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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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Show Transcript:

Dan Nathan: [00:00:00] iConnections Ad [00:00:00][0.2]

Guy Adami: [00:00:50] As part of our Off the Tape series sponsored by I Connections, you’re listening to a bonus episode of On the Tape with the extraordinarily handsome Danny Moses and equally sexy Dan Nathan. In just a few minutes, we’ll be speaking with Allen Sukholitsky, the chief investment officer of masterworks. But first, data coming out fast and furious to hear Danny. How are you? [00:01:16][26.4]

Danny Moses: [00:01:17] 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. And yeah, I woke up this morning to some bad data in China, to some horrible data in New York. The Empire Survey, I believe we call that. And then watching the NAHB, which is coming out in real time with the housing sentiment, continues to be negative, but just buy stocks, I guess Guy. [00:01:37][20.4]

Dan Nathan: [00:01:37] 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? [00:01:45][7.3]

Guy Adami: [00:01:45] No, is that what I said? [00:01:47][1.5]

Dan Nathan: [00:01:47] Yeah, you did. [00:01:47][0.4]

Danny Moses: [00:01:48] That’s a Monday hangover. No. That’s not what I meant to say at all. [00:01:50][2.4]

Dan Nathan: [00:01:50] Bear market rally. That’s what we had last week. The data. The Fed’s going to be data dependent. They’re only going to go 50 basis points in their September meeting by stocks. That’s that’s your point. But I guess what you’re saying right now is they look at these two data points we have this morning. I think that empire manufacturing number was second worst on record. 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 tealeaves right 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. What is weak economic data do? Does it give them cover to pull back, I guess is the question, Guy? [00:02:25][35.0]

Guy Adami: [00:02:26] 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 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. And despite the fact that the economy is clearly slowing, inflation is still a problem. 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 as Dan those woke up this morning. The house was cold, checked the furnace She wasn’t burning. But I’ll give it back to you. [00:03:03][37.0]

Danny Moses: [00:03:03] So two of the 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, 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. 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. 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. 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. And that’s what I’m a little shocked by. Let me just round up by saying we’re going to have a I’ll call it a death cross, as you would call it on the charts. I don’t know what charts look like, but I’m not even really referring to charts. You’re going to have this point in time where economic data worsening and the fear of stagflation, things slowing, outweighs whatever the Fed may or may not do. And I think unfortunately, I think we’re going to cross that in the next few weeks, if not this week. [00:04:11][67.9]

Dan Nathan: [00:04:12] If you want to talk charts, our friend Carter Braxton worth of work charting. He went out with some S&P charts overnight on his service and he was drawing a line from the all time highs in the spikes on January 2nd. He connected it with that bear market rally that we saw in late March. And we’re almost there to the high after this, what, 13, 14% rally, I guess maybe 15% rally in the S&P 500 to 200 day moving average in the S&P is 4327. So we’re not far from that here. You know, Danny, is your point about that data death crossed that we might start to see? I think you just coined something there. Liz and Saunders from Schwab tweeted this this morning, “strong rally, not yet deterring hedge funds as they continue to increase short positions in S&P 500. Futures positioning is the most net short since the summer of 2020.” And I do think that’s kind of interesting because your point, Dan, you’ve been mentioning and just, you know, remember we said on Fridays, pod, please email us, please tweet at us if you are a listener of on the tape and you trade meme stock and just you know we did have a few that seemed like very smart market participants. Danny, to your point, who are trading them, okay. 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, Guy, does that mean that maybe for hedges, you know, I mean, who knows? That’s one of the things I think is really important to kind of decipher is like just to say, oh, hedge funds are getting really short. They make getting really long the freakiest stuff in the stock market and using futures which are very liquid and using stops the kind of stop out some of those positions. [00:05:50][98.1]

Guy Adami: [00:05:51] Right. It’s truly hard to gauge what they’re up to. I think that’s a wonderful point. But I think the collective point is as follows. Despite the fact that the S&P 500 is effectively retraced 50% from the recent low, we saw a 3600 and change from that prior all time high. People are still, I think, overwhelmingly bearish and think this is just another bear market rally. And we’ve seen some data over the last week that would, I would think, reinforce exactly that Danny Moses. [00:06:20][29.2]

Danny Moses: [00:06:21] 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. And this the week, which was last week, saw the largest dollar covers since December 2021 in cumulative terms. Short covers over the past month were among the largest over the past decade. So Dan, your point about going to futures and not doing individual stocks is really interesting. I think this is a time period where hedge funds have Melvin Capital ideas get worried about being exposed here. And this is just a year to kind of stay alive, right, as a hedge fund. And I think that’s what’s going on here. It’s more marketing than it is fundamental analysis here. And that’s what’s taking the lead here. So you can kind of feel it and haven’t run a hedge fund in the past. I get the feeling it’s not worth it 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 stocks. [00:07:05][44.4]

