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The End of Inexpensive Fine Vintage Jewelry

The End of Inexpensive Fine Vintage Jewelry

I have noticed a startling trend in the fine vintage jewelry space.  Good quality antique jewelry is getting harder and harder to find for reasonable prices.  Of course if money is no object, it is still possible to buy superb pieces at outrageous prices.  Alas, few of us find ourselves willing to do that.

As recently as 6 or 7 years ago, I could still walk into an antique or consignment shop and find multiple pieces of fine vintage jewelry in the $300 to $800 range.  These were pieces crafted from solid karat gold and set with high quality gemstones.

Sometimes the stones set in this jewelry would be one of the big four gemstones: rubies, sapphires, emeralds and diamonds.  If this were the case, the gems would often be on the smaller side, generally less than 1/2 carat.  Alternatively, I could find fine vintage jewelry with larger, centerpiece examples of valuable second tier gemstones, like aquamarine, tourmaline or spinel.

In either case, this fine vintage jewelry was eminently investable, as well as strikingly beautiful.  And at only a few hundred dollars per piece, they were also affordable.  Unfortunately, wicked inflation has been hard at work in the antique jewelry market.

At first, it was the pieces set with the larger first tier gemstones that skyrocketed in value.  The diamond jewelry was some of the first to go, not because white diamonds are particularly rare or desirable, but because everyone quickly recognized their value.

The large rubies, emeralds and sapphires were the next to disappear.  Natural rubies, in particular, are very rare stones.  Their relative abundance in 20th century jewelry is actually a quirk of Burmese-Thai geological luck, never to be repeated.

Prices for antique emerald jewelry were not far behind their ruby counterparts.  This is in spite of the fact that substantial new emerald deposits were discovered in Africa in the 1960s and 1970s.  These African sources have now come online, making significant contributions to global emerald supplies.  But demand is still outstripping supply, leading to ever increasing emerald prices.

Even sapphire – the most common of the big three colored gemstones – eventually succumbed to the insatiable demand for inexpensive fine vintage jewelry.  Sapphire prices had been depressed for decades due to the introduction of heat treatment techniques that were perfected in the late 1970s, followed by beryllium diffusion treatments around the year 2000.  But now that the considerable inventories created via these treatment processes are finally exhausted, sapphire jewelry prices are moving inexorably higher.

Price increases for fine vintage jewelry were not limited to pieces set with diamonds, rubies, emeralds and sapphires, though.  Next, price inflation spread to good quality second tier gemstones.  These are stones like non-emerald beryl, precious topaz, fancy-colored garnets, peridot, etc.

You used to be able to buy good quality antique jewelry set with these stones for $500 or $600 all day long.  Now it is becoming harder and harder to find them for reasonable prices.

I recently wrote a Spotlight article about an artisan-made modernist pendant that illustrates this point perfectly.  It is crafted from solid karat gold and is set with a variety of low-to-moderate value gemstones.

Yet, the asking price is $849.  And it isn’t a bad price either.  In fact, it is a very good price – so good, in fact, that I think it would make an excellent investment.

If you had looked to purchase this piece on the second-hand market 10 or 15 years ago, I think you could have easily had it for perhaps $400 or $500.  Not anymore, though.  The price has permanently ratcheted upward, and there is every probability it will continue to go up.

In my opinion, the reasonable prices for fine vintage jewelry that we had enjoyed for many decades were a by-product of low precious metal and gemstone prices from the 1980s through the early 2000s.  This mirrored the general collapse in commodity prices over the same period.

For example, in 1980 the price of a flawless, D-color 1 carat diamond peaked at around $60,000 a carat due to rampant inflation fears.  Then the price declined until the late 1990s, when the same stone could be purchased for around $15,000.  Currently, a white diamond of this size and quality would sell for about $20,000.

The price of gold followed a similar path.  After achieving a secular high of around $850 in 1980, the coveted yellow metal then entered a vicious, two decade long bear market.  Its value finally put in a double-bottom of $275 in 1999 and 2001.  Currently, an ounce of gold trades for around $1,300.

Now that the value of jewelry raw materials has risen sharply, an impact on the pricing of existing fine vintage jewelry was inevitable.  It has simply taken more than a decade for old inventory and stale prices to clear from the marketplace.  Now that the overhang is gone, it is clear that the value of fine vintage jewelry will continue to rise for the foreseeable future.

 

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What’s Your Financial Exit Strategy?

What's Your Financial Exit Strategy?

I am firmly convinced that every investor should have a financial exit strategy.  I define this as any way your investments can reasonably pay-off, even if the markets remain stubbornly against you.

For example, a dividend investor doesn’t count on having to sell his securities for more than their purchase price, although such an outcome would certainly be welcome.  Instead, his implicit financial exit strategy is simply holding his stocks until the dividends have grown large enough to constitute a substantial portion of their original cost.  This is also called yield-on-cost – a sacred concept for many dividend investors.

