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Dead Malls and the Future of the U.S. Economy

Dead Malls and the Future of the U.S. Economy

I recently stumbled across (and promptly binge-watched) a YouTube series by Dan Bell on dead malls.  These shopping complexes are in danger of failing due to high vacancy rates, low foot traffic and high crime rates.

Ever since I watched the Dan Bell series, I have been fascinated by the idea of dead malls.  I think I find them so mesmerizing because in the 1980s and 1990s malls were the physical embodiment of the apogee of the cult of consumerism in post World War II America.  So it is both frightening and captivating to watch the systematic decline of such a culturally important U.S. institution.

Of course it wasn’t always this way.  The concept of the mall, a collection of stores connected by pedestrian walkways and fully enclosed for protection against the weather, only developed gradually during the early to mid 20th century.  It wasn’t until 1956 that the first true fully enclosed, climate-controlled shopping mall opened – Southdale Center in a suburb of Minneapolis-St. Paul.  After this revelation, malls grew rapidly in popularity in the U.S. throughout the remainder of the 20th century.

In the 1980s and 1990s, malls were the place to be.  They took on a cultural significance that is difficult to convey to those who came of age after their greatness had already begun to fade.  In a time before social media or even the internet, malls were the hot hangout spot for teenagers and young adults looking to meet friends and have fun.  Adults loved malls too; in the age before e-commerce they were the best way – and often the only way – to experience almost unlimited shopping choice.

But nothing in this world lasts forever, including the dominance of American retail.  For the last two decades, the U.S. consumer has been relentlessly buffeted by regular financial crises, a perennially weak job market and excessive debt loads.  Given these economic realities, the rise of dead malls was inevitable.

It also didn’t help that retail space, often in the form of malls, was horribly overbuilt in the U.S. from the 1970s until the present.  It is estimated that the U.S. currently has approximately six times the retail square footage per capita of Western European countries like France and the United Kingdom.  American retail culture was bound to face a reckoning eventually and dead malls are just a symptom of that comeuppance.

But there were other powerful secular trends at work in the rise of dead malls as well.  For one, the Great Recession of 2008-2009 permanently changed shopping habits for a wide range of people.  Consumers who had been happy to splurge at the mall before the economic crisis now found themselves pinching pennies wherever they could.

The growth in internet shopping giants like Amazon, Overstock and Newegg also went hand-in-hand with more frugal consumers.  Shoppers can use the internet to compare prices quickly and easily across a range of products.  As a result, it has been said that the internet is the single greatest margin destroying invention in the history of mankind.  Dead malls are a haunting testament to the truthfulness of this statement.

But perhaps the most intriguing thing about the phenomenon of dead malls is the implication for our economic future.  In my opinion, dead malls signal the beginning of the end of rampant, unthinking consumerism.  For decades the unspoken rule that everybody followed was “more stuff is better”.

I think modern society has fully explored the limits of that philosophy.  Unrestrained consumerism is abhorrent, and all too often ends in hoarding, monetary destitution and spiritual impoverishment.  However, I don’t believe this means the end of shopping, or that we will all live as ascetic monks.

Instead, I believe a trend toward luxury minimalism is taking hold.  Luxury minimalism is a philosophy of buying few things, but making certain that what you do buy is of the highest quality.  One of the areas that should disproportionately benefit from this trend is quality antique and vintage goods.

Did you know that it is possible to purchase a stylish vintage Mid-Century fountain pen for less than $100?  Or that you can buy a 1960s era, solid 14K gold retro mechanical wristwatch for around $500?  If other cultures excite you, then fine, handmade antique Japanese lacquerware can be acquired for only a few hundred dollars or less.  There are almost limitless choices, and the best part is that these high quality heirlooms can double as investments as well.

Ethereum, Alternative Investments and Friction Costs

Ethereum, Alternative Investments and Friction Costs

In economics there is a concept known as “friction cost”.  Friction costs are fees, commissions, markups, taxes, surcharges or any other expense that may reduce the attractiveness of a transaction.  Economists are obsessed with friction costs because they theoretically make economies less efficient.

But economists aren’t the only ones who should pay attention to this key concept.  Investors should be concerned with friction costs, too.  Now this might seem like a strange assertion because modern capital markets have turned reducing friction costs into a veritable crusade over the last few decades.