Dan Nathan: [00:07:06] Yeah, but that’s a great stat also because when you say prime, you’re talking about prime brokerages. These are the big investment houses that hold the balance of these hedge funds. Right. So they see they know what it’s a buy initiating a long or a buy to cover. 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. So that’s a really interesting fact, especially when you see the future positioning dialed up to the downside. All right. We’re going to talk about this. The China data over the weekend here, they’re easing. I think there was some interest rate that they lowered by ten basis points. 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. But I mean, they have a housing crisis. You and Chanos have been talking about this a little bit. Xi’s got his meeting coming up this fall, not feeling particularly. That’s safe, if you will. But I’ll just tell you this, that instance of the data has caused crude oil to drop 5%. 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 and when the administration tapped the Strategic Petroleum Reserve, they were already getting worried about higher oil prices. This is before Russia, Ukraine thoughts their Guy Adami. [00:08:22][76.2]

Guy Adami: [00:08:22] Well, I mean, the crude market I think controls everything in terms of the lens through which people look at inflation. 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. The question is, at what point does crude oil going lower become actually a bearish thing and speaks of economies sort of getting really beat up and slowing considerably? That’s something that Danny’s mentioned for a while. So I do think you hit this point of diminishing marginal returns when crude going down is a good thing until it’s not. And I don’t think we’re there yet. I don’t think we’re close to being there. But if crude, let’s say, were to go below 85 in a meaningful way, then you have to say, you know what, it’s a great thing for the consumer, but it speaks to a much larger problem. [00:09:07][45.0]

Danny Moses: [00:09:08] This is exactly what Dan just coined, the death date across 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 because you’ve got you’ll start to see the August inflation data look that’ll come out before the Fed goes again and then the Fed won’t go, you know, so those all feed in that works to a point until it doesn’t until the real reason that oil is cratering like that is real demand destruction. And 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? So that’s pretty much sums up where I think we are. And you’re at this crossroads right now, and I’m just 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 in the Walmart, Home Depot, Target and Lowe’s, which are going to be coming out, which are going to give us kind of a real time look into what’s going on. And I just don’t think there’s a scenario where the Fed kind of goes below 50 basis points in September. Right now it’s 66, 33% chance of 50 is 66 and 75 is 33. And I’m looking out to year end right now. We’re still sitting up that kind of the 350 375 Fed funds target for end of year. And I think we’re still sitting at 225 right here. So I don’t think there’s going to be six rate hikes that are coming here. 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 so. [00:10:31][83.0]

Dan Nathan: [00:10:32] 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. And I actually think this week could be a really important week, especially when most of S&P earnings are done for the Q2 period. But you just mentioned Walmart, Target. We know that the. Both of those companies not only had disappointing results when they last reported, but also had some guides intra quarter and that Walmart one which we covered the fact that Walmart is above where it just preannounced that last week of July, the gap down close to 10%, filled in the whole gap and it’s higher. And then if you look at Target and they know we have to go back to that May disappointing quarter. It was a huge gap. I think the stock was 215 and it opened just above 165. That went as low as 140. Well, here we are. It’s starting to fill in that gap despite the fact that we have had another preannouncement. 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 and now it just crossed below four. Might things be coming around for the consumer? 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 US consumer, if they suggest that the consumer is getting into better shape, entering into the fall, target’s filling in that gap. Target’s going to be back at 200 Walmart. It would be back at 150. Thoguhts there Guy. [00:11:55][83.1]

Guy Adami: [00:11:55] 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 as if the market would take its cues from that. I don’t think they’re going to say that, though. And you’re right, it’s gone from 5 to 4. But let’s not pretend. I mean, things are still sort of difficult for the U.S. consumer. And I would submit and I think Danny would agree with this, 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. That’s not my word. That’s word used by people that actually analyze the space. Danny. [00:12:35][39.3]

Danny Moses: [00:12:35] 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. Right. That’s an issue. And then like you mentioned before in China, those things with Taiwan, massive geopolitical risk. We just sent more politicians over over the weekend. 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. And again, not being priced in. We are so focused here, hyper focused on every data point here. We’re really not paying attention, I think, to the broader issue. So I kind of take a step back and look at the broader issues that are facing the markets here, and that makes me even more bearish than I have been. So. [00:13:20][44.4]

