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Society’s Tangible Wealth Building Escalator Is Broken

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.

Today’s Growing Scarcity of Luxury Raw Materials

Today's Growing Scarcity of Luxury Raw Materials

We are quickly hurtling towards a crisis in the global luxury goods market.  The cause of this future crisis will be scarcity, or, to be more precise, growing scarcity.  The luxury goods market has traditionally used the finest luxury raw materials available, including gold and silver, precious gemstones and exotic hardwoods.  However, a subtle, yet growing shortage of these vital materials has slowly been developing.

This is a surprising and unwelcome challenge for mankind in the modern age.  During the 19th and most of the 20th centuries, the global supply of luxury raw materials rapidly increased as new mining or harvesting technologies were first developed and then perfected.  This massive increase in the prevalence of high-end materials coupled nicely with the phenomenal growth of the middle class in Europe and America during the same period.  Any new supply was quickly absorbed by burgeoning middle class consumers with either no or limited impact on pricing.

However, this seemingly endless cornucopia of ever increasing luxury raw materials has begun to diminish.  In some cases, production has merely stagnated for the last decade or two.  In other, more extreme instances, some of nature’s finest substances, which elegantly graced the fingers and wrists of our parents and grandparents, are now practically unobtainable.

Let’s start by analyzing the king of luxury materials – gold.  For most of human history global gold production was extremely small.  From the days of the Roman Empire until the 15th century, anywhere between 1 and 10 metric tonnes of gold were mined every year.  Then, as technological innovation accelerated, production rose.  By the mid 1850s, the Californian and Australian gold rushes had driven mine supply to 300 tonnes per annum.

But this was nothing compared to the tremendous mining innovations of the 20th century.  By 1970, world gold production was 1,475 metric tonnes.  In the 1980s, heap leaching techniques came online, driving gold production even higher.  In the year 2000, global mine production was around 2,575 metric tonnes.

But then a funny thing happened.  The growth of total mine output slowed considerably after the turn of the millennium.  2016 mine supply was estimated to be only 3,236 tonnes.  This represents an anemic 1.4% growth rate over the past 16 years.  This low growth rate isn’t the entire story however.  Future mine supply is expected to decline in the 2020s due to relatively low gold prices over the last several years suppressing new mine construction.

Gold is only one of many luxury raw materials with a supply problem, though.  The global mine output of diamonds increased dramatically during the 20th century, from just a few million carats per annum in 1900 to a peak of 177 million carats in 2005.  However, total diamond production has since collapsed to only about 125 million carats a year, a level that has remained stagnate for the past 8 years.

Although future diamond output is expected to climb to around 141 million carats by 2025, this is still well below the record levels of 2005 and only represents a 1.1% compound annual growth rate from 2016.  This estimated growth rate declines to a mere 0.6% if we use 2010 as our starting year and plummets to -1.1% if we measure from the peak of diamond production in 2005.

Both gold and diamond mines have been negatively impacted by many of the same economic pressures.  The easily accessible, rich deposits were mined out long ago and are now nothing but fond, distant memories.  This has caused prospectors to scour the ends of the earth looking for viable deposits.  As a consequence, most new gold and diamond mines have opened in some of the least hospitable places on earth, including the frozen wastes of northern Canada and the baking savannahs of sub-Saharan Africa.

Located in rugged, geo-political hotspots, these mines also tend to have far lower ore grades than the average mine from just a few decades ago.  For example, open pit gold mines operating today often yield less than one gram of gold for every ton of ore mined.  Modern diamond mining is even more brutal than gold mining, if such a thing is possible.  A hundred tons of ore is usually needed to yield a few scant carats of gem quality stones.

But the incipient supply issues with the luxury raw material mainstays of gold and diamonds are just the tip of the iceberg.  Many other traditional luxury raw materials are facing even greater supply constraints.  Mahogany, a tropical hardwood renowned for its rich, reddish-brown color and great woodworking characteristics, is another prime example.

For hundreds of years mahogany was the wood of choice for master cabinetmakers and woodworkers throughout Europe and the Americas.  But the resulting over-logging took its toll on mahogany supplies.  By the early 20th century, the type of mahogany traditionally used in antique furniture and other antique luxury goods – Cuban Mahogany – was commercially extinct.

Luckily, another variety of true mahogany – Honduran Mahogany, which had very similar physical qualities to Cuban Mahogany – was available in quantity.  Unfortunately, we exploited this new timber resource just as mercilessly.  Now Honduran Mahogany is endangered as well.

Less than 15 years ago, in 2003, Honduran Mahogany came under CITES (Convention on International Trade in Endangered Species of Wild Fauna and Flora) trade restrictions.  This means that all Honduran Mahogany imported into the West must be either plantation grown or otherwise sustainably harvested.