And they’ve been largely successful, too.  Stocks trades are often ridiculously cheap these days.  Anybody can open an online brokerage account where it costs less than $10 for an equity trade.  However, while friction costs for paper assets – stocks, bonds, option and futures – are about as low as they can possibly go, friction costs are often still quite substantial for many alternative investments.

For example, early in 2017 I briefly looked into investing a small amount of money in an up and coming crypto-currency ecosystem called Ethereum.  Now there are a couple different ways to acquire Ether – the technical name of the Ethereum platform’s currency.  You can either buy it from an online exchange or mine it.

Mining Ethereum tokens, while intriguing, didn’t seem very viable for my situation.  It requires a computer with a powerful GPU (graphics processing unit) that has a micro-architecture amenable to running complex mining calculations.  Not all modern GPUs, even very powerful ones, are efficient at these calculations.  But all GPUs that are good at Ethereum mining are relatively expensive – yet more friction costs.

Even if you do happen to have an appropriate GPU, any computer you dedicate to Ethereum mining needs to effectively run 24 hours a day, 7 days a week in order to be worthwhile.  And any computer mining Ethereum will consume large amounts of electricity.  If the machine is running 24/7, which it should be, you will end up with a large power bill at the end of the month.  You just have to hope that the value of the Ethereum you’ve mined is greater than the value of the electricity you’ve used.

Then there is the decision of whether you want to mine Ethereum independently or join a mining pool.  A mining pool makes the process somewhat less technically challenging and also makes the pay-outs more predictable.  But a mining pool also increases frictions costs; they generally charge a fee totaling between 1% and 4% of the amount mined.  The alternative, mining Ethereum independently, not only makes payouts extremely unpredictable, but also turns you into your own technical support desk if something goes wrong.

As you can see, friction costs come in all different shapes and sizes.  Sometimes they are very straightforward, as in the case of fees and commissions.  But sometimes friction costs do not come in the form of money.  Instead, they show up in the guise of time or technical expertise.  This is often the case with alternative investments like crypto-currencies (or other alternative investments for that matter).  In light of these friction costs, I opted to pass on Ethereum mining.

The alternative to Ethereum mining is purchasing the crypto-currency outright.  Surely the friction costs of buying Ether must be lower than with mining it!  Sadly, this is not necessarily the case.

In order to buy Ethereum you must open an account with an online crypto-currency exchange like Coinbase.  But there are a plethora of fees associated with these accounts.  First there is a commission for purchasing the crypto-currency itself.  This can vary from 0.2% all the way up to 3%.  But there is also often a surcharge on deposits to fund your account – anywhere from 0% to 5%, depending on the funding method used.  Withdrawals also face similar fees.  Some crypto-currency exchanges even charge a fee for an in-kind withdrawal, when you withdraw your own Ethereum without selling it first!

Now personally, I don’t like the idea of holding crypto-currencies at online exchanges for any length of time.  Any funds, including crypto-currencies, held “on deposit” at an online crypto-currency exchange is technically the property of that online exchange.  Depositors are merely unsecured creditors in the event of a bankruptcy.

This might seem like legal hair-splitting, but I assure you it is extremely relevant for alternative asset investors.  In fact, in February 2017, the world’s leading Bitcoin exchange at the time, Mt. Gox, which handled over 70% of all Bitcoin transactions, suddenly and unexpectedly suspended trading and declared bankruptcy.  A large amount of their Bitcoin inventory had been stolen, leaving depositors with little legal recourse to recover their funds.

I considered avoiding this problem by purchasing Ethereum at an online exchange and then moving it to a segregated “wallet”.  A wallet is just software that is meant to store your crypto-currency in a secure, offline way.  Sounds great, right?

But first you have to choose one.  There are dozens of wallets out there and even though most of them are free they all have different features.  I discovered that when it comes to crypto-currencies, choosing the right wallet is of paramount importance.  You want to make certain that the wallet you choose stores the private key for your Ethereum locally, on your own computer, and not on an external server.  However, your friction costs don’t stop once you’ve chosen a wallet for your Ethereum.

Instead, you now have the conundrum of where to store the wallet.  If you keep your wallet on your local computer hard drive and it crashes, becomes corrupted, catches a virus or otherwise malfunctions, then there is a good chance your Ethereum is gone forever.  So I thought about transferring my wallet to a USB thumb drive.  Then I could unplug it from my computer and stash it somewhere safe in my house.

