Editorial

One piece of advice that investors hear again and again is to always buy the best quality investment available.  This platitude is particularly common in the stock market.  Pundits will often recommend best in breed companies with strong business models and good management, like Apple, Coca Cola or Google.  These types of companies have traditionally given shareholders consistently high returns over many decades.  The reasoning behind this “buy the best of the best” investment strategy is that superlative quality investments should ultimately produce superior returns.

This idea of buying quality also applies to alternative assets like art and antiques.  It is accepted wisdom that high end antiques tend to appreciate at a far more rapid pace than lower quality antiques.  In fact, low quality or damaged antiques may not appreciate at all over time.  Instead, they usually either stagnate in value or depreciate, due to their undesirable characteristics.

But this concept of buying high end antiques can be taken one step further.  Instead of settling for just high quality antiques, you can also apply the “best of the best” doctrine.  Now, most people equate ultra high end antiques with jet-setting tycoons placing million dollar bids at a Sotheby’s or Christie’s auction.  But this is largely a myth.  In some niches of the antique market, prices are low enough that even average people can successfully invest in the very highest quality pieces.

In fact, there are a surprising number of antique categories where the finest examples available only cost between $500 and $1,000.  Indian silver rupee coins from the Mughal Empire, Mid-Century fountain pens, vintage cigarette holders and European art medals are just a few examples of investment grade antiques that qualify.

There are actually far greater numbers of ultra high end antiques accessible than those few categories I listed above.  And sometimes, shockingly, these best of the best antiques don’t even cross the $500 mark!  But how can this be?

To put it simply, alternative asset markets are highly inefficient.  Unlike the traditional securities markets, where computer trading algorithms constantly search global exchanges for bargains, few people delve into the intricacies of investment quality antiques.  Therefore, it is a largely unexplored and underrated asset class today.

This means that tangible assets are, by default, left to the bold and adventurous investor.  In contrast, the rest of the world crowds into the increasingly precarious stock and bond markets.  These conventional investors hope against hope that another financial crisis doesn’t eviscerate them before retirement arrives.  Personally, I don’t see the appeal of most traditional financial assets when fine art and antiques offer the savvy investor so much more.

Of course, the very highest tier of some categories of antiques can be prohibitively expensive.  For example, the very finest investment grade jewelry commonly sells for millions, if not tens of millions, of dollars.  Similarly, the very best ancient Greek coins can trade for anywhere from a few tens of thousands of dollars to millions of dollars.  So, in order to make the best of the best antique investing strategy work, you must be willing to explore more obscure niches.  But the monetary payoff for investing in high end antiques can be significant.

It is amazing to live in an age where a person can purchase a museum quality antique for the same amount of money as the average monthly car payment (about $500 in 2017).  These unparalleled high end antiques drip with precious metals, glittering gemstones and exotic hardwoods.  Historic and enticing, these luxury items have endured as objects of desire for hundreds of years already, and will undoubtedly continue to do so for centuries more to come.

If you know anything about investing, I suspect that you may have come to some of the same conclusions that I have.  Our capital markets are deeply broken.  They no longer fulfill their basic mission of efficiently allocating money to productive businesses and ventures in the real world.

Savings accounts shouldn’t pay less than 1%.  U.S. Treasury bonds shouldn’t yield between 1% and 3%.  Large multi-national companies shouldn’t trade at prices that imply they will carve up the world among themselves in some kind of a neo-feudalistic, dystopian future. And yet, here we are, wandering, bewildered, through an economic wasteland.

The securities markets gyrate wildly, yet ever upward, as we vainly hope that the false wealth will last until we can personally cash out and flee to some remote tropical paradise.  For most of us, including those currently toiling away on Wall Street, that day will never come.  Instead, both our dismal economic history and dark monetary future will eventually converge, and probably when we least expect it.

I am aware of the counterarguments.  The economy has been growing reliably, although anemically, since The Great Recession of 2008-2009.  The U.S. Federal Reserve will keep interest rates ultra low for as long as necessary in order to stoke economic growth.  The Federal Government is completely dependent for its tax revenue on our Frankenstein economy and will, therefore, never tolerate a serious market dislocation.

A few of these claims even have some validity.  For example, I sincerely believe the Federal Reserve will keep interest rates depressed for the foreseeable future.  But sometimes a disaster looms on the horizon and there is absolutely nothing anyone can do to avoid it.

I also believe the world’s business oligarchs and politicians will fight any financial chaos with the full might of their great wealth and formidable influence.  And yet, in spite of this, I think that the powerful and moneyed classes will ultimately be incapable of slowing the great arc of history as it bends toward a grand economic rebalancing.

The winds of economic change are already beginning to blow, albeit faintly.  The surprise election of Donald Trump to the U.S. presidency was one indicator that the financial status quo is beginning to fail.  The Brexit – Great Britain’s unexpected exit from the Euro Zone – was another such event.  There will surely be many other even more remarkable developments over the months and years to come.  As financial conditions inevitably become less favorable your old investment plan may no longer be ideal.