Guy Adami: [00:13:20] Home Depot and Target tomorrow before the Bell, Lowe’s and Walmart, Wednesday before the Bell. I mean, you talk about four huge earnings releases over the course of a 48 hour period. You got to throw in a TJX, which everybody looks at. Oh, by the way, a Cisco Systems that Dan Nathan knows extraordinarily well on Wednesday. And you’ve got a pretty interesting week for earnings. So again, earnings obviously matter. The market’s rallied considerably. I think the reversal I saw last week in HYG on Thursday is interesting, something we should continue to watch. I do think this 4200 level, we’re sort of tapping out on the upside and I think any further upside is limited. But that’s, as they say, what makes markets. [00:14:06][46.3]

Danny Moses: [00:14:07] All right. So let me just end with this. One of the dumbest things I saw on the weekend was Max left in who is not a dumb person, obviously from Affirm which is the buy now pay later company said he can’t wait to silence his critics and his doubters when actually the recession hits. So he’s so hell bent on believing that he can offer rates that no one else can during a recession, that his model is going to prove to be effective. Everyone should read that article. You cannot commoditize lending as my good friend Vincent Daniel always says, If you grow your lending book more than GDP, you’re going to have an underwriting problem. So everyone should read that article. That stock has rallied a lot of firm off the lows. It’s down a lot from the highs, but I think it’s one of the most nonsensical things I read all weekend. I just wanted to throw that in there. [00:14:48][40.6]

Guy Adami: [00:14:48] Before we go to our guest. Vinnie and Porter are feeling extraordinarily well on this Monday as their New York Mets just continued to defy logic and beat the shit out of everybody. In a minute, a conversation with Allen Sukholitsky, the chief investment officer of masterworks. [00:15:08][20.0]

Dan Nathan: [00:15:11] iConnections Ad [00:15:11][0.2]

Guy Adami: [00:16:03] Allen Sukholitsky is the chief investment officer of Masterworks and MWC group. Masterworks, the leading art investment platform for self-directed investors launched M W Capital Group to deliver diversified art investment solutions to financial advisors and institutional investors. Prior to MW capital Group, Alan was a senior market strategist at Goldman Sachs, focused on investment strategy, portfolio construction and investment implementation. He almost two decades of global economic and investment experience. Allen, we just heard your bio, which is fascinating, but it’s a long way from Goldman Sachs to where you are now. Talk about that journey because I think it’s really interesting. [00:16:44][41.6]

Allen Sukholitsky: [00:16:47] Yeah so I have to tell you that, you know, if somebody asked me years ago if I ever thought I was going to take my career in any direction related to art, I would have looked at them like they were crazy. But there is actually sort of a natural explanation. I mean, when in my capacity at Goldman, I basically was doing macroeconomic research, researching different asset classes, publishing on them, traveling around, talking about what we thought was more attractive, less attractive, asset allocation, modeling, all of that stuff. So it was one of those things where you spend enough time doing it and you think you’ve kind of seen probably everything under the sun at that point. And all of a sudden I had a little bit of a call it a light bulb moment where I came across this company called Masterworks that was investing in the art market. And it was kind of jarring when I first thought about it, because at no point did I ever think about art investing as something you could even do. It just never crossed my mind. And so then what ended up happening is I actually started doing, quite honestly, some of my own research before I even started talking to Masterworks in the first place. And, you know, honestly, I couldn’t believe my eyes in terms of the characteristics of the asset class itself. I had not seen any characteristics like that before. And so that’s what kind of ultimately sold me the idea of bringing art as an asset class to investors and ultimately masterworks. [00:18:04][77.0]

Dan Nathan: [00:18:05] So Allen, when you were at Goldman and doing this research, I mean, you’re serving DCM clients. I mean, was there demand for these sorts of assets? And we’re going to talk about correlations and I know that you spent a lot of time doing that sort of work. But again, you know, but let’s put some context to the size of this and sort of what was the threshold that you said when you’re thinking about investable alternative asset classes? And how did art fit into that framework back then? [00:18:30][24.7]

Allen Sukholitsky: [00:18:31] Well, art, to put it simply, did not fit into that framework. And that’s what was so much of that light bulb moment for me. The fact that let’s start with the size of the asset class, I feel like it’s kind of informative for everything we’re talking about here. The asset class is basically estimated to be $1.7 trillion in size. That is for context, about half the size of private equity in the United States. So the reason I’m saying that is because, you know, going back to your question about what was the coverage of art as an asset class at Goldman, it’s one of these things where you would imagine there are probably a lot of investment opportunities that are maybe very small that would fall under the radar. And it’s understandable why they wouldn’t necessarily be covered. Right. They might be small, very niches, opportunities. They don’t get coverage. Okay. But it’s just extraordinary that you have an asset class that’s about half the size of the U.S. private equity industry. And yet, as I always say, 99.9% of investors have never for a second thought about investing in art. And so for me, it was kind of this it was really an opportunity that I saw in my career where it’s taking such a unique asset class. So if you think about this, you know, think about all the different asset classes that there are in the world. I’m going to use the word popular, the ones that everybody knows about an investor, stock bonds, commodities, hedge funds for all of those. Okay. So if you think about all the asset classes we’re familiar with, they usually fall into two buckets. Broadly speaking, one bucket is the asset class has existed for a really long time and investors have invested in it for a really long time. And the other category is you’ve got newer, more up and coming asset classes. And by definition, investors have not invested in them for that long. The second category would be things like, you know, crypto, let’s say NFT is things along those lines. Well, now if you think about art, it doesn’t even fit into either category because that asset class has existed for centuries, in fact, predating most other major asset classes. And yet almost no investors have ever thought about investing in it. That’s why I thought it was such an extraordinary opportunity. [00:20:36][124.9]

