Trends

The Greatest Generation, those who came of age during the Great Depression and World War II, are almost gone.  The few who remain are now in their 90s, if not older.  Those who followed them, the Silent Generation, have now entered old age, with even the youngest in their early 70s.  While little recognized, the gradual passing of these two generations has important implications for both collectors of, and investors in, 20th century antiques.  As we shall see, demographics are inexorably intertwined with the antiques market.

As people reach an advanced age, they tend to move to nursing homes or downsize to more convenient living arrangements.  They also sometimes die.  These life changes often lead to the dispersal of some or all of their personal estates – including items that are often of great interest to connoisseurs of fine 20th century antiques.  Furthermore, there is a direct relationship between the age of a person when his estate is liquidated and the age of items contained in that estate.

For example, throughout the 20th century it was common for middle and upper class families to gift a high end watch, pen, piece of jewelry or other fine luxury good to their children upon reaching adulthood.  This would often occur after graduation from high school or college, when the young adult was in his late teens to early twenties.  So it is reasonable to conclude that an individual’s accumulation of estate items usually begins around this age – 20 years old.  These personal goods eventually become tomorrow’s antiques, with the very finest of them reaching the status of investment grade.

Of course this analysis is slightly simplistic.  The average person will accumulate and dispose of many personal items – future antiques – throughout his life.  In addition, an individual may be gifted family heirlooms that are already 30, 40 or even 50 or more years old when given.  But the fact remains that most of the items an average person accumulates over his life will be purchased new, starting when he reaches age 20, give or take.

Average life expectancy in the United States – and most of the developed world, as well – is around 80 years.  Therefore, a little simple math lets us know that many of the items coming into the antique market today will generally be no more than 60 years old.  This is calculated by taking the average life expectancy of 80 years and subtracting 20 years, the starting age of accumulation.  This means that currently, in 2016, the bulk of antiques hitting the market from estate liquidations will be no older than the mid 1950s.  Demographics make this a near certainty.

The estate supply of iconic solid gold wristwatches, classic fountain pens, elegant sterling silver cigarette cases and other fine objets d’art from the 1920s, 1930s and 1940s is nearing exhaustion.  Yes, there will be exceptions; some people live to age 100 and never throw anything out.  The occasional investment grade Art Deco or Retro piece will still surface from time to time.  But the demographics are both established and inexorable; pieces from this era are becoming ever scarcer and more desirable.

This epiphany makes one thing absolutely clear.  If you are interested in investing in or collecting Art Deco or Retro antiques from the 1920s, 1930s or 1940s, do not delay.  Make every effort to buy as many high quality examples that you can find, as soon as possible.  The supply of these underappreciated works of art will only shrink further as the years roll on.

But there is a notable corollary to our initial conclusion.  Right now there are still ample amounts of vintage Mid-Century 1950s and 1960s items for sale on sites like eBay and Etsy at reasonable prices.  But this apparently robust inventory is really a temporary artifact of demographics.  The older generations who have these antiques stashed in their dresser drawers or buried in their closets are currently in the process of releasing them into the market en masse.  Within a mere 10 to 15 years these coveted Mid-Century antiques will also become increasingly scarce.  And their prices will undoubtedly increase significantly when that happens.  Invest accordingly.

The antique market has undergone dramatic changes in the last 20 years.  It has transformed from a closed industry where only insiders flourished into a market where anyone with some knowledge can achieve sensible investment returns.  In 1995, before the commercial advent of the internet, the industry was dominated by dealers who purchased items from private individuals and auctions and then re-sold them in physical shops with a markup ranging from 100% to 300%.  The spread between the bid and the ask price of most antiques was too large for a retail buyer to ever expect to make a reasonable – or even positive – investment return except by luck.  This made antiques a problematic investment recommendation.

For example, let’s suppose you bought an investment grade antique for full retail price in the pre-internet days.  It then appreciated by 7% per annum for 15 years straight at which point you decided to sell.  But when you sold, you were forced to accept an antique dealer’s wholesale price, which was 50% of his retail pricing.  The huge difference in the bid/ask spread (in this case a 100% markup) would mean your initial 7% annual return atrophied into just a 2.17% return.  And as bad as that seems, your return would have been even worse if the dealer were to have offered you less than 50% of his retail pricing.  In effect, buying antiques at a retail price and later selling them at a wholesale price destroyed your potential investment return.

The inception of the online auction house eBay in the late 1990s was a sea-change for the antique market.  At a stroke, eBay allowed dealers to sell their goods to the highest bidder nationally or even internationally.  By the same token, private individuals cleaning out their garages could list items on eBay and receive the same prices that dealers got on their auctions.  The antique market bid/ask spread which used to be 100% to 300% suddenly shrunk to eBay’s listing fee – only 10% to 20%!  This tremendous decline in the bid/ask spread made antiques and art far more accessible as an investment vehicle for the average person than ever before.