If you are currently saving for retirement, it is imperative you pay attention to these trends.  The investing world as you know it – the stable, benign, everyone’s a winner market of the last 35 odd years – is in the process of fundamentally changing.  Although the securities markets seem placid so far, the tremors have already begun.

You need a reliable backup investment plan for this new reality.  While I believe in and highly recommend investment grade art and antiques, there are other possibilities as well.  It could be a burglary safe full of precious metal bullion.  Or it could be a rental property that you paid cash for.  Or it could be timber land that you intend to log in the future.

But whatever unconventional asset you choose, it must meet two criteria.  First, it had better be a physical, tangible investment that you personally control.  This will keep at least part of your net worth out of the paper asset casino that dominates most retirement accounts.  And maintaining personal control will ensure that you aren’t at the mercy of an incompetent management team or an out-of-touch board of directors.

Second, it is vital to finance any alternative asset purchase using either very little or, preferably, no debt.  While the debt financing window is wide open today, there will surely come a time in the not-so-distant future when refinancing your debt, even against good collateral, will be impossible.  It is far wiser to be debt free and not risk blowing up your carefully constructed backup investment plan.

Financial change is coming.  The clues are already out there in the real world for all to see.  Get yourself a good alternative investment plan while there is still time left.  There is a slim possibility you won’t need it, but it is better to be financially safe than sorry.

According to statistics compiled by the U.S. Federal Reserve, U.S. households and non-profit organizations had an aggregate net worth of nearly $90.2 trillion as of September 30, 2016.  This is a fabulous, almost unbelievably large sum of money.  It confirms the United States as the richest, most prosperous nation in the history of the earth.

Time and time again, people have used this statistic to justify higher government expenditures or enhanced Federal social programs.  After all, being the wealthiest nation on earth, we should be able to afford nationalized healthcare, a complete overhaul of the country’s infrastructure, free college education or whatever your personal political hot button issue happens to be.  Everybody loves a windfall, right?

There is only one problem with the U.S. household net worth numbers.  They are a total, complete and utter fabrication.  It is a lie of such boldness that all other financial lies must defer to it.  The Truth – with a capital “T” – concerning U.S. household net worth is, unfortunately, rather grim.

The U.S. financial authorities, led by the Federal Reserve, have embarked on the grandest monetary experiment ever conceived in human history.  For over 20 years now they have repeatedly liquefied financial markets at any incipient sign of weakness.  This has been tantamount to a decree that no wealthy banker, hedge fund manager or speculator will be left behind.

This corrupt public policy has resulted in serial bubbles in security and real estate markets throughout the country.  Indeed, this misguided experiment has been so compelling that many other nations’ central banks have also joined in, causing stock, bond and property bubbles to become a synchronized, global affair.

At first these bubbles were viewed as an unmitigated good.  This is typical of great inflations. The negative side effects only come later, sometimes much later.  Unfortunately for the United States – and the rest of the world too – our dark future is beginning to close in around us rather quickly at this point.

And that leads us back to the aggregate household net worth number given at the beginning of this article – that fantastical 90.2 trillion dollar amount.  Over the past year this gargantuan sum ostensibly increased by 5.2 trillion dollars.  Over the past 3 years U.S. household net worth surged by 14.1 trillion dollars.  Over the past 5 years it ballooned by 28.7 trillion dollars.

And yet, in spite of this false prosperity, the U.S. is not one penny richer than it was 5 years ago.  In fact, I suspect it is poorer – possibly much poorer.  How can I reconcile this dreary assertion with the official, and much more sanguine, numbers staring me right in the face?

To put it simply, I don’t believe the numbers.  I actually downloaded the quarterly Balance Sheet of Households and Nonprofit Organizations (B.101) straight from the Federal Reserve website and played around with the figures.  What I discovered was illuminating.

First a quick breakdown of how all this household wealth is held.  The lion’s share, $73.1 trillion, is in financial assets, primarily bank deposits, stocks, bonds, mutual funds, pensions and the ownership of private businesses.  A further $26.1 trillion is attributable to real estate, both buildings and raw land.  The final amount, a meager $5.9 trillion is held in the form of equipment, consumer durable goods and intellectual property.

These three categories total $105.1 trillion.  Against this amount are liabilities of $14.9 trillion, mostly mortgages, car loans, student loans and other consumer debts.  These two numbers net out to the $90.2 trillion U.S. household net worth sum sited above.

But I wanted to have a better idea of what the real picture looks like.  So I applied a discount to many of the assets (and liabilities) from the spreadsheet.  I effectively assumed that many of these securities are significantly overvalued and will ultimately need to be written down in value in order to be realigned with reality.

