Story Stocks versus Alluring Antiques

Story Stocks versus Alluring Antiques

Thousands of years ago, small bands of humans used to sit around the campfire and exchange tales of bravery, passion and vengeance.  In some ways, humanity never outgrew those mythical accounts and ancient epic poems.  This is rarely more evident than when observing how investors in today’s equity markets flock to story stocks.

A story stock is a publicly traded company with a compelling narrative that explains why it is growing quickly.  The very best story stocks leverage this plot into capital market access, where they issue billions of dollars worth of stocks and bonds to fuel their corporate ambitions.  Right now Amazon, Netflix and Tesla are excellent examples of some of the most irresistible story stocks of our time.  But while the sizzle is always great with story stocks, oftentimes the steak is missing.

When people invest in equities, what they are really doing is buying future cash flows in the form of earnings and dividends.  Even though the narrative surrounding each individual story stock might be unique, the end product that all investors want – cold, hard cash – is actually a commodity.  Ultimately, it doesn’t matter whether an investor gets future stock market earnings from the latest and hottest technology company or from distinctly unsexy stocks in the trucking, mining or utility industry.  To any rational investor, a dollar’s worth of cash flows is a dollar’s worth of cash flows, regardless of where it originates.

What usually happens when investors get suckered into buying story stocks is that the fabled companies fail to live up to their own mythology.  This is especially the case during stock market bubbles, when investors’ greed-filled imaginations run wild.  Bubbles are exactly the time when story stocks are not only at their most seductive, but also at their most dangerous.

For example, during the original 1999 internet bubble there was a company called Juniper Networks.  This company was one of the classic story stocks of the era.  Its business centered on the production of networking hardware and software – critical tools used to power the early internet.  According to the prevailing zeitgeist of the time, the future belonged to these internet infrastructure companies.  And Wall Street enthusiastically agreed with this assessment.  Juniper Networks nearly tripled from its IPO price on its first day of trading and was often treated as one of a select group of “must own” stocks for any savvy, forward-looking investor.

Although the fantasy spun around the company was a good one, it wasn’t enough to keep this story stock afloat.  Juniper Networks’ stock price peaked at $232 on October 20, 2000.  Today, in January 2018, Juniper Networks stock trades at a meager $28 per share.  The company’s price-earnings ratio declined from a nosebleed 473 at its 2000 high, to a rather pedestrian 16.6 currently.  Investors who chose Juniper networks as one of their story stocks are still sitting on 87.9% losses to this day, 17 years later!

This is the omnipresent danger with story stocks.  The fantasy might be alluring, but at the end of the day, all investors really want is for their investments to spin off lots of cash.  And cash flows simply don’t care about the story.

Now I’m not opposed to a good tale.  After all, much of human identity and society is driven by myths, legends and sagas.  But as an investor, I think it is imperative to know when to embrace the narrative and when to demand cold, hard facts.  When dealing with the stock market, I very much lean toward facts rather than pleasant fictions.

However, there is one class of assets where history, anecdote and adventure are not just acceptable, but truly desirable.  I’m speaking, of course, about fine art and antiques.  These alternative assets have been pursued, hoarded and coveted by the wealthy and powerful for centuries.  And this is because they fulfill deep-seated psychological needs, including the need for a good story.

Edvard Munch’s famously unsettling painting, The Scream, is a good example of how a story can enhance a work of art, propelling it to the status of a cult classic.  According to Munch, his inspiration for painting this masterpiece was as follows:

“One evening I was walking along a path, the city was on one side and the fjord below. I felt tired and ill. I stopped and looked out over the fjord – the sun was setting, and the clouds turning blood red. I sensed a scream passing through nature; it seemed to me that I heard the scream. I painted this picture, painted the clouds as actual blood. The color shrieked. This became The Scream.”

That is powerful commentary!  It is easy to see how this description builds a compelling myth around The Scream, elevating the painting to a status that it probably wouldn’t hold otherwise.

Of course, it isn’t just priceless artworks that benefit from a good origin story.  Far more affordable art and antiques also become more interesting and desirable when their history, provenance and legends are known.

For instance, in 1954 between 200 and 300 gold Brazilian 12 guilder coins were restruck at the Sao Paulo Exposition Numismatic in commemoration of the city’s 400th anniversary.  The original coins are steeped in history, having been minted in 1645/46 in the Dutch-occupied, Brazilian port city of Recife.  At this time, the Dutch West India Company had seized a large portion of the Portuguese colony of Brazil for its sugarcane resources.  These beautiful gold coin restrikes deftly position the tumultuous history of 17 century Brazil and early-modern European colonialism against a mid 20th century Latin American backdrop.