But even that raised more questions (and associated friction costs).  I have a couple old USB thumb drives floating around, but do I trust any of them to store hundreds or thousands of dollars worth of crypto-currencies?  Probably not.  So I really should go buy a new one.  In fact, it would probably be wise to invest in a dedicated, high-security crypto-currency hardware wallet (like the Ledger Nano S – Cryptocurrency hardware wallet), where the wallet and flash drive come as a single, integrated unit.

But where would I put this new flash drive with my Ethereum investment?  If the thumb drive with my Ethereum’s private key is lost, stolen or destroyed, there is usually no way to recover the crypto-currency that was stored on it.  A fire, flood or burglary would be devastating under these circumstances.  A good home burglary safe would be a perfect solution for this situation, but they aren’t cheap.

In the end, because of all of these friction costs, I didn’t follow through with my plans to purchase Ethereum.  Much to my chagrin, within a few months the price of Ethereum skyrocketed, moving from around $10 per Ether in January 2017 to a peak of over $400 in June 2017.  I couldn’t believe how bad my luck was, missing out on this tremendous appreciation.

But there are valuable lessons to be learned from my experience.  First, friction costs can come in a variety of forms – everything from fees, to wide bid-ask spreads, to specialized knowledge.  And, as unpleasant as friction costs can be, they aren’t universally negative.  For example, illiquidity has undoubtedly been a powerful factor in keeping the price of many alternative investments, including fine art and antiques, relatively reasonable.

I think the moral of the story here is that alternative investments have a steep learning curve in addition to other friction costs.  But you shouldn’t let that deter you.  Instead, start learning what you need to know now.  The better educated you are about alternative investments like bullion, antiques, gemstones, fine art and yes, crypto-currencies, the greater the chances you will find a gem in the rough.  More importantly, knowledge will give you the confidence needed to add these often overlooked alternative assets to your investment portfolio now, before prices rise out of reach.

The Truth about Offshore Gold Storage

The Truth about Offshore Gold Storage

Foreign investing seems to be all the rage these days.  I am continually bombarded by articles on finance websites emphasizing the necessity of international diversification.   And here’s the thing.  I don’t disagree with these assessments.

International diversification is an important element in any well-balanced investment portfolio.  This can easily be accomplished by purchasing ADRs (American Depositary Receipts) or foreign-focused ETFs (Exchange Traded Funds) and mutual funds.  These securities give exposure to well-established foreign corporations that are operated according to international best practices.

But this isn’t the kind of foreign investing that worries me.  Instead, I want to talk about offshore gold storage.  Precious metal pundits and skeptical financial commentators often advise people to buy and store gold overseas.  Their argument generally goes something like this:

The world’s financial system is incredibly over-levered and unstable.  This will inevitably lead to a currency crisis in the dollar, euro, pound or yen (or even all of them simultaneously).  The financial authorities will invariably respond to this financial panic by instituting capital controls, requiring the purchase of overvalued government bonds in retirement accounts or even seizing financial assets outright.

Notice that the foreign ADRs, ETFs and mutual funds I mentioned above, while claims on foreign cash flows, don’t provide any protection against this scenario.  These paper assets in your brokerage account are easily accessible to desperate governments, should the need arise.  That is why many tangible asset proponents recommend that people protect themselves via offshore gold storage.

However, while I am sympathetic to many of these arguments, the devil is in the details.  The timing, magnitude and propagation of any global financial crisis will have a dramatic impact on its outcome.  Believing yourself to be completely inoculated against financial adversity because of your overseas gold holdings is an investing conceit that most people can ill afford.  Offshore gold storage is not the panacea it purports to be.

Overseas gold storage is usually couched in terms of “escaping” from your home country’s financial system.  Pundits will often recommend that individuals acquire foreign citizenship and passports at the same time, in order to “internationalize” themselves.  Sometimes they will go so far as to advise people make direct investments in foreign real estate or private businesses.

In any case, I am not a fan of being an “international” man.  For one, you must have an incredibly large net worth to make it remotely viable, probably on the order of $10 million or more.  It also presupposes that you can easily blend in with the population of whatever country you’ve chosen as your safe haven.  But the locals will always be able to spot the outsider among themselves.  And, if this immigration occurs in the context of a global financial crisis, those outsiders will not be well received.