So here is what I did.  I generously accepted that all bank deposits and U.S. treasury securities are worth 100 cents on the dollar, with no write-downs necessary.  I discounted most financial assets, including stocks, bonds, pensions and mutual funds by anywhere from 25% to 75%.  These are the securities that are most egregiously overvalued.

I then assumed that real estate is fairly valued at a 20% to 40% discount from the current market value.  Most of this price decline would be absorbed by the excessively expensive coastal cities.  Flyover country would largely get a bye here.

In order to be fair, I also wrote down the liabilities side of the household balance sheet as well – anywhere from 25% to 60%.  If we are realistic, not all those mortgages and student loans are getting paid back in full.

When I ran the final numbers the results were stunning.  That astonishingly high 90.2 trillion dollar U.S. household net worth declined to between $47.4 and $66.7 trillion.  That is a 26% to 47% household net worth haircut!  And I believe I was fairly conservative in my estimates as well.  I wouldn’t be the least bit surprised if the final write-downs were even larger than these numbers.

This is ultimately why I urge everybody to allocate a portion of their investment portfolio to fine art and antiques.  The global economy is sick to its core.  When this singular truth is finally revealed, it is paper assets like stocks and bonds that will ultimately bear the brunt of the resulting financial chaos and panic.  The United States isn’t nearly as wealthy as its political and business elite think, but you don’t have to march off the financial cliff with them.

What are the relative merits of investing in precious metals versus antiques?  It is a compelling question for hard asset investors.  After all, precious metals have had stellar price gains since the turn of the millennium.  As of September 30, 2016, gold has appreciated at an annualized rate of 9.93% over the last 15 years.  Silver has compounded at an annualized rate of 8.66% over the same period.  Even platinum, the laggard of the precious metal family, has still managed to return a very respectable, although perhaps not spectacular, 4.20% per annum over that time frame.

So if you want to inoculate your investment portfolio against inflation, financial disruptions or the zombie apocalypse, precious metals look like a pretty good deal.  And they are a pretty good deal.  I certainly like precious metals and hold them in my own portfolio.  But I like to think of them as a complement to investing in tangible assets like art and antiques, not as a replacement for them.

Now, not everyone agrees with me on the question of precious metals versus antiques.  Some people feel that precious metals are so simple, straightforward and easily understood that they should be your only tangible investment.  These pundits argue that when you buy antiques you’re paying too much for intangible attributes.  This manifests itself in the form of a premium – the price over its intrinsic value that you pay for an object.

All precious metals – gold, silver, platinum and palladium – sell for fairly modest premiums over bullion value.  Gold and silver bullion coins and bars typically have premiums of only a few percent over spot prices.  Platinum and palladium bullion pieces usually have somewhat higher premiums, but they are still generally in the 5% to 10% range.

Antiques, in contrast, generally have premiums that start at 15% or 20% over intrinsic value.  And they often go much, much higher than that.  It isn’t unusual for some antiques to have premiums of several hundred percent or more!  In cases where an antique contains no precious metals or gemstones at all, a premium cannot even be calculated because the item has no intrinsic value.

But all this talk of premiums misses an important point.  Throughout history, the wealthy have been willing to pay good prices for high quality, investment grade antiques because of their unsurpassed beauty, historical importance and the social status they confer.  A fine antique’s aesthetic qualities grant it an allure that is at once both intangible, and yet, utterly real.  As the summation of human culture, arts and ingenuity, investment quality antiques are, quite simply, worth more than the sum of their parts.

Gold and its cousins cannot claim that, although they are desirable for other reasons.  Instead, precious metals behave a bit like the cold, hard cash of the tangible asset realm.  They are a great baseline position – a wealth preserver free from the vagaries of paper currencies.  And they are liquid, meaning easily bought and sold quickly close to their fair market value.  But precious metals do have their limitations.

For one thing, it is impossible to buy precious metals at a discount.  No dealer will ever sell an ounce of gold for a penny less than the going spot price.  And that global price is only a few clicks away on the internet, so everyone knows what it is at any point in time.  Sure, you can get a small price break on the premium if you buy large quantities of bullion from a reputable dealer.  But even then, the discount will never be more than 1% or 2%.

On the other hand, discounts abound in the antique market for those savvy enough to search them out.  Because the antique markets are illiquid, they lack the efficiency found in traditional asset markets like stock and bond exchanges.  But this is a good thing.  It makes it possible, with a little bit of specialized knowledge, to buy antiques at low prices.  Not only that, but the right knowledge can also help you invest in antiques that will provide excellent future returns.  This level of fine-tuning is not possible with gold or silver bullion.

But, I still feel it is important to allocate a portion of your investment portfolio to precious metals, in addition to antiques.  Like antiques, gold, silver, platinum and palladium are immune from currency crises, bankruptcy, fraud and confiscation.  Indeed, precious metals can provide much needed liquidity to a tangible asset portfolio, allowing you to confidently invest in high return, but illiquid antiques.  In the end, gold and antiques are the perfect pairing for a well diversified tangibles portfolio.