correlation question for sure. I mean, obviously when
34:01 we look at the world, everything is sort of vis-a-vis the stock market and those types
34:04 of things, but I'm fascinated. The comparison to gold is really interesting having done
34:08 it my 15 years of my career. My next question is this, to the extent that you can give historical
34:15 returns, given the database that you spoke of, can you speak to that?
34:19 Yeah. So I want to give a little background on the database because it is with no exaggeration
34:24 our secret sauce here at Masterwork. And here I'll start by saying this, all of us in financial
34:30 services, when we want data for any sort of financial instrument, we go to our favorite
34:36 data provider. It could be Bloomberg or Refinitiv or any of the other data providers out there.
34:40 And we have all of that data readily accessible at our fingertips. Nobody ever even thinks
34:45 about where it came from. It's just there. Well, believe it or not, nothing like that
34:51 has ever existed for the art market. So the first project that Masterworks had when it
34:56 started was to hire several dozen analysts and they had one job. That one job was to
35:02 go through thousands of auction catalogs that we bought from all over the world. We quite
35:07 literally think we bought probably every single one of them. And their job was to go through
35:11 every one of those page by page, transaction by transaction, and put all of that data into
35:17 a computer. So we have since built what I, here's the analogy I basically use. I say
35:22 we built Bloomberg for the art market, except that the only difference between us and Bloomberg
35:28 is Bloomberg, of course, sells licenses. You can access all of their data. What we built
35:32 is entirely proprietary and it's what allows us to research, analyze the art market, different
35:38 segments of the art market, similar, you know, I can't help but put my old strategist hat
35:43 back on. Think of it almost along the lines of the way you might research sectors within
35:47 the S&P 500. We'll research artist markets within the broader art universe. So we have
35:53 an understanding of what are the different sharp ratios for different artists markets?
35:57 How do they appreciate differently? We can calculate relative value the way you might
36:01 do it in other markets. This is very much our secret sauce. And what we've built are
36:07 indices that capture the performance of different segments of the art market. So one of those
36:12 indices would be our post-war and contemporary art index, because at Masterworks, that's
36:17 the segment of the market we focus on. And that segment of the market has been appreciating
36:22 for decades now at 14%. By point of comparison, S&P 500 is 10%. And so we think at least at
36:29 the index level, art should be considered. But then we think we bring a good amount of
36:33 alpha to the process too, because of this proprietary database that we have.
36:38 So here's an off-the-wall question from my background. So as I mentioned, I traded gold.
36:44 And one of the things that we uncovered in the early '80s, at least the folks at Drexel
36:49 Burnham did, all this gold sitting in vaults around the world, basically earning nothing.
36:56 The powers that be at Goldman Sachs, Drexel Burnham went to these central bankers and
37:00 said, "We will lease the gold from you. We'll take it from you, pay a lease rate, and then
37:04 we control it." So here's my off-the-wall question. You actually physically buy this
37:09 art, and it's sitting somewhere, I would imagine. Maybe you can answer that quickly, and then
37:14 I'll ask my question.
37:16 Yeah, so that is right. It's stored more often than not at the Delaware Freeport. That's
37:21 a state-of-the-art storage facility. I usually say that if you're a major art collector and
37:25 you don't have your art in your house, you probably keep it at the Delaware Freeport.
37:30 So that's where the art is stored. We also, by the way, as a side note, we built a beautiful
37:33 gallery in our office a few months ago, and we're going to be rotating a lot of the pieces
37:37 we have there. But most of the time, it's at the Delaware Freeport.
37:40 Which I think is interesting. And you mentioned sort of the three- to ten-year time horizon.
37:44 Is there a business potentially in leasing art to individuals who want to have it as
37:50 a vanity piece in their apartments, homes, wherever it is for a period of time, understanding
37:57 they're going to give it back to you when the lease is over or if it is sold over a
38:03 period of time? Because that could be extraordinarily lucrative, I would imagine.
38:06 It could be. It's not something we're considering at the moment, but I can tell you that because
38:12 we are a startup at the end of the day, there are whole lots of different business ideas
38:16 that we're constantly reevaluating. I always like to say that it sounds strange after all
38:22 this time to still label us a startup because we've been quite successful as far as startups
38:27 go, but we are technically a startup and we're always open to different ideas. There's no
38:31 question. Your idea is one of the ones we've been thinking through.
