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Society’s Tangible Wealth Building Escalator Is Broken

Tangible assets have been a key component of wealth building for most of recorded human history. In fact, before the advent of the Industrial Revolution in the 18th century almost all assets were in the form of real estate, precious metals, livestock or other physical property and goods. Even today physical assets constitute a large proportion of the net worth of many households. A house is perhaps the premiere example of this phenomenon. Owning a house is considered the bedrock of middle class status in most developed countries.

But tangible wealth building strategies in the modern age have run afoul of adverse global economic trends. In decades past, there used to be a generational escalator of sorts in tangible assets – an accumulation process that middle class people naturally progressed through as they aged. This traditionally started as soon as a person became a young adult and continued right up until retirement age.

Formerly, parents or other relatives would buy recent high school or college graduates useful items like fine wristwatches, stately fountain pen and pencil sets or jewelry like cuff links for men or earrings or a necklace for women. These heirloom quality items were often what I refer to as functional luxuries. This means they would not only perform a needed task, but would also retain or appreciate in value over time.

The next stage in the traditional tangible wealth building escalator was marriage. In addition to the bride and groom exchanging an engagement ring and wedding bands, wedding guests would happily bestow wedding gifts. While small appliances and kitchen utensils were common, it also wasn’t unusual for paintings, sterling silverware or objet d’art to be gifted. These tangible assets were not only thoughtful décor for the newlywed’s home, but would also boost the net worth of the new couple.

The next phase of physical wealth accumulation for most young people would come in the form of a house. And even if not immediately affordable, most young adults would live in a cheaper apartment until they had saved enough for a down-payment. A house often was – and remains – the single largest purchase a person makes, representing an important step in the generational wealth building process.

Inheritance is another element of the tangible wealth building tradition scattered throughout peoples’ lifetime. When we are younger, grandparents, great aunts and great uncles pass away. As we reach middle age and older, our parents and their siblings pass away.

As sad and trying as these events may be, the tangible inheritance from them are sometimes substantial. Aunt Greta can’t take her prized diamond ring with her to the afterlife. And Uncle Phil’s carefully stashed collection of old gold coins needs to go to someone. Even grandpa’s early American maple slant front desk must find a new home when the time comes. Regardless of who leaves what to whom, inheritance is a key way that tangible wealth is transmitted across generations.

When the generational wealth building escalator functioned properly, middle class families approaching retirement age possessed significant amounts of wealth in the form of physical goods accumulated over a lifetime. These tangible assets conferred a multitude of benefits on their owners.

For example, a house provides substantial protection against future inflation by inoculating the homeowner against rental increases. Fine art and antiques not only have decorative value, but also tend to appreciate in real terms over long periods of time. And because functional luxuries are rarely thought of as assets, it removes the temptation that some people might have to sell them for “quick cash”. In effect, physical wealth acts as a discreet piggy bank, helping to buffer the middle class from the ravages of inflation, banking crises and financial bubbles.

Unfortunately, this traditional method of building wealth has been unraveling for decades in the Western world. Fewer and fewer young adults receive tangible graduation gifts of significant value due to changing fashions coupled with the broad decline of the middle class. The number and quality of wedding gifts has experienced a similar erosion. Many times, newlyweds simply request money or gift cards, which are immediately spent on the necessities of living in a very expensive world.

Reckless economic policies instituted by the world’s central banks have also contributed to the breakdown of the traditional wealth building escalator. The de facto pursuit of housing bubbles by the financial authorities has been particularly damaging to young people looking to buy their first home. Even modest condos in desirable urban areas can easily exceed half a million dollars or more – a sum far outside of the price range of most 20 somethings.

Young people who do manage to scrape together the outrageously large six-figure down payments often find themselves house poor. They are crippled by massive mortgages that require dual-income professional salaries to service. And even a temporary job loss – a stunningly regular occurrence in the modern economic landscape – can easily lead to a devastating foreclosure.

Perhaps most worrisome is the tremendous decline in the quality of consumer goods over the past 40 years or so. Decades ago, the gift of a mechanical watch, high-end fountain pen or fine jewelry could – after a short period of initial depreciation – be expected to appreciate in value over time. But, starting in the 1970s and accelerating into the 1980s and 1990s, consumer goods gradually became cheaply made and disposable.

Today, few of the consumer goods sold qualify as functional luxuries – they are simple not built to a high enough standard. As a result, most consumer goods that people now buy rapidly depreciate, failing to provide a reliable store of wealth. Long gone are the days when you could expect your personal purchases to last a lifetime and still be worth something.