It is a great story, and one that should be compelling to any coin collector or investor.  Yet, these pieces of Brazilian-Dutch numismatic history currently sell for ridiculously low prices right now – a mere $604 in this case.  And almost half of that price is attributable to the gold content of the coin!

However, I don’t expect this situation to persist forever.  Eventually this romantic tale will gain a wider audience.  And when it does, prices for Brazilian 12 guilder restrikes (and probably the originals as well) will inevitably rise.

I like stories.  But I think investors need to be very careful about investing in them.  There are some asset classes where stories make sense and others where they don’t.  There’s a reason you’ve never heard of the term “story bonds”; likewise, story stocks rarely make much sense for long-term investors.  All too often, those fabulous tales of perpetual and limitless future growth end up being disappointing mirages.

Happily, more narrative-oriented investors can always rely on fine art and antiques.  Their history and myth builds a foundation of desirability that appeals to even the most hard-nosed connoisseur.  Fine art and antiques are one of the few asset classes where a good tale is worth the price of admission!

 

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14K Gold Retro Lord Elgin Wristwatch with 559 Movement

14K Gold Retro Lord Elgin Wristwatch with 559 Movement
Photo Credit: Continental-Coin-and-Jewelry

14K Gold Retro Lord Elgin Wristwatch with 559 Movement

Buy It Now Price: $719.99 (price as of 2018; item no longer available)

Pros:

-Here is a marvelous example of a retro Lord Elgin wristwatch featuring a solid 14 karat gold case and a 21-jewel, adjusted 559 movement.

-This retro Lord Elgin wristwatch measures 26 mm (1.02 inches) wide (including the crown) and 31 mm (1.22 inches) long (including the lugs).  Many older wristwatches are smaller than modern watches, so first time buyers should take note.

-The Elgin National Watch Company only branded their best men’s watches with the Lord Elgin nameplate.  Similarly high quality women’s wristwatches were sold under the Lady Elgin name.

-The Elgin grade 559 was a high quality, manual-wind movement that was produced from 1941 to 1947.  It was adjusted in 4 different positions to reduce timing errors.  According to the Pocket Watch Database website, this particular Elgin 559 movement was probably made in 1947.

-The Mid-Century styling of this retro Lord Elgin wristwatch, with its sleek tonneau (barrel-shaped) case, curved crystal and champagne-colored enamel dial, is truly exceptional.  This late 1940s wristwatch has phenomenal zeitgeist, an important factor when choosing to invest in a high value antique.

-Vintage mechanical wristwatches from the major American manufacturers of the 20th century – Elgin, Waltham, Hamilton, Gruen and Bulova – are significantly undervalued in the market due to today’s irrational obsession with European watch companies.  I feel that this mispricing will eventually be corrected – most likely via increased prices for vintage American watches.

-Shockingly, this retro Lord Elgin wristwatch comes with its original red plastic case and accompanying documentation!  It is always a pleasure to be able to find a vintage item from the 1940s with its original case.  This modestly increases the desirability and investment potential of the watch.

-The seller, Continental Coin and Jewelry, is giving the buyer of this choice retro Lord Elgin wristwatch a one year warranty.  In light of this fact, and the wonderful quality of this timepiece, I think the $720 asking price is fair.

 

Cons:

-This retro Lord Elgin wristwatch could be cheaper.  It is possible to purchase other vintage Lord Elgin watches with solid karat gold cases in the $400 to $600 range.  However, almost all of these lower-priced watches will need to be serviced at a minimum, if not fully restored.  This will generally drive the total price up by somewhere between $100 and $300.  Fully serviced Lord Elgin wristwatches in good condition – like this example – realistically start at around $600.

 

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U.S. Savings Bonds – A Disquieting History

U.S. Savings Bonds - A Disquieting History

U.S. savings bonds have been a time-honored method of accumulating wealth for middle class families.  They are simple to buy and redeem and are also backed by the full faith and credit of the U.S. government.  But these hallowed financial instruments have slowly evolved over the years, and, unfortunately, most of it hasn’t been for the better.