Another example of a financial exit strategy would be applicable to growth investors.  These investors buy rapidly growing (but often cashflow negative) small or medium-sized companies in the hopes that the market will recognize and reward this success with an elevated share price.  But if the market, for whatever reason, chooses to low-ball a growth investor, he can continue to hold the company until it eventually becomes large and successful.  At that point, the firm will almost always pay out a generous dividend.  This eventual dividend cashflow is the financial exit strategy for growth investors.

Microsoft and Apple are classic examples of this approach in real life.  They both began as small, rapidly growing companies that paid no dividends (and required lots of financing) and ended up as massively successful companies that paid large dividends.  If, as a growth investor, you felt that they were not being awarded the proper growth multiple, you could simply continue to hold, waiting for your financial exit strategy to work.

But a theoretical financial exit strategy isn’t always foolproof.  It is possible that a dividend investor’s chosen stock fails to grow its dividend, in which case the default method of cost-on-yield escape is non-operative.  Likewise, a growth investor may find that his rapidly expanding company runs out of liquidity or faces a shrinking customer base due to a recession.  In these instances, that small, formerly fast growing company will never mature into the large, dominant firm originally forecast.

And this brings us to our pertinent question for the day: What is your financial exit strategy?  Unfortunately, I think for many investors the answer is “I don’t have one!”

The raging bull market of the past 9 years has made many market participants complacent.  They either believe they don’t need a financial exit strategy or that relying on central banks’ endless quantitative easing (QE) is sufficient.  But I think this is a poor substitute for actual risk control.

And this line of reasoning inevitably brings us back to my favorite asset class – hard assets like fine art, antiques and precious metals.  Even a modest allocation to these overlooked tangible assets can help diversify a traditional stock and bond portfolio in a way that other paper assets cannot.  And this realization has extremely important future implications for your financial health.

Under normal circumstances, a portfolio composed solely of stocks, bonds and cash is safe enough.  But we are not living in normal times.  Instead, we are drifting through the hazy twilight of our current debt-laden, dollar-based age, which is sometimes known as Bretton Woods II.

I recently stumbled across a whitepaper from a financial firm called Myrmikan Capital, LLC that illustrates my worries about our current financial predicament quite succinctly.  I have excerpted the pertinent portion below:

In 1940, for example, when the roaring ’20s had been fully liquidated, the Fed’s gold backed its liabilities by 88%.  There was very little credit in the dollar system, which made it a good time to own stocks.  By the top of the 1960s bubble, the Fed had monetized so many government bonds that, at the pegged and London market price of $35 per ounce, gold backed the Fed’s liabilities by just 12%.  That was a great time to own gold (had it been legal for Americans to do so).

On January 21, 1980, the spot price of gold hit a peak of $875, which meant that the gold on the Fed’s balance sheet backed its liabilities by 133% – in order words, its liabilities were overbacked by 33%.  That was not a good time to own gold.  Today, the Fed reports it holds 8,133 tonnes of gold, worth $349.4 billion at $1,330 per ounce, which equals 7.9% of the Fed’s reported $4.4 trillion in liabilities.  Now is a good time to own gold.  Better than in 1968, in fact.

Prior to reading this, I had written an article on the stair-step pattern clearly visible in the long-term price of gold, which perfectly mirrors Myrmikan Capital’s analysis.  This is frightening stuff, or it should be for any conventional stock or bond investor.  Simply put, the Federal Reserve and other global central banks are engaged in naked inflationism.  And while the ultimately negative consequences of their profligate monetary policy have not yet arrived for the most part, stand assured that they are coming.

I have an analogy to describe the current financial system.  Suppose you are attending a wild rave on the top floor of a ramshackle apartment complex.  The guests are, without exception, all either drunk or high.  The booze and drugs are flowing freely.  And suddenly someone opens up a closet and discovers boxes filled with fireworks and oil-soaked rags.  The party guests are enamored with this find and waste no time breaking out their lighters.

You and I both know what is going to happen.  That is why, in this analogy, I am slowly edging towards the apartment’s fire escape.  I want to be the first one out when the inevitable disaster strikes, because very, very few people will manage to escape.  Tangible assets – precious metals, antiques and fine art – are a way to emerge financially intact from such as catastrophe.  They give you a viable financial exit strategy from a market that loves playing with fire.

 

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Antiques, Millennials and the Rebirth of Formal Dining

Antiques, Millennials and the Rebirth of Formal Dining

One of the most persistent myths of the modern age is that Generation Xers and Millennials abhor antiques, while at the same time oddly adoring anything “vintage” (as if there was much difference between the two).  The mainstream narrative goes something like this:

The younger generations love living in apartments, condos or townhouses in the inner city.  Your average Millennial employs a sleek, streamlined sensibility when decorating his (or her) posh city condo.  The color palette is invariably bright and colorful and design choices are always modern and sophisticated.  All things considered, in the popular imagination a typical Millennial’s urban pad looks remarkably like the product of a James Bond villain – part contemporary art collector and part evil genius.