Predictably, the price of Honduran mahogany has soared since these import certifications were implemented.  And, unfortunately, there are no other commercially viable species of true mahogany left in the world.  The price of this fine cabinet wood is certainly not coming down again in our lifetime, and perhaps never.

Once again, mahogany is just an example of a larger trend.  As the amount of virgin rain forest has inexorably declined over the last 50 years, a wide range of exotic tropical hardwoods have also decreased in availability.  Native peoples have not only harvested these valuable trees for timber, but they also clear-cut the forest to create farm land and grazing land.  As a direct result, supplies of exotic hardwoods have declined while prices have simultaneously risen.

Gold, diamonds and mahogany are not exceptional.  The same story of growing scarcity applies to a variety of other luxury raw materials as well.  For instance, organic gems such as natural pearls, tortoiseshell, precious coral and ivory have all become increasingly rare due to widespread environmental pressures.  Rising populations have encroached on formerly pristine natural areas while expanding cities have released massive amounts of pollution into nearby oceans and wilderness.  Both of these activities destroy large swaths of natural habitat and reduce extant populations.

It might not be obvious yet because of the lingering effects of the Great Recession, but luxury raw materials have already entered an era of relative scarcity.  This is one of the reasons I like high quality antiques as investments.  They are often crafted from the finest raw materials known to man – luxury raw materials that will only become rarer as time goes on.

The History and Future of the Artist-Patron Relationship

The History and Future of the Artist-Patron Relationship

Most of us are familiar with the image of artist as avant-garde outsider, relentlessly dedicating himself to pursue the creation of the edgy and unorthodox.  And from the late 19th century to the present, this stereotype has been more or less true.

Most artists aren’t mainstream.  They create unconventional works.  They doggedly seek to push aesthetic boundaries.  These things, incidentally, have also given rise to the myth – or perhaps the reality – of the “starving artist”.  After all, it’s tough to be at the forefront of intellectual thought and still convince average people to buy your offbeat creations.

Long ago, however, the artist-patron relationship was dramatically different.  In the Middle Ages and Renaissance artists generally worked exclusively at the behest of rich and powerful patrons.  A wealthy patron would employ a gifted artist for years, or even decades, at a time, providing him with funds to cover the cost of his supplies and living expenses, as well as a generous stipend.  In return, the artist would complete works of art commissioned by his benefactor.

Although many of these Renaissance period artworks had religious themes, they were also intimately bound up with politics.  Patrons would often demand that they be inserted into ostensibly historical paintings or frescos in order to emphasize the patron’s religious devotion or importance.

A great example of this is the famous Italian Renaissance painter Raphael’s greatest work, The School of Athens.  This giant fresco, commissioned by Pope Julius II in the early 16th century, shows famous ancient philosophers and scholars debating in a mythical Classical setting.  However, Raphael inserted the Pope’s nephew, the Duke of Urbino, into the painting.  Raphael was either instructed by his patron to make this anachronistic addition or did it on his own to curry favor with the Pope.  In any case, this was commonplace in medieval and Renaissance art.

The Medici, a dynasty of wealthy bankers who dominated Florentine politics during the late Renaissance, perhaps best exemplifies the typical artist-patron relationship of the time.  Immensely rich and powerful, the Medici family sponsored famed artists such as the legendary Botticelli and Michelangelo.  Indeed, the Medici’s home city of Florence reached its cultural apogee under their rule, in no small part because of their generous patronage of the arts.

But this traditional artist-patron relationship began to fundamentally change in the mid to late 19th century.  Until this time, the French Académie des Beaux-Arts dictated trends in European art.  Artists who won awards or accolades at the Academy were well placed to receive important commissions from wealthy patrons.  But the institution was hopelessly traditionalist, valuing religious, historical and portrait themed paintings and sculptures rendered in a photo-realistic style above all else.

Starting in the 1860s, a small group of promising artists, including Claude Monet and Pierre-Auguste Renoir, rebelled against the rigid traditions of the Academy.  After repeated rejections by the Académie des Beaux-Arts, these pioneering artists founded their own art show called the Salon des Refusé, or the Salon of the Refused.  The works displayed at this unorthodox show later became the basis for Impressionism, the first truly Modern Art movement.

After the successful rebellion of the Impressionists from the Académie des Beaux-Arts, it became increasingly common for artists to reject the traditionalism that had dominated fine art from the Renaissance to the early 19th century.  They were free to pursue whatever styles, concepts or mediums they desired.  But this newfound liberty came at a steep price.  Rich patrons no longer directly subsidized an artist’s lifestyle.

Instead, artists effectively began creating works on spec, meaning they completed a piece of art first, and then tried to see if anyone was interested in buying it afterwards.  But if an artist’s style was too avant-garde, the public, including wealthy art collectors, would be initially repelled.  This translated into few sales and a meager, hand-to-mouth existence for most artists.  This was an unfortunate development for artists, considering how expensive good art is to produce.