It might seem like an absurd suggestion, but U.S. savings bonds have a dirty, secret history.  For the past 15 years, the U.S. Treasury has been systematically degrading the attractiveness of these traditional financial vehicles.  As a result, it is very difficult to recommend them as anything other than a cash-substitute in certain niche financial situations.  If you really want to make money, or even just preserve your purchasing power, you will need to redeem your savings bonds and roll the proceeds into better investments.

Let’s start at the beginning.  The history of U.S. savings bonds stretches back to the Great Depression.  In 1935, President Franklin D. Roosevelt approved a law that allowed the U.S. Treasury to issue small denomination government bonds, sometimes called “baby bonds”, directly to the American public.  The government paid a very generous (for the Depression years) 2.9% interest rate on these initial notes.

The U.S. savings bond program remained relatively small until World War II, when the federal government’s financing needs skyrocketed.  As a result, the popular Series E bonds were introduced in 1941.  These fixed rate financial instruments were purchased and held by millions of households during and after the War.  From the 1940s until the 1970s, savings bonds almost always paid an interest rate that was comfortably higher than inflation.

In 1980, Series E notes were phased out and replaced by Series EE bonds.  Series EE savings bonds, which are still being issued today, earn either a fixed or variable rate of interest, depending on their issue date.  They pay no interest outright, but instead accrue interest like a zero-coupon bond.  Series EE savings bonds were traditionally sold for half of their face value, with a $100 bond selling for $50.  They are guaranteed to accrue to face value by the end of their original maturity, which is currently 20 years from the date of issue.

The other type of U.S. savings bond currently being issued is the Series I bond, also known as I-bonds.  The interest rate for these notes is based on the inflation rate as measured by the CPI (Consumer Price Index) plus a fixed “real” (after-inflation) interest rate.  Series I bonds were first issued in 1998 and, like Series EE bonds, accrue and compound interest until redemption.

 

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Now this is where things get interesting.  In 2003 the minimum holding period for both EE and I-bonds was increased from a reasonable 6 months to a rather unreasonable 12 months.  The U.S. Treasury supposedly changed this rule to prevent retirees, children, the frugal and other unrepentant savers from arbitraging the interest rate differential between savings bonds and short-term debt instruments!  As the U.S Treasury arrogantly stated, “Savings Bonds are designed to be a long-term savings vehicle.”  Just to drive home its point, the U.S. government also penalizes you three months worth of interest on any savings bond you redeem that is less than 5 years old.

And while the U.S. Treasury claimed that savings bonds are for the long-haul, their actions indicated otherwise.  From 1997 to 2005, Series EE savings bonds earned only 90% of the prevailing 5 year U.S. Treasury note’s interest rate.  It’s a very raw deal to give your valued “long-term” savers a subpar 90% of the lower interest rate 5-year bond, when the U.S. government could have easily paid 100% of the higher interest rate 20 or 30-year Treasury bond!  Unfortunately, this was a portent of worse things to come for long-suffering savings bond investors.

Then we fast forward to 2005, when the Treasury changed the terms on EE bonds from the old, floating rate model to a new, fixed rate one.  At first, this new fixed rate was effectively identical to the old floating rate (90% of the 5-year treasury).  Fair enough.  But the Treasury Department couldn’t resist the urge to turn the screws on small savers.

 

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By spring 2006 the EE series was only offering 74% of the going 5-year treasury rate.  By May 2010 that number had fallen to 57%.  Another 4 years later, in May of 2014, it was a pitiful 30%.  At the latest rate-reset in November 2017, the Series EE savings bond paid an almost non-existent 0.10%, or $10 per annum for every $10,000 invested, fixed for the life of the note.  This translates into an insulting 5% of the then-current 5-year Treasury bond rate!

Savers hoping for better treatment with I-bonds were also sorely disappointed. Immediately after their introduction in the late 1990s, Series I savings bonds were very competitive, with the real rate hovering between 3.3% and 3.6%.  But after the 2000 tech bubble burst, the U.S. Treasury decided it was time for the little saver to pay his “fair share”.

Real interest rates on I-bonds crashed during 2001 and 2002, declining from 3.4% at the beginning of that period to 1.6% by the end.  Real rates then bounced around the 1.0% to 1.5% level until the Great Financial Crisis of 2008.

At this point, the federal government decided that I-bond holders didn’t deserve to earn any interest on their savings at all.  After all, the Feds had to pay for all those bank bailouts somehow!  Real rates quickly plummeted to the 0.0% to 0.2% range where they have remained ever since.  That’s right.  As of November 2017, Series I savings bonds currently pay a measly 0.1% as their real rate of return.