But like all myths, this one isn’t quite authentic.  It is true that younger people like different antiques than older generations.  For example, overly ornate and frilly Victorian styles are out and alluringly sleek Mid-Century Modern is in.  Grandma might not approve, but this is a story that has been retold many times throughout human history.

The real issue for Millennials is that they were born into less than ideal economic circumstances.  Jobs and raises have been scarce for many people since the Great Recession of 2008-2009, but younger workers were hit especially hard.  As a result, Millennials have been forced to live in smaller apartments, live with roommates or even, under exceptional circumstances, move back home with their parents.  None of these living arrangements is conducive to buying antiques.

In addition, practicality reigns supreme in the lives of most 20 and 30 somethings these days.  If your dining nook doubles as a living room, you’re not going to feel particularly inclined to clutter it up with unnecessary furniture or knickknacks.  Instead you would carefully and thoughtfully decorate in a way to make maximum use of the space.

Another major reason that Millennials shy away from buying antiques is because they don’t host formal dining parties.  Given their fluid living arrangements and restrictive space constraints, this is perfectly understandable.  Instead, they tend to focus on more intimate, informal gatherings with good friends.

But these trends may not last forever.  I think that formal dining (or at least more formal dining, relatively speaking) will make a comeback over the next couple of decades.  Why do I believe this?  That’s easy – demographics!

Right now it is a safe bet that most family gatherings in the U.S. occur at the clan matriarch’s house.  This could include holidays, graduations, birthdays or anniversaries, among others.  And for many families, these celebrations involve semi-formal or formal dining.  After all, Thanksgiving dinner just isn’t the same without fancy place-settings around the big mahogany dining room table.

This means that under most circumstances, Generation Xers and Millennials make the pilgrimage to the ancestral family home several times a year for these events.  And while traditions vary from family to family, it isn’t uncommon for the fine china, good silver and formal dining room suite to be on full display during these meals.

This is a system that exists because it works.  But it only works because the older generations – the Baby Boomers and Silent Generation – tend to live in the largest houses and, just as importantly, have the accessories for formal dining.  It is difficult to host a family gathering in a cramped condo.  Likewise, formal dining requires nice silverware, plates and glasses – many of which are invariably antiques.

But right now the Silent Generation is quickly passing into the mists of time.  The youngest members of that generation are in their mid 70s as of 2018.  The Baby Boomers are not far behind.  They range in age from their mid 50s to early 70s.

And now we come to the crux of the matter: downsizing.  The ancestral family home and de facto gathering spot is usually owned by the oldest members of a family.  These houses are, generally speaking, generously proportioned and chocked full of a lifetime’s accumulation of stuff.  But they are also highly demanding in terms of time, money and maintenance.

Within the next 20 years, the Silent Generation will pass away and many of the Baby Boomers will choose to downsize for the sake of convenience and expense reduction.  But the family gatherings will not stop just because grandma and grandpa have moved to a retirement community in Florida.  This will leave a formal dining vacuum that will need to be filled.

Enter the Generation Xers and the Millennials.

These younger generations will be forced to take up the challenge of formal dining and family gatherings.  By this time it is probable that, just like the generations before them, they will have abandoned their tiny inner city condos and apartments for larger suburban housing.  And this is just as well, because they will need the room.

Now, I don’t believe that this means that Millennials will adopt the tastes of their parents or grandparents wholesale.  Quite the contrary, they will continue to carve their own eclectic stylistic path.  But, discretionary funds allowing, they will buy antiques or vintage items in some form.

Long gone will be the practical but boring, white IKEA furniture.  In its place will be real wood furniture.  It is doubtful that Waterford crystal and Depression glass will make a comeback, but formal dining with paper plates and plastic utensils is equally unlikely.  Instead, a middle path of sensible Fiestaware and meticulously chosen vintage sterling silver decor is more probable.

Is formal dining dead among younger people?  Hardly.  They just haven’t had the opportunity or demographic push necessary to adopt it yet.  Informal entertaining is great, but it definitely has its limits.  The rebirth of formal dining is on its way, and some parts of the antique market will benefit from the trend.

 

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Future Stock Market Valuations and the Shiller P/E Ratio

Future Stock Market Valuations and the Shiller P/E Ratio

The above graph shows the historical Shiller P/E ratio for the broad U.S. equity market from 1881 through early 2018.  The Shiller P/E ratio is also known as the CAPE ratio, which stands for Cyclically Adjusted Price Earnings ratio.  This is because the ratio uses the trailing 10 years of reported earnings data in an attempt to remove earnings cyclicality from its calculation.