The famous Dutch Post-Impressionist Vincent Van Gogh is perhaps the most well-known example of this phenomenon.  Although he was tremendously prolific, creating over 2,000 artworks during his lifetime, he struggled to find commercial success.  Although his works routinely trade for millions of dollars today, he ironically died a pauper, barely able to eke out a Spartan existence from his artistic talent.

The influence of these early non-conformist artists has persisted down to the modern era.  But while the 20th century was dominated by the unfettered, iconoclast artist, I believe the pendulum of history is beginning to swing in the other direction.  We are starting to see a variation of the traditional artist-patron relationship reassert itself.

This is most evident on peer-to-peer e-commerce platforms like Etsy.  Etsy allows an aspiring artist to create a few works on spec to gauge potential interest, and then accept commissions from interested customers – really modern-day patrons – for custom work.  This arrangement allows artists to tap the much-needed funds of well-to-do art aficionados, while simultaneously providing collectors a degree of control over the type of art they receive.

The Cultural Advantage Enjoyed by British Antique Investors

The Cultural Advantage Enjoyed by British Antique Investors

The British people have had a love affair with antiques for centuries.  No 18th century Georgian landowner’s holdings were complete without a fine house in London and a sprawling country estate, both of which were invariably decorated with the finest antiques available.  In the late 19th and early 20th century, wealthy British industrials took up the mantle from their aristocratic predecessors, stuffing their palatial mansions with hundreds, if not thousands, of antiques.  Today, antique investing is a more egalitarian affair, having been adopted wholesale by the British middle class.

This effortless social acceptance of antiques and art as a legitimate investment class in the British Isles has serious financial ramifications.  It means that British investors are, on average, more willing to sink serious money into these alternative assets and take the leap to becoming British antique investors.  Although stocks and bonds still constitute the majority of British investment portfolios, antiques are by no means ignored.

This situation contrasts sharply with U.S. investor preference, where anything outside of vanilla equities or fixed income instruments is often viewed with deep suspicion.  Even relatively staid investments like real estate are often eschewed by American investors unless they come neatly pre-packaged in an easily tradable, equity-like ETF (exchange traded fund) or REIT (real estate investment trust) version.

But why is this so?  Why are British antique investors drawn to the old and precious with such ardor?  I believe there are powerful cultural reasons why British investors gravitate towards antiques.

First, unlike most other Anglosphere countries, Great Britain has a long and storied history that stretches back to ancient times.  England has been ruled by people as varied as the Celts, Romans, Anglo-Saxons and Normans.  And that list excludes the island’s most recent 900 years of history!  In comparison, nearly all other Anglosphere nations – the U.S., Canada, Australia and New Zealand – have histories that span no more than a few hundred years at most.

Naturally, it shouldn’t come as a surprise that antiques have been omnipresent in British high society since time immemorial.  This familiarity has permeated British society to the point that the average British person intuitively understands the advantage and disadvantages of antiques.

Do you need your money back in 2 years?  Then a bank CD is a better place for your hard earned cash.  But if you want to stash that cash for a couple decades or longer, antiques, with their zero coupon bond characteristics, are an ideal investment vehicle.  These subtleties are lost on most U.S. investors due to their lack of experience with antiques.

Another big reason British investors love antiques is because of their once dominant global empire.  From the late 18th century to the mid 20th century, the British Empire, with London at its heart, spanned the globe.  During this period, goods and commodities of every description, including antiques, fine art and antiquities, flooded into the imperial capital from the farthest reaches of the Empire.

Over time, British citizens became familiar with antiques and art from a plethora of different cultures, including exotic Indian jewelry, sensuous Chinese jade sculptures and ancient Egyptian artifacts, just to name a few.  Although the British Empire is no more, its far reaching trade network has left an indelible footprint on the British aesthetic palate.

Today, London’s position as a global financial hub has helped the antiques trade retain its prominent place in British Society.  Trillions of dollars of global capital flow through London every year looking for safe and lucrative investments.  And this financial clout, coupled with Britain’s cultural history, prompts many international art and antique investors to make their acquisitions there.

In fact, in 2016 Great Britain’s market share of the world’s antique and art trade was an impressive 24%, second only to the U.S.  This is a remarkable feat considering that British GDP only represents 3.5% of global GDP.

Right now high quality antiques represent one of the greatest bargains in the investment world.  And British antique investors are better positioned than almost any other people to reap these rich rewards.  Because of their history and culture, more British citizens either already own antiques in their investment portfolio or will be inclined to buy when the right opportunity comes along.  Of course, the British antique investors’ cultural advantage can become your advantage too.  All you need is an open mind and a willingness to learn.