 

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As an added insult, the U.S. Treasury discontinued issuing Series HH bonds in 2004.  These now defunct savings bonds allowed existing Series EE and I bond holders a tax-free exchange option once their notes had reached final maturity.  Series HH bonds did not accrue interest like other savings bonds, but instead paid it out directly to note holders on a semi-annual basis.  This way, loyal, long-time savings bond owners could defer Federal income taxes while also receiving interest payments via physical check or direct deposit.

But I believe the real death knell for U.S. savings bonds came in 2012, when the U.S. government discontinued issuing paper savings bonds.  Over the decades, countless savings bonds had been gifted at holidays, graduations, weddings and birthday parties.  By switching over to an electronic only distribution model, the Federal government destroyed the utility of savings bonds as gifts or savings vehicles for children.  Yes, the U.S. Treasury provides optional, print-it-yourself gift certificates, but these are a laughably poor substitute for the tactile and visual enjoyment provided by an official savings bond certificate.

If you care to look at the historical record, it is pretty obvious what is going on here – financial repression.  The government doesn’t want you, or anyone else, to save.  Instead they want to force you to recapitalize the nation’s financial system by giving you no alternative to low-interest bank accounts.  Or, if you’re inclined, the Federal Reserve is also happy for you to speculate with your life savings in the stock market casino.  Either way, the U.S. government wins and you lose.

Of course, you can always refuse to play their game.  That’s why I recommend you buy hard assets – things like fine art, antiques, precious metals and gemstones.  Savings bonds don’t represent the safe, lucrative investments they once did.  It’s time to redeem your savings bonds and convert them into tangible assets that will actually preserve your wealth.

 

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How Much Gold Does the Average U.S. Household Own?

How Much Gold Does the Average U.S. Household Own?

How much gold does the average U.S. household own?  It is a deceptively simple question that has a very complicated answer.  For one thing, there are no reliable statistics surrounding private gold ownership in the U.S.  And people certainly aren’t going to willingly volunteer this very personal information either.  However, I believe this question will become increasingly important as our global monetary system is inevitably reordered in the decades to come.

Before we make an attempt to answer this question of private American gold ownership, let’s talk for a moment about the official U.S. government gold reserves.  According to the U.S. Treasury Department, the United States currently holds over 8,133 metric tonnes, or 261,498,926 troy ounces, of fine gold at secure facilities around the nation.  Over 50% of this stash, approximately 4,583 metric tonnes, is stored at the world famous United States Bullion Depository at Fort Knox, Kentucky, where it is guarded by an active U.S. Army camp.

If these official U.S. gold reserves were distributed evenly across the estimated 125.8 million American households, it would total about 2.08 troy ounces (64.7 grams) of gold per household.  Of course, this analysis ignores the rumors that have persistently circulated for many decades that some (or even most) of these official U.S. gold reserves have been leased or sold without public knowledge.  These rumors have been stoked, in part, because the U.S. gold reserves at Fort Knox have not been audited since 1953.

Regardless, these really aren’t the numbers we’re looking for.  Instead, we want the average private gold ownership per U.S. household.  Or, more specifically, we want the median level of gold ownership per U.S. household.

Conspiracy theories about Fort Knox aside, it is obvious that official government statistics are not going to provide us the information we want in regard to average private U.S. household gold ownership.  So I am going to try a different approach here.  I am going to use my experience with gold scrapping and cleaning out elderly relatives’ homes to make an educated guesstimate about the amount of gold owned by the average U.S. household.

In order to attempt to derive a more meaningful number, I am going to explicitly exclude very wealthy households from my estimate.  This demographic is much more likely to own an abnormally large amount of very expensive gold jewelry and gold coins.  I will also ignore precious metal stackers and gold-bugs in this analysis; these people will obviously have more gold than the average middle class household.  In addition, I will exclude extremely poor households that are likely to possess no precious metals at all, other than perhaps a pair of wedding bands.

 

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The primary source of U.S. household gold is undoubtedly held in the form of solid karat gold jewelry.  Most solid karat gold jewelry ranges from 9 karat gold (37.5% fine) up to 18 karat gold (75% fine).  However, most people own a lot less solid karat gold jewelry than you might think.

Most karat gold jewelry is very lightweight; hollow pieces are not uncommon.  This is done to keep the weight, and therefore the cost, of the gold jewelry down.  So, for example, your average solid karat gold women’s ring or wedding band might only weigh between 2 and 5 grams, and contain 1/40 to 1/8 of a troy ounce of fine gold.  As you can see, it takes quite a bit of solid karat gold jewelry before you can even accumulate one troy ounce of pure gold.