Dan Nathan: [00:20:37] Yeah, well, talk to us a little bit. You know, I’ve gotten to know Scott Lynn has become a friend over the last couple of years as CEO of Masterworks. And it’s kind of interesting. He’s been on okay computer one of our other podcasts over the last year. And it seems like there’s a light bulb moment here because the first time he came on, I think a little more than a year ago, maybe masterworks had, I don’t know, 350,000 registered users the second time he came on 400,000. I think the number now is north of 450,000. And I suspect these are smaller sorts of investors. Right, who are looking at this as like they’re just basically saying something’s been democratized here and now I have access to it. So speak a little bit to the user growth that you have and then now just the ability, it’s one thing to think of like, you know, a high minded, you know, $1.7 trillion asset class that usually only people with certain means or access have like the ability to invest in. But now it seems like, you know, anybody can invest in it and you don’t have to buy a whole piece of art to put on your wall. You can buy a portion of it. [00:21:41][64.4]

Allen Sukholitsky: [00:21:42] Yeah, well, first I’ll. I’ll have to respectfully correct your figure about 450,000. It’s now close to about 500,000. So those numbers are growing seemingly by the minute. And yes, we are basically democratizing the asset class. There’s no question about that. But what’s interesting to note is actually that the individuals that are more often than not coming to our platform to invest, they are very often financial services oriented individuals. They are very often investment minded individuals. They are not necessarily what you would ever think of as traditional art market background individuals. And so what we’re always trying to make clear is, yes, we are talking about an asset class that traditionally has not really ever been thought about as an investment. But we are very much treating it, approaching it, investing in it as if it is a true investment. So that’s on the sort of the democratizing side of it. But, you know, the other element that I can’t help but mention is that we’ve also launched diversified strategies that are actually looking more at the institutional investor community. And if you think about that evolution of our business from initially catering to self-directed investors and now after several years moving into institutional, that is actually the exact opposite of how most other private market illiquid asset classes have ever worked. Right. So who is accessing private equity and venture capital Decades ago? It was primarily institutional and ultra high net worth. Then eventually enough time goes by and you have new vehicles that come about that allow access to those asset classes at lower price points, which sort of ends up democratizing them in a way. But that always happens after the fact. That’s kind of the last stage of the process. With us we actually started democratizing the asset class first, and after we’ve been successful doing that, we thought, you know, honestly, all of these attractive investment characteristics that art has, there’s no reason why we shouldn’t be offering those to institutional investors as well. [00:23:43][121.0]

Guy Adami: [00:23:44] Allen It’s interesting you talk about democratization of art. I totally get it. But I’ve also seen enough James Bond movies and seen enough footage from Sotheby’s and Christie’s to understand this is a very unique audience. What kind of pushback, if any, did you get from the art community on this? [00:24:01][17.8]

Allen Sukholitsky: [00:24:03] They usually fall into two camps. Those two camps are probably described the way you would expect them to be described. Some individuals in the art community do not at all like what we are doing because we are bringing a financial element to something that historically has not necessarily been financially oriented. And then you have other individuals in the art community, including, by the way, artists who love what we are doing, because for them, the calculation is basically, yes, it’s true that Masterworks is doing something financially oriented with art, but at the same time, think about the number of individuals we are bringing into the market, into the art market by virtue of what we’re doing. So for all of the hundreds of thousands of individuals who are signing up on our platform, many of these individuals are those who might not have had much familiarity with art previously. And all of our pieces, you know, we for every piece that we bring to market, there’s a process we go through where we file the documentation with the S.E.C. all of this we do as a way to bring transparency and education to a market that, if I had to be honest, I would say, is not traditionally been the most transparent. So we’re bringing education to a whole slew of the population that, quite honestly, probably never thought a whole lot about art in the first place. [00:25:20][77.5]

Guy Adami: [00:25:21] So in some I’m certain of this. So the auction houses, the Christie’s Sotheby’s, they’re actually you’re a client of theirs, I would imagine you’re not competing with them necessarily. You’re actually one of their clients. [00:25:31][10.5]

