Plenty of economists, art dealers and collectors have warned of an art bubble over the past year. But there is one sure sign that the art market is overdone: Jay Z is now rapping about Warhol, Basquiat and Art Basel.
"It ain't hard to tell
I'm the new Jean-Michel
Surrounded by Warhols
My whole team ball
Twin Bugattis outside
Market guru James Grant quotes Jay Z's "Picasso Baby" in his latest Grant's Interest Rate Observer, arguing that prices in the contemporary art market may not be justified by long-term value. While well-hyped artists like Jeff Koons, Damien Hirst and Jean-Michel Basquiat are fetching eight-digit prices, it's unclear whether their work will withstand the test of time, art critics and museums.
It's hard to tell, for instance, whether one of Koons' famous pieces, "New Hoover"—four vacuum cleaners in an acrylic case —will be valued as a work of genius or "just another vacuum cleaner," Grant said.
(Read more: Art is the next gold: Novogratz)
"Modern art is valued in terms of modern money," he wrote. The Fed's low-interest-rate policies have driven the wealthy increasingly to collectibles of all kinds, including art, cars and jewels. "Miniature interest rates have reduced the opportunity cost of investing in any kind of nonyielding asset."
And while Koons and Basquiat are hot now, they might end up like the English portraits of the early 19th century, whose frenzied boom was followed by a spectacular bust. Prices never recovered.
So how can a smart investor play the collectible game without getting sucked into the Koons hype?
Grant suggests buying historical documents: letters from Abraham Lincoln, bills signed by Thomas Jefferson and even public credit reports from Alexander Hamilton. Of course, prices for historical documents have soared along with art.
And a yellowed letter doesn't look as good over the mansion mantelpiece than a Hirst or Barnett Newman. But the names Jefferson and Lincoln may be more likely to hold up over time.
"Sell Newman, we say, and Jeff Koons, too: buy the Founding Fathers and—as far as that goes—Abraham Lincoln," Grant writes.
—By CNBC's Robert Frank. Follow him on Twitter @robtfrank.