All of these economic forces have converged to hobble the tangible wealth building process that used to underpin the middle class. In fact, the transmission of accumulated generational wealth in tangible form is one major reason the middle class tended to remain stable. Now that this mechanism for wealth preservation has largely broken down, I fear what the future holds for many people. This is why I firmly believe it is more important than ever to augment your traditional stock and bond investments with tangible assets.

The Small Investor Advantage in Antique Investments

We normally think that the world’s real investment action happens in London, New York, Hong Kong or some other global financial capital. We imagine that powerful and wealthy investment bankers, titans of industry and hedge fund managers gather around dark wooden conference tables and pitch their investment plans to each other. As a result, we assume, the price of oil increases or an 80 floor office building is added to some city’s skyline, or a well-known, publicly traded company is bought-out.

And while these sorts of things definitely do happen, small investors like you and me actually have a much bigger advantage in the marketplace than it might appear. The big boys in the investment world – investment banks, pension funds, hedge funds and other large institutions – have one major Achilles heel. They need to be able to purchase an investment in volume for it to make financial sense.

And when I say “volume” I mean tens or even hundreds of millions of dollars worth. This is why Wall Street loves stocks, bonds and (sometimes) real estate. These are the only investments with enough market value and liquidity to meet their voracious appetites. In light of this revelation, it becomes easy to see why big institutional investors are the battleships of the investment world. They might be impressively large and awe-inspiring, but they are also slow and can’t change direction easily.

And this is what gives small investors a tremendous edge. A regular person can sink anywhere from a few hundred dollars to a few thousand dollars into an alternative investment and have it positively impact his net worth once it appreciates even modestly. In contrast, anything less than about $100 million is a rounding error to Goldman Sachs and its investment bank peers.

This small investor advantage is perhaps most pronounced with antique investments. Antiques are the great unsung investment opportunity of our time. Antiques today are the equivalent of New York City brownstones selling for $50,000 in the late 1970s or gold trading at $275 an ounce back in 2001. Investment grade antiques are phenomenally good deals, but they are completely overlooked, neglected and ignored.

And a big reason why this is the case is because the large institutional financial firms can’t make any money on them. The market is too small. Even the niche financial players, like private equity, special situation hedge funds and angel investors are generally too large to effectively squeeze into the antiques market.

That leaves average people like you and me to exploit this cornucopia of investment opportunity. Right now a modest $10,000 investment can buy you a dozen fine vintage mechanical wristwatches, or a half-dozen luscious old mine cut diamonds, or nearly a hundred exotic silver rupee coins from the Indian Mughal empire. Of course, it is possible to get started in the field of antique investments with much less than $10,000. Even a couple hundred dollars is enough to enter the lucrative world of old, glittering objet d’art.

The deals are real and anybody can buy. You don’t need to be a business magnate or a financial wizard to acquire tangible investments that will perform well for years to come. In fact, most of these bargains are only available to small investors in antique investments. Institutional sized players need not apply.

Now there is no such thing as something for nothing in this world. And this situation is not an exception to this ironclad rule. If you’re interested in buying into the world’s most undervalued asset class, then you’ll need a little bit of knowledge. You’ll have to decide on an area of concentration and buy a book or two to gain a deeper understanding of your chosen niche. And the Antique Sage website, filled with hundreds of useful articles on antique investments, can certainly help.

But it is important that you take action. Much like prime New York City real estate and precious metals, fine investment quality antiques will not stay at their current price levels forever. In fact, while still undiscovered by the general public, fine antiques have already skyrocketed in price by a factor of 2 to 4 times over the past 10 to 15 years! And they still have plenty of room to run. Savvy small investors have been acquiring antique investments for years already. Don’t be left behind.

France’s Ancien Regime and the Coming Investment Revolution

Before its 1789 revolution, the French political system was called the “Ancien Regime”, which translates roughly as the “old order”. Most of us envision this period of French history as a time of grand palaces, political intrigue and glamorous nobility. However, the reality was somewhat uglier, with widespread corruption, economic oppression and disdainful arrogance. What is really shocking, though, are the parallels between France’s Ancien Regime and our own time, and why it means an investment revolution is inescapable.

Pre-Revolutionary France was embodied by the Estates General, an assembly of the three most important groups in the kingdom. This consultative body was summoned exclusively at the behest of the king, usually to approve new taxes, but occasionally to fundamentally alter established French law.

The First Estate was the church, ranging from the most exalted Parisian cardinal to the humblest of provincial priests. The Second Estate was the nobility, whose titles were either inherited or purchased. The third estate was the commoners, effectively everyone else in society – about 98% of the French population.