Allen Sukholitsky: [00:25:32] We often do work with the auction houses, but I will also say that the overwhelming majority of our transactions, I think the numbers are roughly 80%. They take place in the private market. So we really only transacted auctions at probably 20% of the time. It allows us to sort of improve the fees meaningfully and it’s just sort of an easier process too, mostly because so we have an entire acquisitions team that has all of the traditional art market experience you would expect to enact. Musicians team in the art market to have and they have an enormous global network. We also just hired an individual a few months ago who is now the former head of Bank of America’s entire art lending business. He’s going to be in charge of the dispositions process. So he has an enormous global network, and all of this allows us to transact more directly with collectors and investors. [00:26:24][51.8]

Dan Nathan: [00:26:25] So let’s take a step back here. And, you know, we just mentioned dispositions. Let’s talk about acquisitions. Let’s talk about how let’s say if I am a registered user on the platform and I have a balance with you and I have an interest in buying fractionalized art because I see it as a diversified asset class. So we’re going to talk about some of the other characteristics about correlations and and that sort of stuff at a second. But walk us through a little bit how, let’s say one of your registered users could invest in one of your acquisitions. And you just mentioned transparency. I know a lot about the process, but when you guys acquire a painting, what happens there and then how does the user invest in that? [00:27:03][37.6]

Allen Sukholitsky: [00:27:03] Yep. So the way that it works is we buy a painting with balance sheet capital, we set up an LLC, we file the LLC with the SEC, we put that one painting that we just bought into the LLC and we take the LLC public. So since that LLC only owns one asset in it, which is the painting we just bought, when investors are buying shares in that LLC, they are effectively buying shares in the painting. So that’s basically the process of how do we ultimately securitize the painting in the first place. Once we do that, then we make the paintings available on our website. You can sign up on our website. It’s free to sign up. You can see the paintings that we have available for investment, and once individuals sign up on the website, then ultimately they have a call scheduled with a member of our membership team here at Masterworks, and they kind of talk them through the different opportunities that are available to them as an investor. They talk about what’s ultimately their investment time horizon, what’s their tolerance for risk. They go through a suitability checklist. I mean, even after being here for quite some time, it’s still wild for me to think about how we’re doing all of the same things that any other financial advisor, let’s say, would do with their clients. For all the other major asset classes that they’ve been doing for who knows how long. At this point, we’re doing the exact same process for our investors, so ultimately we can build a portfolio for them, discuss what the appropriate allocations are, the different investment characteristics of those individual paintings that are available for investment on the website. It’s quite honestly very much the similar conversation you would have with a financial advisor that you might work with. [00:28:39][96.0]

Dan Nathan: [00:28:40] Yeah. So talk to us a little bit about liquidity. I know because I’ve read about it and I’ve talked to some people there. I mean, when you guys have a hot acquisition, they go pretty quickly. So there’s a lot of demand for them. What about the holding period for some investors? Again, you know, it’s not thought to be a very liquid asset class. Right. Are you guys creating liquidity? I know there is some secondary market activity. How do you guys think about that and do you see that market evolving into something or are Guy and I going to be talking about this market on fast money on CNBC sometime in the next few years? [00:29:11][31.6]

Allen Sukholitsky: [00:29:12] Yeah. So in terms of liquidity, it is an illiquid asset class like other illiquid asset classes, the holding period that we typically tell investors, you should expect that will hold each painting for, call it roughly 3 to 10 years. That’s our anticipated hold period. We haven’t actually talked about this. We can get into that in a few minutes about this database that we built, which is entirely proprietary. Nobody else, to our knowledge on the planet has it. And this informs a lot of our investment decisions. It informs why we pick that 3 to 10 year time period among a lot of other things. So that’s the expected hold period. The additional thing that I would say, though, when I feel like I’ve sort of hammered this point home a few minutes ago, but I’ll repeat it, which is we are very much approaching this asset class as an investment opportunity, which means that we are going to treat it just like any other let’s say portfolio manager would treat the investments in their asset class that they cover. So that is to say that if, let’s say we buy a painting and two years later we get an extremely attractive offer for that painting, we are going to sell that painting just like an equity portfolio manager. Let’s say you have a 12 month target going out. You hit that target in a month. You’re very seriously going to consider reducing your position if not closing it. So we are approaching this the exact same way. And some of the irony, I’ll tell you, is we keep repeating that the anticipated hold period is 3 to 10 years, and yet most of the paintings we’ve sold so far have actually been sold in under three years. But nevertheless, we do not want anyone to expect that that’s the norm. [00:30:43][90.7]