But it is the idea of offshore gold storage that I dislike the most.  First, the storage fees for offshore gold storage in a secure vault are often exorbitant, generally ranging from 0.25% to over 1% per annum.  That might not seem like a lot, but it is a recurring annual fee that insidiously eats into your principal.  100 ounces of gold subject to a 1% storage fee will be whittled down to a mere 78 ounces after 25 years.  That is not the kind of return most people are looking for on their tangible investments.

Next, chances are good that you will never actually physically see your gold if it is stored overseas.  In other words, you will pay your money, but your gold may or may not be there.  Obviously, choosing a reputable (and by extension more expensive) custodian for your offshore gold storage will give you a greater assurance that your gold actually resides in the vault you think it does.  But remember this – fancy corporate letterhead and official-looking audits are relatively easy to forge with today’s technology.  Many, many people have been defrauded by bullion storage schemes in the past and I suspect that many more will be over the coming years.

It is also relatively common for precious metal dealers and banks to warehouse gold in what is called “unallocated” or “unsegregated” storage.  This is when a financial institution promises to give you your gold on demand.  But there might not actually be much, or any, gold in their vaults most of the time.  Holders of unallocated gold deposits are, in effect, unsecured creditors of a financial institution in the event of default or insolvency.

“Allocated” or “segregated” offshore gold storage, where specific gold bars with individually recorded serial numbers are stored in a vault, while safer, is still not without its risks.  Fraud and inside jobs are omnipresent dangers in such situations.  Even staid central banks have been accused of surreptitiously loaning out their nations’ gold reserves to achieve shady policy goals!  The bottom line is that if you can’t physically hold your gold, you don’t own it.

Finally, if there is ever a global financial crisis of epic proportions, the ostensibly politically stable countries with large amounts of offshore gold storage – Switzerland, Singapore, Hong Kong, Australia and the U.K. – will be sorely tempted to nationalize all that treasure.  This temptation will be even more acute if the country in question is suffering from a severe currency crisis.  All those precious gold bars neatly stacked in secure vaults would go a long way to quelling a country’s financial panic and restoring prosperity.  Yes, there would presumably be international diplomatic repercussions, but it just may be worth it, depending on the severity of the financial crisis.  This may not be a likely scenario, but I think it is one that can’t be discounted entirely, either.

Now, I don’t believe offshore gold storage is completely useless.  If you have a net worth of tens or hundreds of millions of dollars, there might be some value in keeping a million or two of gold bars in a Swiss vault deep underground.  But for the average investor, or even most well-heeled investors, offshore gold storage is just too expensive and carries too many risks.

This is why I advocate keeping your tangible investments local.  As the old adage goes, possession is 9/10ths of the law.  And while precious metals are great investments, other tangible assets, like art and antiques are also great diversifiers.  There is nothing quite like holding a sparkling old mine cut diamond or an ultra-rare French piedfort coin in your hand to remind you what true wealth is.

How Precious Metal Stacking Saved Coin Collecting

How Precious Metal Stacking Saved Coin Collecting

The last time before the present that coin collecting was popular in the U.S. was in the mid to late 1960s.  This mid-century renaissance in numismatics was primarily driven by the impending abandonment of silver in circulating coinage.  For over 125 years, the U.S. mint had used a traditional alloy of 90% silver and 10% copper for nearly all of America’s circulating silver coinage.

However, due to the Kennedy administration’s involvement in the Vietnam conflict and the subsequent inflationary “guns and butter” policy of president Linden B. Johnson, the government began over-issuing currency.  This inflation naturally led the price of silver to rise in the global market.  By the mid 1960s, it had become apparent that the U.S. government would need to replace the silver used in circulating coins before the intrinsic (bullion) value of the pieces exceeded their face value.

This development in U.S. coinage policy cultivated intense interest among the public.  One side effect was the increased popularity of coin collecting, particularly among younger people.  Although it was the twilight of circulating silver coinage in the U.S., it was a golden age for casual coin collectors.