38:34 Yeah. So I guess late last year, you guys were valued at a billion dollars. So you reached
38:39 that kind of unicorn status. Is that a name that we still use these days? It's pretty
38:44 cool, though. Congrats on that. But when you think about some of the trends, there's a
38:48 couple of really big macro trends. We talked about it, inflation, it's been bubbling up.
38:52 You just gave us some of your thoughts on that. What about the trend of digital art?
38:57 Because I know that when you think about buying a fractionalized Banksy or something like
39:03 that, you don't own it. You can't put it up on your wall or anything like that. You're
39:06 just really investing in the thought that it's going to be worth more at some point
39:10 in the future. Now, when you think about digital art, and Scott and I spent some time talking
39:15 about it, I know that you guys are not huge fans of NFTs, but a lot of people are investing
39:22 in NFTs for the culture, for the experience. And they think they own something. That guy
39:26 would say, "Well, I could just screenshot that. I have the same thing you have, and
39:30 I could feel just as good about it as you do." You're just placing a financial value
39:34 on it. So talk to us a little bit how you think about that. Because I guess when Masterwork
39:39 started, when you joined the company, you guys probably weren't focused on this NFT
39:43 craze that, for all intents and purposes, seems like it's kind of died down a little
39:48 bit. Yeah. Undoubtedly, that was the right decision,
39:51 not to be focusing on NFTs. One of the things that we kept saying for years was that it's
39:56 just not abundantly clear how you value NFTs. They haven't even existed for that long. They've
40:02 only existed for two years at this point. And if you think about what we're doing at
40:06 Masterworks, we're actually trying to bring an asset class to investors that has existed
40:11 for long before most other asset classes did. So in a lot of ways, there really aren't
40:17 many comparisons between what we're doing with real physical paintings and ultimately
40:22 digital art. It seems like that kind of preference or viewpoint that we had has paid off because
40:28 in recent history, NFTs, quite honestly, have not done well, to put it mildly. Am I going
40:33 to say definitively that at no point in the future we are ever going to reconsider if
40:37 there's some way to get involved in the NFT market? I can't draw a line in the sand and
40:42 say that's absolutely not going to happen. We're always up for evaluating ideas, but
40:45 I have to tell you, it feels quite the polar opposite of what we are actually trying to
40:50 do. So it's interesting on the digital art front,
40:53 the NFTs, and we spent some time on the podcast over the last, let's call it year and a half,
40:58 thinking about crypto. We've had a lot of crypto folks on there and a lot of active
41:02 practitioners or people who are really all in, but they basically say, "Listen, more
41:06 investors should not have anything more than, let's say, a single digit allocation to a
41:13 speculative asset like this that is volatile, that sometimes is not particularly liquid."
41:19 How do you guys think about that when you're talking to customers or investors? How much
41:24 exposure should they have to this market?
41:27 Yep. So I'll answer that question in two parts. The first part is I'll cite external research
41:32 on this topic in the interest of trying to position something as being as objective as
41:36 possible. Citigroup has actually been quite forward thinking in terms of incorporating
41:41 art into their asset allocation models. And their guidance has been, so for specifically
41:48 investors who are able to have a portion of their portfolio in illiquid asset classes,
41:53 right, so that's the starting point, they have to be able to do that, they would recommend
41:57 up to 4% of an allocation to art. In terms of our own research, what I actually decided
42:03 to do, I mean, it was nice in my prior life when I was able to run asset allocation scenarios
42:09 from a totally product agnostic perspective. I'm not necessarily in that same capacity
42:14 here, so I didn't want to guide to any particular allocation, but what I wanted to do was to
42:19 see if I create three baseline portfolios that represent three different types of investors,
42:26 how frequently will adding a small allocation to art make that portfolio do better than
42:32 what it would have done without art? And what I found was very eye-opening. Whether you
42:37 have a basic 60/40 as a starting point, whether you have a diversified but still liquid portfolio
42:43 that's got at least 10 asset classes in it, whether you are an endowment portfolio that's
42:47 got very healthy allocations to private equity, real estate infrastructure, so on and so forth,
42:52 with each of those portfolios, if you make a small 5% allocation to art, you will improve
42:59 your Sharpe ratios in about 100% of 10-year periods. It is actually extraordinary. And
43:04 if you're wondering what's the reason for that, it's very simple. When you come across
43:09 an asset class that has no correlation to any other major asset class, and this asset
43:15 class has been appreciating for decades at around 14%, you can understand immediately
43:21 how putting that asset class in your portfolio will provide that level of diversification
43:25 and improvement.
