John Exter was a famous 20th century American economist. His illustrious career included stints at MIT, the board of the U.S. Federal Reserve, and First National City Bank (which later became Citibank) as a senior VP. He was even the first governor of the Sri Lankan Central Bank in the early 1950s. To say John Exter had an impressive resume would be an understatement.
However, he is best remembered for creating Exter’s Pyramid, an inverted pyramid that roughly organized asset classes according to increasing risk and market size. His pyramid is inverted because in a normal, healthy economy a relatively small number of extremely safe assets (located at the narrow base of Exter’s pyramid) support a large number of risky ones (towards the wide top of the inverted pyramid). Exter chose to use gold as the foundation of his inverted Pyramid – a sensible choice given that the gold-based Bretton Woods monetary system was still intact during his tenure.
But John Exter didn’t just choose gold as the base of his pyramid because it was in vogue at the time. He was also an avowed hard money advocate. He was old enough to remember the days when the United States still had a circulating gold coinage. He was also old enough to have the wisdom to know that a “flexible” money supply – a flawed ideal pursued by global central bankers for most of the 20th century – would inevitably lead to heartache and economic ruin. Fortunately for John Exter, he died in 2006. So he was never forced to witness the hideous financial denouement wrought by the world’s incompetent central banks during the Great Financial Crisis of 2008-2009.
Today, almost 10 years after that terrible crisis, the investment and economics professions have lost whatever tenuous attachment to reality they might have once possessed. One of the top Google results for the term “Exter’s Pyramid” is an article from 2014 by an investment firm that is boldly titled “Exter’s Defunct Pyramid“. You can probably guess the content of the article from the title alone; it is not flattering. In any case, it accuses John Exter of being an ancient fuddy-duddy whose old-fashioned ideas about gold don’t apply to our streamlined, ultra-modern, super-perfect fiat currency system.
This way madness lies.
And I think our collective insanity is obvious to any truly impartial observer of our current capital markets. As far as I can tell, the United States specializes in manufacturing lottery tickets in the form of highly dubious companies listed on public exchanges that purport to do something vaguely technological. To paraphrase a common saying: financial stupidity – there’s an app for that!
Seriously, we have companies like Snap Inc. This firm specializes in making software for live vlogging, which is like blogging except with videos taken in real time so you can’t edit out mistakes. Snap hopes to make money by selling advertising that it must cannibalize from powerful internet giants like Google, Facebook and Amazon – either that or tear the last few advertising dollars from the rapidly dying print media industry. Oh, did I mention that Snap currently sports a market cap of $17 billion and has yet to earn a single penny? And with a business plan like that, I suspect it never will.
Unfortunately, I think that today’s stock market is a confidence game in the classic sense of the word. There are only con artists and marks. If you don’t know which one you are, it is probably the latter.
With these thoughts propelling me, I decided to update Exter’s Pyramid to reflect the realities of a very uncertain 21st century. Below, I have listed my interpretation of John Exter’s asset classes from least risky to most risky:
- Precious Metals
- Fine Art, Antiques & Gemstones
- Paper Money & Bank Deposits
- Government Debt
- Municipal Debt
- Corporate Debt
- Commercial Real Estate
- Stocks
- Derivatives & Securitized Debt
As you can see, I’ve replaced gold with the more general category “precious metals”. Precious metals, including gold, remain the most liquid of the safe assets available without a doubt. I’ve also inserted a new asset class in the number two position: fine art, antiques and gemstones. These undervalued tangible assets are all too often overlooked by an investment community that doesn’t understand them or have the specialized knowledge needed to evaluate them. The investment potential of fine art and antiques is, incidentally, what the Antique Sage website is all about.
Next I’ve placed the asset classes we traditionally think of as being safe. This includes physical cash, savings accounts and government bonds. These assets all have great liquidity, but could potentially suffer from currency devaluations driven by future financial crises.
After these come municipal and corporate debt on the risk scale. These asset classes can either be fairly safe or extremely risky, depending on a host of factors that most armchair investors are ill-equipped to judge. They have some elements of safety, but also many potential risks in the current environment.
The final asset classes in my interpretation of Exter’s Pyramid are commercial real estate, equities, derivatives and pretty much anything that has been securitized. These assets are all ticking time bombs. When they finally implode, the financial carnage will be devastating. Stay far away from these wealth destroyers.
To many financial professionals, Exter’s Pyramid is a historical footnote – a reflection of an obsolete monetary system that has no bearing on the present. But I believe differently. I think that Exter’s Pyramid is actually a window into our future – an economic warning of things yet to come. We would do well to heed the words of wise men who have come before us – men like John Exter.