During this period it was still possible to find desirable and rare coins in pocket change.  In addition, iconic older coin designs such as Mercury dimes, Standing Liberty quarters and Walking Liberty half dollars still circulated side by side with more contemporary Roosevelt dimes, Washington quarters and Franklin/Kennedy half dollars.  Children and adolescents everywhere happily sifted through rolls of coins, looking for better date examples to save.

Gresham’s Law states that “bad money drives out good money”.  Consistent with this ironclad economic rule, valuable silver coinage began to be pulled from circulation and hoarded by the mid 1960s.  Coin collectors were blamed as the scapegoat for the resulting shortage of circulating coins, even though it was the government’s short-sighted inflationary policies that had driven up the price of silver in the first place.

Finally, in 1964, Montana senator Lee Metcalf sponsored legislation that temporarily froze the date on U.S. coins and eliminated mint marks in a misguided attempt to make them unpalatable to collectors.  As a result, even though they were dated 1964, the last circulating 90% silver coins were actually struck by the U.S. mint in 1966.  During this same period, the U.S. government also introduced our current, execrable copper-nickel clad coinage.

Although it took a few years, silver coinage inexorably disappeared from circulation.  Once it became impossible to find good collector’s pieces in circulation anymore, interest in coin collecting gradually faded among younger generations.  Although coin collecting was still popular in the 1970s and 1980s, the hobby was a shadow of its 1960s golden age.

By the 1990s, coin collecting had fallen on hard times.  A bubble in third-party certified, or “slabbed” coins in the late 1980s had burst, devastating average collectors who had been sucked into it.  At the same time, high quality, rare date coins from the 19th and early 20th century relentlessly rose in value, pricing collectors of modest means out of the high end of the market.

This unfortunate state of affairs only worsened in the early 2000s.  By this time, the traditional hobby of coin collecting was clearly dying.  The existing collector base was rapidly aging, most having started collecting during their childhood in the golden age of the 1960s.  But there were almost no young coin collectors coming into the hobby to replace their graying ranks.  This was at least partially due to the fact that, since the late 1960s, it was impossible to find desirable coins in circulation.

I got my start in coin collecting in the late 1980s and early 1990s.  And I did so primarily by searching through rolls of half dollars and nickels for the odd, overlooked silver coin.  Even back then, it was no easy task.  Gresham’s law had done its wicked work all too well over the decades.  I did find a few silver pieces though – just enough to keep me coming back for more.

My entrance into the hobby of coin collecting was only possible because of the low prices of gold and silver during that time.  However, in my opinion, the days of sifting through rolls of circulating coinage from your local bank in order to pick out a handful of worn silver specimens ended about 15 years ago.  By the mid 2000s precious metals began to skyrocket in value, thus depriving aspiring young collectors of even this meager avenue of participation.  It looked like the hobby of coin collecting was destined for extinction.

But then a funny thing happened.  Precious metal stacking, the name given to systematically buying physical gold or silver bullion for investment purposes, came to the rescue.  In fact, I don’t think it would be an exaggeration to say that precious metal stacking literally saved the hobby of coin collecting.

Precious metal stacking is the purchase of gold and silver purely for bullion purposes.  But, a significant number of stackers inevitably became interested in the numismatic aspects of bullion coins issued by governments.  This might sound like a contradiction, but some modern, government-issued bullion coins, with their beautiful designs and near-perfect strikes, really do possess great numismatic potential.

It is a short step from precious metal stacking to searching for semi-numismatic, certified MS-70 examples of American Silver Eagles or Australian Gold Kangaroos.  From there, new collectors can branch out in many different directions.  Some gravitate toward older proof coins with their deep mirror finishes and historical importance.  Others look back to the classic early 20th century circulating U.S. coinage that inspired many of today’s most popular bullion coin designs.  Some branch into foreign coin collecting, drawn there by the plethora of attractive modern bullion coins struck by foreign governments.  A few even look further back in time to the origins of coinage in medieval and ancient coins.

Precious metal stacking has completely revived the coin collecting industry.  Not long ago, numismatics was a slowly dying hobby dominated by older collectors who were chasing the coins they fondly remembered from their youth.  Now it bustles with the activity of thousands of new precious metal stackers using gorgeous modern bullion issues as their gateway to further numismatic adventures.  No, coin collecting today is not the same as it was in the 1960s, but it is still here and vibrant, thanks to precious metal stacking.