For instance, if you bought the same antique as in the example above and held it under the same conditions, you would be able to sell it for approximately 87% of retail today versus 50% of retail in the bad, old pre-internet days.  This would leave you with an average annual return of 6.01% out of a theoretically possible 7% – an immanently reasonable return on your investment.  And it is distinctly possible that spreads in the antiques/art market could tighten even further in the future as the online marketplace continues to mature.  To sum it up, antiques and art were simply not a viable asset class for the average person before the arrival of the internet.  But today they represent a unique opportunity for those astute investors bold enough to seize it.

We live in a world dominated by the financial clash of two titanic groups: spenders and savers.  Spenders like to borrow, shop and consume until the credit card is declined.  Savers enjoy squirreling away their hard earned lucre in bank CDs, savings accounts and the stock market.  Spenders and savers can be coworkers, neighbors, friends and family members.

And yet these two groups are always at odds.  Spenders want easy money policies.  They want low interest rates, readily available credit and high inflation.  These attributes are conducive to their preferred free-spending financial lifestyle.  Savers, on the other hand, favor a more restrictive monetary system.  They desire high interest rates, tight lending conditions and little or no inflation.  These economic circumstances allow savers to reap the full reward of their saving activity.

If you are reading this article, there is a good chance you are a saver.  Unfortunately, if that is the case then I have bad news for you.  Since World War II the U.S. financial system has been operated in favor of spenders.  The U.S. Federal Reserve and U.S. Treasury have cooperated for the last 75 odd years to ensure that inflation is always appreciably positive, interest rates don’t rise too high and credit is always accessible to both businesses and consumers alike.

There was a little bit of a silver lining for savers though.  While the U.S. financial system has been generally tilted towards spenders for decades, this bias wasn’t egregious.  Bank savings accounts paid interest rates above the rate of inflation.  The Federal Reserve tolerated moderate inflation, but always reigned in excessive dollar devaluation.  And credit availability was traditionally subject to fairly strict qualification rules.  These compromises may not have been ideal for savers, but they were good enough most of the time.

And then the Great Financial Crisis of 2008-2009 hit.  Bank savings accounts and CDs started paying practically nothing.  The Federal Reserve, along with central banks all over the world, enthusiastically declared that they would tolerate as much inflation as they could create.  And the U.S. Treasury bailed out systematically important, too-big-to-fail banks like Citibank, Goldman Sachs and J.P. Morgan Chase on the implicit condition that they make loans available to anyone who can fog a mirror.  Suddenly the age old struggle between spenders and savers didn’t seem so balanced anymore.  Spenders – governments, corporations and individual consumers – were the big winners while savers were left behind.

This brings us to the present.  Today we live in an economy that is highly financialized, dominated by grotesquely oversized banks that feed at the government teat.  Traditional investments, regardless of whether they are stocks or bonds, pay miniscule dividends or interest.  And, much to our chagrin, we’ve discovered that debt is the new financial heroin of our age.  But the real question is where do we go from here, especially those of us who are savers?

Unfortunately, I have more bad news for savers.  Inflation is basically a form of wealth redistribution from savers to spenders.  For many decades after World War II inflation was low and this process of redistribution was, consequently, slow.  But in spite of inflation not being particularly high since the Great Financial Crisis, redistribution has increased in pace.  This is primarily due to the fact that savers can’t earn a guaranteed return above the rate of inflation anywhere.  But this uneasy stalemate between spenders and savers will not last forever.

While it probably won’t happen within the next few years, one day the United States will experience a currency crisis.  I define a currency crisis as being an abrupt decline in the foreign exchange value of a country’s currency by anywhere between 50 and 90 percent.  This event will shake the foundations of the international financial order.  Currency crises usually happen after many years of a slowly deteriorating fiscal position.  As the grandfather of modern economics Adam Smith once commented, “There is a great deal of ruin in a nation.”  In fact, it is usually telegraphed for so many years beforehand that everybody assumes it won’t or can’t happen.  However, when the crisis finally hits, it often unfolds faster than even the most pessimistic observer thought possible.

How can a saver protect himself?  Ultimately, all wealth is physical.  Central banks, financial institutions and corporations can print money, issue debt and sell stock.  But none of these actions truly increases the amount of wealth present in an economy.  They are dilutive, redistributive processes, effectively moving wealth from savers to spenders.  The astute saver will realize this and convert much of his hard earned money into tangible assets.  Whether those assets consist of bullion, real estate, commodities or fine art and antiques is largely a matter of personal preference.  What is important is that you do it while you still can.  The final destination of a debt saturated economy is always a currency crisis and the clock is ticking for the United States.  Art, antiques and other tangible assets are a great way to protect yourself.