This last point is so important that it cannot be overstated.  Any attempt to measure stock market valuations must take into account the fact that corporate profit margins and, by extension, earnings are highly variable.  When the economy is rapidly expanding, companies have pricing power and margins rise.  When the economy is mired in recession, pricing power declines, leading to lower profit margins and lower earnings.

If you look closely at the historical Shiller P/E graph, you’ll notice that I’ve added two different bands.  The first is denoted by green dashed lines.  This reflects the approximate boundaries of undervalued and overvalued markets in the period from circa 1880 to 1995.  During this timeframe, stock market valuations rarely declined below 7.5 for any significant period of time.  Similarly, valuations spent relatively little time about 22.5.

I think this is largely due to the fact that the stock market during this time was dominated by professional investors.  These stock market pros knew that low valuations were good times to buy and high valuations were good times to sell.

In addition, it was an epoch when central bankers were still sane.  They knew the boundaries of their mandate and that it was their job to take away the monetary punch bowl just as the party was getting started.

A funny thing happened in the mid 1990s though.  Central bankers collectively lost their minds and began wildly inflating securities market bubbles.  They decided that there was no problem that easy money could not solve.  Global central banks, led by the U.S. Federal Reserve, became activist institutions.  They adopted asymmetrical monetary policies which encouraged speculation and the reckless accumulation of debt, while simultaneously discouraging prudence and savings.

In addition, we saw the arrival of the armchair or amateur investor.  This trend was driven by millions of workers who were given 401-k or IRA accounts and told to go invest their retirement funds themselves.  Most of these people were not financial professionals and didn’t know when to buy or when to sell.

I delineated the modern era of stock market valuations with red dashed lines in the Shiller P/E chart above.  During this period, stock market valuations spent most their time much higher than they had historically, bounded between a P/E ratio of 21 and 32.

Interestingly, my analysis of historical stock market valuations does not rely solely on the Shiller P/E ratio for its validity.  You could easily substitute a variety of other cyclically-adjusted valuation measures and get basically the same chart.  So price-to-revenue, market cap-to-GDP or Tobin’s Q ratio would all work just as well (provided you can find the historical data).

Now the real question for equity investors today is which way will stock market valuations go in the future?

As I see it, there are three possibilities.  First, we could ascend to a new, higher range.  This would seem to be what the stock market is discounting at the moment, but it implies societal and governmental changes that I don’t think many people would be comfortable with.

For example, I believe higher stock market valuations could be supported if we were to enter a neo-feudal age.  In such a scenario, corporations would effectively become partners with the government – especially large tech companies like Facebook, Amazon, Apple, Alphabet (Google) and Netflix.  Tax and anti-trust laws would be changed to give these already gargantuan firms even more advantages then they already enjoy today.  As a result, their earnings would permanently readjust upward.

This would be a dystopian nightmare for average people.  Income inequality would become far worse than it is today, as the rich would get richer and workers would see their salaries stagnate or even decline.  Only those people with large equity, business or real estate portfolios would make good.

In the second possibility, stock market valuations would stay within the red dashed boundaries I’ve defined for the modern era.  This would be a muddle through scenario, where the global economy continues to underperform while inflation remains largely suppressed.  Income inequality would continue to worsen, although not at the same pace as under the first scenario.

Wages would remain weak and corporate profits would continue to grow at a reasonable clip.  Most equity investors would be disappointed by this status quo outcome, as it would involve a reversion to the stock market valuation mean that would suppress future returns considerably.

The third possibility would be a return to the stock market valuations of the pre-1990s.  Nobody is prepared for this scenario at the moment, which would probably be driven by chastened central banks that reign in loose monetary policies for any number of reasons.

Central banks could have a come to Jesus moment as federal debt levels explode, thus forcing them to confront the negative consequences of their prior feckless behavior.  Or it might be revived inflation that finally forces the central bankers to raise interest rates higher than they would otherwise.  Central banks might even be compelled to change their longstanding easy money policies due to political changes driven by disgruntled electorates.

In any case, this third scenario would be a catastrophe for most financial assets.  Stock market valuations would be cut in half while property and bond markets might not do much better.  Many local governments, corporations and pension funds would undoubtedly go bankrupt in this situation.

I will leave it up to the reader to decide which of the three scenarios that I’ve presented is more likely to occur.  But I will say this.  If you are relying on traditional portfolio diversification to protect your nest egg, you are taking on an extraordinary risk.

Neither stocks, nor bonds, nor real estate is in a position to save you if an average recession, much less a financial disaster, unfolds.  This is one of the reasons I like investing in tangible assets, such as precious metals, fine art, gemstones and antiques.  They are some of the only assets left that still trade for reasonable valuations.

 

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