Guy Adami: [00:30:44] Well, you mentioned liquidity, and that timeframe sort of sets up my next question, which is exactly that we’ve been the last 10 to 12 years, specifically the last few years, unparalleled liquidity in the system. Now, theoretically or seemingly, we have a Federal Reserve that’s trying to take it out of the system. I’m certain you all talk about that at masterworks. Can you speak to the role of inflation, liquidity, those types of things that everybody in the markets we talked about at the beginning of this live in? [00:31:14][30.2]

Allen Sukholitsky: [00:31:14] Yep. So the interesting thing is I feel like the liquidity conversation will be significantly more relevant years from now if and when we considerably more democratized the asset class than we already have in the first place. And the reason why is because if you think about the primary participants in the art market, for most of history, to be frank, they are typically individuals who are very much at the upper upper echelon of society. And almost by definition, those individuals are probably, at least on the margin, if not more so, less impacted by general liquidity, whether it’s generated by the Federal Reserve or otherwise. They’re just not that impacted by it in the first place. I mean, their balance sheets are typically enormous to begin with. So for them it’s just a matter of they have the means to transact in the art market. Now, if we do a good enough job of democratizing the market in many years from now, every investor all over the world is investing in art. People are trading shares left and right. Then you can imagine that liquidity will start to have more of an impact on the art market the way that it does for equities and a lot of other asset classes for that matter. In terms of you brought up inflation. I mean, this I always find interesting to talk about because, you know, you ask any investor who’s invested in multiple asset classes before you ask them a simple question. When you think about an inflationary environment, what should you consider investing in? I guarantee you just about all the time the answer is going to be gold. Now, here’s the interesting thing. Gold is absolutely not a bad investment during an inflationary environment. In fact, you know, if you go back to the seventies and early eighties, when inflation was running at an average of, let’s say, 9% in any given calendar year, the performance of gold was 31%. I would argue that is pretty attractive. But what the vast majority of investors absolutely do not know is that the art market averaged 33% during that period of time. So it’s one of these things where the art market appears to have very attractive sort of inflationary characteristics. But the one thing that I always like to make clear is if I get the question, is art an inflation hedge? My answer is actually no. And here’s the reason why. An inflation hedge, strictly speaking, is something that will do exceptionally well when inflation is elevated. But it’s not going to really do that well when inflation is not elevated. I mean, that’s what a hedge is. And the reason why art is not an explicit inflation hedge is because, yes, it does very well when inflation is elevated, but when inflation is not elevated, it still actually does quite well. And that’s why I think it’s important to make that distinction there. [00:33:54][159.3]

Guy Adami: [00:33:55] It’s fascinating. So you answered the correlation question for sure. I mean, obviously, when we look at the world, everything is sort of vis a vis the stock market, those types of things. But I’m fascinated, you know, the comparison to gold is really interesting having done it my 15 years of my career. My next question is this. To the extent that you can give historical returns, given the database that you spoke of, can you speak to that? [00:34:17][22.7]

Allen Sukholitsky: [00:34:18] Yeah. So I want to give a little background on the database, because it is with no exaggeration, our secret source here at Masterworks. So and here I’ll start by saying this. All of us in financial services, when we want data for any sort of financial instrument, we go to our favorite data provider. It could be Bloomberg or Refinitiv or any of the other data providers out there, and we have all of that data readily accessible at our fingertips. Nobody ever even thinks about where it came from. It’s just there. Well, believe it or not, nothing like that has ever existed for the art market. So the first project that Masterworks had when it started was to hire several dozen analysts. And they had one job. That one job was to go through thousands of auction catalogs that we bought from all over the world. We quite literally think we bought probably every single one of them. And their job was to go through every one of those page by page, transaction by transaction, and put all of that data into a computer. So we have since built what I here’s the analogy I basically use. I say we built Bloomberg for the art market, except that the only difference between us and Bloomberg is Bloomberg, of course, sells licenses. You can access all of their data. What we built is entirely proprietary, and it’s what allows us to research, analyze the art market, different segments of the art market, similar. You know, I can’t help but put my old strategist hat back on. Think of it almost along the lines of the way you might research sectors within the S&P 500 will research artist markets within the broader art universe. So we have an understanding of what are the different Sharpe ratios for different artists markets, how do they appreciate differently? We can calculate relative value the way you might do it in other markets. This is very much our secret sauce. And what we’ve built are indices that capture the performance of different segments of the art market. So one of those indices would be our postwar and contemporary art index because it masterworks. That’s the segment of the market we focus on. And that segment of the market has been appreciating for decades now at 14%. By point of comparison, S&P 500 is 10%. And so we think, at least at the index level, art should be considered. But then we think we bring a good amount of alpha to the process, too, because of this proprietary database that we have. [00:36:37][139.0]