Although the Estates General was nominally democratic, it had one glaring flaw. Any two Estates could overrule the third via a simple majority. And that is exactly what happened. The clergy and nobility, although only about 2% of the total French population, possessed many advantages and prerogatives that the Third Estate lacked. Therefore, these two groups colluded via their representation in the Estates General to retain their privileges to the perpetual disadvantage of the commoners.

Commoners paid a dizzying array of complicated and onerous taxes in Pre-Revolution France. For example, member of the Third Estate had to pay the taille or property tax, the capitation or poll tax, the vingtieme or income tax, the gabelle or salt tax, the aides or excise tax and the timbre or stamp tax. Peasants even had to pay an in-kind tax called the corvee, which forced them to labor a certain amount of the year for their aristocratic landlords or local government. But the French clergy and nobility, in contrast, were exempt from almost all of these taxes.

As if these tax inequalities were not bad enough, the status of French nobility and the Church entitled them to collect taxes directly from commoners, oftentimes on behalf of the king. Corruption among tax collectors was rife and members of the First and Second Estates always kept a substantial chunk of these taxes for themselves.

Starting with the reign of Louis XIV – the Sun King – the French monarchy badly mismanaged the nation’s finances. This problem deteriorated to the point where the king actually openly sold titles of nobility to raise desperately needed funds. If you were a wealthy Frenchman in the 17th or 18th century, you simply bought yourself nobility and a fiefdom. These not only exempted you from most taxes and obligations that commoners had to bear, but were also inheritable, allowing your progeny to forever sidestep their civic responsibilities.

Unfortunately, I feel an investment revolution is inevitable because the modern world has successfully created a neo-feudal system similar to the French Ancien Regime. The tripartite division among the Ancien Regime’s Estates General is mirrored in today’s institutions. The mainstream media has effectively replaced the Church as the First Estate. This is ironic considering the mainstream media has long been pretentious enough to style itself the present-day Fourth Estate.

The mainstream media’s sense of self importance is without equal. They sit isolated in their echo chambers, disdainfully passing judgment on everyone around them, yet finding only themselves blameless. And, as the 2016 presidential election or Bexit has proven, they aren’t above trying to influence the outcome of immensely important world events. The mainstream media doesn’t simply report the news these days; they manufacture it like sausage.

The mantle of the nobility of the Second Estate has passed to the business and political elite of the world. Immensely wealthy, out of touch with reality and often hopelessly corrupt, these people make important decisions that impact the lives of millions on a daily basis. But regardless of how inept or poor those decisions may be, they never suffer any personal consequences. Being one of the few, chosen elite in today’s world means never having to say you’re sorry. Failed presidential candidate Hillary Clinton is the poster child for this class.

The Third Estate today looks much the same as it did in pre-revolutionary France. Everyone who isn’t a globetrotting tech titan, standing senator or editor for the New York Times falls into this category. In other words, the Third Estate is composed of the unwashed masses.

Our modern tax system is also just as lopsided as it was under the French monarchy. The modest income of average people is heavily taxed while the vast capital of business elites, often tax exempt, flits effortlessly around the globe. Large multi-national corporations are perhaps the worst offender here, using offshore holding companies by the dozen and engaging in complicated international tax avoidance schemes like the “Double Irish” or the “Dutch Sandwich”.

Much like the French nobility, modern-day wealthy individuals and families are able to dodge taxes via the use of corporate trusts, stock options and venture capital funds. Whoever has the most money and the most tax lawyers, wins. And that isn’t regular people. Any 18th century Frenchman would instantly recognize our modern-day methods of buying social status and power.

But amidst our present gilded age, there is a looming investment revolution for our self-appointed elites. The corruption and self-interest of the French clergy and nobility during Ancien Regime prevented the Estates General and the monarchy from ever reforming their political system. As a result, France’s problems festered until revolution finally descended, completely wiping out the privileges of the clergy and the nobles.

We are facing a similar circumstance today. Political and business elites collude with the mainstream media to protect their exorbitant privilege and wealth, all to the detriment of average people. They stash most of their wealth in stocks, bonds and other paper assets. Then they ensure monstrous profits by inflating global asset bubbles and legislating special tax breaks for themselves. This is all courtesy of their central bank collaborators and political friends.

And these globalist elites currently believe they are untouchable – that an investment revolution is impossible. They are the modern-day equivalent of Ancien Regime French aristocrats who bought their titles. But change is coming. Owning a few thousand shares of Google, Facebook or Amazon common stock might seem like a ticket to perpetual wealth today, but the view a decade from now will likely be very, very different. An investment revolution is brewing and most paper assets will be poison.