It is far more common to encounter costume jewelry in the average U.S. household, which I loosely define as gold-filled and gold-plated jewelry.  Gold-filled jewelry has a thick layer of karat gold that is mechanically fused to a copper-alloy base.  In contrast, gold-plated jewelry is made by electro-depositing a very thin layer of gold directly onto base-metal.

Gold-filled jewelry can often be economically recycled for its gold content, provided it is judiciously mixed with solid karat gold jewelry before being sent to the refinery.  However, gold-filled jewelry’s fine gold content by weight is between 2.1% and 7.5% – substantially less than even the lowest solid carat gold alloys.  Because it is so diluted, it takes a huge amount of gold-filled jewelry to accumulate a significant amount of pure gold.

Gold-plated jewelry is even worse.  The thickness of gold electro-plate is typically measured in microns, or 1/1000s of a millimeter.  Most gold-plating on jewelry is between 0.1 and 5 microns in thickness.  As a result, electro-plated gold jewelry is impossible to economically recycle, rendering it, to the best of my knowledge, the leading cause of permanent gold loss in the world today.

Another major source of gold found in the average U.S. household is gold coins.  These are fairly uncommon, but some people have a random gold coin or two tucked away, even if they aren’t collectors.  These coins usually come in two forms: old circulated gold coins and modern bullion coins.

The first type of gold coin commonly seen in American households is pre-1933 semi-numismatic U.S. gold coins.  These were issued by the U.S. government before 1933, when the United States was still on the gold standard.  These coins come in denominations from the diminutive $1 gold piece to the gigantic $20 double eagle.  Although these coins were fully exchangeable with paper currency before the Great Depression, they tended to see little circulation because they represented such large sums of purchasing power.  Apart from collectors, most households that have these coins today inherited them.

Modern gold bullion coins are another type of gold coin frequently encountered.  The Canadian, U.S., Mexican, Australian and British mints (among others) began producing these coins in the 1980s.  The smaller fractional sizes – 1/4, 1/10 and 1/20 troy ounce coins – have been popular gifts for graduations, holidays and birthdays.  As a result, even average people with no interest in gold bullion have sometimes accumulated one or two of these coins.

 

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The final type of gold commonly found in households is rather unexpected – electronics scrap.  Many people don’t realize it, but gold is a vital component in almost every high-tech gadget out there!  In particular, heavily gold-plated contacts are used in CPUs, RAM sticks and other vital electrical contact points where corrosion resistance is a necessity.  Cell phones, desktop and laptop computers, tablets and set-top TV boxes are just some of the electronics that contain gold.

Of course, the only problem is that electronics don’t contain very much gold at all.  As the price of gold has steadily risen over the last 15 years, hardware manufacturers have gone to great lengths to reduce the amount of gold used in electronics.  This makes recovering the gold from computer scrap very difficult.  In spite of this, there is a thriving market for electronics scrap on platforms like eBay.  The average U.S. household has, in aggregate, only a few hundredths of a gram of gold stored in electronic equipment and computers.

So now it is time for the big reveal.  How much gold does the average U.S. household own?  In my opinion, a good guess is between 1/3 and 1 troy ounces (10 to 31 grams) of pure gold, plus or minus.  Almost all of this gold will be in the form of solid karat gold jewelry and gold coins, with a smattering from gold-filled jewelry and electronics scrap.  With gold currently trading at $1,800 per troy ounce, this translates into anywhere from $600 to $1,800 worth of gold, give or take, per household.

There are a few conclusions we can draw from our estimate of average U.S. household gold ownership.  First, it is safe to assume that these private gold holdings do not represent a significant addition to most peoples’ net worth.  Second, we can infer that the silver holdings of most American households are also proportionately low; applying a traditional 15x multiplier to gold holdings probably gives a reasonable estimate of household silver holdings.  Third, we can presume that the median U.S. household value of all other tangible assets, like gemstones, antiques and fine art, is also rather small.

These are important findings.  A massive dislocation is coming in the paper asset markets, where most Americans currently have the bulk of their (non house) net worth.  Hard assets, like precious metals, gemstones, fine art and antiques, can serve as a buffer during this future period of financial chaos.  But it doesn’t work if you don’t own any.  Invest accordingly.

 

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