Guy Adami: [00:36:38] So here’s an off the wall question from my background. So as I mentioned, I traded gold. And one of the things that we uncovered in the early eighties, at least the folks at Drexel Burnham did all this gold sitting in vaults around the world, basically earning nothing. The powers that be at Goldman Sachs, Drexel Burnham went to these central bankers and said, We will lease the gold from you, will take it from your pay and lease rate, and then we control it. So here’s my off the wall question. You actually physically buy this art and it’s sitting somewhere, I would imagine. Maybe you can answer that quickly and then I’ll ask my question. [00:37:14][36.3]

Allen Sukholitsky: [00:37:15] Yeah, so that is right. And it’s stored more often than not at the Delaware Freeport. That’s a state of the art storage facility. I usually say that if you’re a major art collector and you don’t have your art in your house, you probably keep it at the Delaware Freeport. So that’s where the art is stored. We also, by the way, as a side note, we built a beautiful gallery in our office a few months ago, and we’re going to be rotating a lot of the pieces we have there. But most of the time it’s at the Delaware Freeport. [00:37:38][23.0]

Guy Adami: [00:37:39] Which I think is interesting. And you mentioned sort of the 3 to 10 year time horizon. Is there a business potentially in leasing art to individuals who want to have it as a vanity piece in their apartments, homes, wherever it is for a period of time, understanding they’re going to give it back to you when the lease is over or if it if you know, if it is sold over a period of time. And because that could be extraordinarily lucrative, but I would imagine. [00:38:05][26.3]

Allen Sukholitsky: [00:38:06] It could be it’s not something we’re considering at the moment. But I can tell you that because we are a startup, at the end of the day, there are whole lots of different business ideas that we’re constantly reevaluating. You know, I always like to say that it sounds strange after all this time to still label us a startup because we’ve been quite successful as far as startups go. But we are technically a startup and we’re always open to different ideas. There’s no question your idea is one of the ones we’ve been thinking through. [00:38:33][26.8]

Dan Nathan: [00:38:33] Yeah, so? So I guess late last year you guys were valued at $1,000,000,000, so you reached that kind of unicorn status? I don’t think that. Is that a name that we still use these days? It’s pretty cool, though. Congrats on that. But when you think about some of the trends, you know, there’s a couple, you know, really big macro trends. We talked about it, inflation that’s been bubbling up. You just gave us some some of your thoughts on that. What about the trend of digital art? Because I know that when you think about, you know, buying a fractionalized Banksy or something like that, you don’t own it. You can’t put it up on your wall, right, or anything like that. You’re just really investing in, you know, the thought that it’s going to be worth more at some point in the future. Now, when you think about digital art and Scott and I spent some time talking about it, I know that you guys are not huge fans of NFTs but you know a lot of people are you know, they’re investing in nfts for the culture right for the experience and they think they own something. That Guy would say, well, I could just screenshot that. I have the same thing you have and I could feel just as good about it as you do. You’re just placing a financial value on it, right? So talk to us a little bit how you think about that, because I guess when masterworks started, when you joined the company, you guys probably weren’t focused on this NFT craze that for all intents and purposes seems like it’s kind of died down a little bit. [00:39:47][73.8]

Allen Sukholitsky: [00:39:48] Yeah. I mean, undoubtedly that was the right decision not to be focusing on NFTs. I mean, one of the things that we kept saying for years was that it’s just not abundantly clear how you value NFTs. I mean, they haven’t even existed for that long. They’ve only existed for like two years at this point. And if you think about what we’re doing at Masterworks, we’re actually trying to bring an asset class to investors that has existed for long before most other asset classes did so. In a lot of ways, there really aren’t many comparisons between what we’re doing with real physical paintings and ultimately digital art. It seems like that kind of preference or viewpoint that we had has paid off because in recent history NFT is quite honestly, have not done well, to put it mildly. Am I going to say definitively that at no point in the future we are ever going to reconsider if there’s some way to get involved in the NFT market? I can draw a line in the sand and say, that’s absolutely not going to happen. We’re always up for evaluating ideas. But I have to tell you, it it feels quite the polar opposite of what we are actually trying to do. [00:40:50][62.9]

Dan Nathan: [00:40:51] So it’s interesting on the digital art front, NFTs and you know, we spent some time on the podcast over the last, let’s call it a year and a half thinking about crypto. We’ve had a lot of crypto folks on there and a lot of. The practitioners are people who are really all in, but they basically say, listen, you know, most investors should not have anything more than, let’s say, a single digit allocation to a speculative asset like this that is volatile, that sometimes is not particularly liquid. That’s right. How do you guys think about that when you’re talking to customers or investors? How much exposure should they have to this market? [00:41:25][34.8]