43:26 Alan, performance is important. How has the performance of the platform been?
43:31 Yeah, so our track record is 15.3% net annualized returns for investors since inception, which
43:39 is September 2019 through June of this year. And for that period of time, I can't help
43:45 but highlight that that performance has basically outpaced US stocks, hedge funds, private equity,
43:52 international stocks, gold. It's been pretty good performance. And even in this challenging
43:58 environment that we've seen for broader markets, we're still seeing opportunities. Last month,
44:03 we sold a painting for almost 30% net returns to investors.
44:08 I'm sure you probably saw this earlier this week, Alan, but a T206 Onis Wagner card sold
44:14 at private auction for over $7 million. I mean, the absurdity of that is not lost on
44:19 me, but I'm sure you've really immersed yourself to a certain extent on the art side of this,
44:25 and I'm sure you have conversations. This is just sort of curiosity on my part. Is there
44:30 sort of the Moby Dick out there, the white whale that we would love to be able to purchase
44:36 if we can get our hands on it in terms of art?
44:39 Well, I'm only going to say that we focus specifically on art because it has significantly
44:46 more data than a lot of other areas of the market. We sometimes get questions around,
44:52 would we ever consider sculptures, photographs, baseball cards, sneakers? Those are not at
44:59 all areas we are thinking about investing in because, and I can't emphasize this enough,
45:03 we are at least 50% of our investment process quantitatively driven. We focus on the areas
45:10 where there is considerable amounts of data, and that for us is specifically multimillion-dollar
45:15 paintings. That's where we're focused.
45:16 I love it. It's fascinating. And just so how are people finding you now? You mentioned
45:21 you're up to half a million clients. How are people finding you? How are you growing organically,
45:26 and how would you like to grow going forward?
45:29 Yeah, so we do a lot of podcasts. I mean, that would be one area. A lot of investors
45:34 often come across masterworks-oriented marketing or advertising at different investment websites.
45:40 There are quite honestly so many different avenues that investors are able to find us.
45:44 And I can't even help but add this now that we're on the topic. As it turns out, we have
45:49 about 20% of our investors that are coming from outside the United States. And the reason
45:55 why that is actually so surprising is because we don't do any marketing or advertising outside
46:01 the United States. I would bet there are a lot of companies that would love to have 20%
46:06 of their customers coming from a place that they never even market or advertise to. So
46:11 over time, we might think about growing that universe of investors too. But ultimately,
46:15 I think a lot of it is really just the ease of the process that makes investors interested.
46:20 You sign up on the website, you schedule a call with one of our advisors, you discuss
46:25 what's appropriate for your portfolio, the different investment opportunities we have
46:29 at any point in time, and you're off to the races. You make your investment, and after
46:34 that, you can even make more investments on your own at that point once you've had that
46:38 initial conversation with an advisor. It's very easy.
46:41 Well, Alan, thank you so much for your time. Thank you for joining us off the tape. Have
46:46 a great afternoon.
46:47 Thanks, guys.
46:48 Thanks once again to CME Group and iConnections for sponsoring this episode of On the Tape.
46:54 If you like what you heard, make sure you hit follow and leave us a review. It helps
46:59 people find our show, and we love hearing from you. You can also email us at onthetape@riskreversal.com
47:06 anytime. Follow and connect with us on Twitter @OnTheTapePod, and we'll see you next time.
47:13 On the Tape is a Risk Reversal Media Production. This podcast is for informational purposes
47:18 only. All opinions expressed by me, Dan Nathan, Guy Adami, Danny Moses, and any other participants
47:24 are solely our opinions and should not be relied upon for specific investment decisions.
47:28 decisions.
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