This is why I advocate the ownership of investment quality art and antiques. These discrete, tangible investments are not tied to the continuation of our hopelessly corrupt and ineffective economic policies. All those French titles of nobility are worth very little today, but a fine 18th century French painting, sculpture or silver tea set is still highly prized. When the long awaited investment revolution finally arrives, I know which assets I would rather own.

Avoid Market Bubbles by investing in Antiques

One of the greatest dangers in today’s investment landscape is the widespread presence of dreaded market bubbles. These pernicious anomalies have been happening with frightening regularity over the last 20 years or so. And while market bubbles may be fun on the way up, the fun always ends eventually. They are simply bad news for prudent, long-term investors.

Our two decades of bubble purgatory started off in the late 1990s with the arrival of the technology bubble 1.0. This was a time when ridiculous startup companies such as Pets.com, Kozmo.com, Boo.com and Webvan all traded at insane valuations on the stock market. Few of the companies caught up in this bubble had positive earnings or cashflow, instead relying on uninterrupted access to the capital markets to fund their daily operations.

When the bubble inevitably collapsed, few dot com businesses were spared. The technology-heavy NASDAQ 100 index declined by a staggering 83% from its spring 2000 peak to its fall 2002 nadir. Investors foolish enough to play in this bubble wonderland bitterly regretted their choice in the end.

A few years later, the U.S. Federal Reserve, not satisfied with only subjecting the American public to a single market bubble, quickly inflated a housing bubble by holding interest rates too low for too long. This resulted in average people all over the country being scammed into buying multiple houses, often with exotic interest only, floating rate or negative amortization mortgages.

The gains, driven by low interest rates and loose lending conditions, were tremendous at first. But, as with all market bubbles, few investors managed to get out before the historic 2008 housing bust. Housing prices, which had last declined nationally during the 1930s Great Depression, did so again, wiping out heavily leveraged speculators and naive investors alike. The ensuing financial panic was so severe that it nearly destroyed the world’s banking system.

Once again, the U.S. Federal Reserve decided that three bubbles would certainly succeed where two had miserably failed. Therefore they dropped interest rates to almost zero and have held them there for 8 years and counting now. Predictably, almost all stock and bond markets have rocketed skyward during this time. But neither profits nor revenues have kept pace with asset price increases.

In today’s technology 2.0 bubble, companies like Facebook, Amazon, Tesla and Netflix trade at absurdly high price-to-revenue ratios. In addition, “unicorn” startup technology companies, defined as venture capital funded firms with implied market caps above one billion dollars, are everywhere – with an estimated 229 in existence as of January 2016. Uber, a startup online taxi service that lost about 3 billion dollars in 2016, flaunts a $62.5 billion dollar market cap, higher than that of Honda, Ford or General Motors! Even normally staid non-technology companies like McDonalds, GE and Starbucks have seen their stock prices rise dramatically with little real justification.

This means that, for an astonishing third time in only 20 years, we are in the midst of yet another market bubble. And this one will most likely be even more damaging than its predecessors due to its sheer breadth. Almost every traditional asset class from high yield bonds to corporate equities to commercial real estate has been caught up in the mania. By extension, most investors, even those who believe they are playing it safe, will inexorably be hit by the collateral damage from the eventual bust.

Of course, if you are willing to explore the world of unconventional assets, there are hidden investment gems to be found far removed from cancerous market bubbles. The art and antiques market is a prime example. These tangible assets have been a key wealth building tool of wealthy households for centuries, yet fly underneath most investors’ radar.

Investment grade antiques merge five desirable attributes – portability, quality, durability, scarcity and zeitgeist – into an aesthetically attractive package. This category of the antiques market has some of the greatest works of art known to mankind. Among them are the Shah Jahan Cup, a 17th century Indian Mughal carving made from a single piece of solid jade, the Hope Diamond, a reputedly cursed 45.52 carat, deep blue diamond now housed in the Smithsonian museum and the Brasher Doubloons, a series of six of the very first gold coins made for the fledgling United States in 1787.

Luckily for today’s investors, not all investment grade antiques are famous, million-dollar masterpieces. In fact, it usually only takes a few hundred dollars – and occasionally less – to buy a beautiful, historically significant and highly desirable antique that is sure to appreciate for decades to come. Antiques may not be the talk of the investment community right now, but that is a good thing. I’d rather put my money into undervalued antiques than ride the stock market bubble down for another 50% or greater loss.

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