Allen Sukholitsky: [00:41:26] Yep. So I’ll answer that question in two parts. The first part is I’ll cite external research on this topic in the interest of trying to position something as being as objective as possible. Citigroup has actually been quite forward thinking in terms of incorporating art into their asset allocation models, and their guidance has been so for specifically investors who are able to have a portion of their portfolio in illiquid asset classes. Right. So that that’s the starting point. They have to be able to do that. They would recommend up to 4% of an allocation to art. In terms of our own research, what I actually decided to do, I mean, you know, it was nice in my prior life when I was able to run asset allocation scenarios from a totally product agnostic perspective. I’m not necessarily in that same capacity here, so I didn’t want to guide to any particular allocation. But what I wanted to do was to see if I create three baseline portfolios that represent three different types of investors. How frequently will adding a small allocation to art make that portfolio do better than what it would have done without art? And what I found was very eye opening. Whether you have a basic 6040 as a starting point, whether you have a diversified but still liquid portfolio that’s got at least ten asset classes in it. Whether you are an endowment portfolio that’s got very healthy allocations to private equity, real estate infrastructure, so on and so forth. With each of those portfolios, if you make a small 5% allocation to art, you will improve your Sharpe ratios in about 100% of ten year periods. It is actually extraordinary. And if you’re wondering what’s the reason for that, it’s very simple. When you come across an asset class that has no correlation to any other major asset class, and this asset class has been appreciating for decades at around 14%, you can understand immediately how putting that asset class in your portfolio will provide that level of diversification and improvement. [00:43:25][118.5]

Guy Adami: [00:43:26] Allen. Performance is important. How is the performance of the platform been? [00:43:30][4.3]

Allen Sukholitsky: [00:43:31] Yeah. So our track record is 15.3% net annualized returns for investors since inception, which is September 2019 through June of this year. And for that period of time, I can’t help but highlight that that performance has basically outpaced U.S. stocks, hedge funds, private equity, international stocks, gold. It’s been pretty good performance. And, you know, even even in this challenging environment that we’ve seen for broader markets, we’re still seeing opportunities. Last month, we sold a painting for almost 30% net returns to investors. [00:44:07][35.9]

Guy Adami: [00:44:08] I’m sure you probably saw the story this week, Alan, but 8206 own is Waggoner card sold at private auction for over $7 million. I mean, the absurdity of that is not lost on me, but I’m sure you’ve you’ve really immersed yourself to a certain extent on the art side of this. And I’m sure you have conversations. This is just sort of curiosity on my part. Is there sort of the Moby Dick out there, the white whale that we would love to be able to purchase if we can get our hands on it? In terms of art? [00:44:37][29.6]

Allen Sukholitsky: [00:44:38] Well, I’m only going to say that we focus specifically on art because it has significantly more data than a lot of other areas of the market. We sometimes get questions around would we ever consider sculptures, photographs, baseball cards, sneakers? Those are not at all areas we are thinking about investing in because and I can’t emphasize this enough, we are at least 50% of our investment process is quantitatively driven. We focus on the areas where there is considerable amounts of data, and that for us is specifically multimillion dollar paintings. That’s where we’re focused. [00:45:15][36.6]

Guy Adami: [00:45:16] I love it. It’s fascinating. And just so how can people how are people finding you now? You mentioned you’re up to half a million clients. How are people finding you? How are you growing organically and how would you like to grow going forward? [00:45:27][11.5]

Allen Sukholitsky: [00:45:29] Yeah, so we do a lot of podcasts. I mean that that would be one area. A lot of investors often come across masterworks oriented marketing or advertising at different investment websites. You know, there are quite honestly, so many different avenues that investors are able to find us. And, you know, I can’t even help but add this now that we’re on the topic, as it turns out, we have about 20% of our investors that are coming from outside the United States. And the reason why that is actually so surprising is because we don’t do any marketing or advertising outside the the United States. I would bet there are a lot of companies that would love to have 20% of their customers coming from a place that they never even market or advertise to. So, you know, over time, we might think about growing that universe of investors, too. But ultimately, I think a lot of it is really just the ease of the process that makes investors interested. You sign up on the website, you schedule a call with one of our advisors. You discuss what’s appropriate for your portfolio, the different investment opportunities we have at any point in time. And you’re off to the races, you make your investment, and after that you can even make more investments on your own. At that point, once you’ve had that initial conversation with an advisor, it’s very easy. [00:46:40][71.7]

Guy Adami: [00:46:41] Well, Allen, thank you so much for your time. Thank you for joining us. Off the tape. Have a great afternoon. [00:46:46][4.7]

Allen Sukholitsky: [00:46:47] Thanks, guys. [00:46:47][0.3]

Guy Adami: [00:46:49] Post-roll [00:46:49][0.0]

Dan Nathan: [00:47:13] Disclaimer [00:47:13][0.0]




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