The History and Romance of World War I Trench Watches

The History and Romance of World War I Trench Watches
Photo Credit: slake25
This beautiful World War I trench watch has a sterling silver case with import hallmarks from the London Assay office (circa 1918) and a 15-jewel Longines movement.  The dial bears the mark of the retailer – J.C. Vickery of London – instead of the watch manufacturer, which was common for the time.

Our story about trench watches begins, oddly enough, back in the mid-1990s when I was still in high school.  Unlike most high school students of my time (or any time for that matter), I loved antiques.  Happily, my grandmother also loved antiques.  So we would often take Saturday expeditions together to the nearest flea market, antique store or junk shop in search of that next great vintage treasure.

One weekend, my grandmother and I visited an antique shop that we both enjoyed frequenting – Three Sisters and Me.  Now long defunct, at the time this antique store was an eclectic mix of country primitives, odd Victorian pieces and vintage kitchenware.  My grandmother and I loved digging through the shop’s nooks and crannies, picking up whatever struck our fancy.

While browsing through its dusty shelves, I came across a plastic Ziploc grab-bag of vintage jewelry with a $5 price tag.  Now most of the items in this lot were costume jewelry or cheap trinkets – exactly what you’d expect for something priced at only a few dollars.  But I saw enough sterling silver items in the grab-bag to pique my interest.  If nothing else, I would be able to scrap the contents and make myself a small profit.

So with my grandmother’s encouragement, I laid down a five dollar bill on the shop counter and became the happy new owner of an odd, if not intriguing bag of junk jewelry.  It was only later on when I was back at my grandmother’s house that I discovered the secret treasure that bag held.

As I dug through my newfound entertainment for the afternoon, I saw it – a World War I era Waltham trench watch.  It featured a sterling silver “Admiral Benson” cushion-shaped case with wire lugs and an onion-style, fluted winding crown.  Despite not keeping time, the watch’s 15-jewel, manual-wind Waltham movement was still a miniature work of art.  The white enamel military dial, although cracked with age, still retained its original skeleton hands – complete with traces of radium lume!  The 6 o’clock sub-seconds and red 12 o’clock marker enhanced the dial’s bold, yet elegant Arabic numerals.  You simply knew that this piece, like so many other trench watches of its era, had been the prized possession of some unnamed Allied soldier on the Western Front.

Unfortunately, this story has a sad ending.  Due to my own ignorance and the folly of youth, I chose to scrap this amazing trench watch for its silver content.  After I carefully inspected the piece, I came to the determination that the watch’s defects were too great to justify the expense of a full restoration.  Its crystal was missing.  The case lugs were slightly bent.  The movement was both rusty and non-functional.  And the enamel dial had significant damage.

I have regretted that decision for the last 25 years of my life.  And I will probably regret it for the next 25 years, as well.

My remorse isn’t due to any financial loss incurred, although that is part of my cautionary tale.  If fully restored (at the cost of perhaps a few hundred dollars), I estimate that my $5 trench watch would be worth between $500 and $1,000 today.  No, I regret it because my poor decision represents the loss of yet another irreplaceable piece of World War I horological history.

 

Antique World War I Era Trench Watches for Sale on eBay

(This is an affiliate link for which I may be compensated)

 

Although made by the millions for the greatest war the world had ever known up until that point, trench watches are incredibly rare today.  Untold numbers were lost or blown up on the battlefield, thrown out when fashions changed or allowed to rust away over the course of the last 100 years.  As proof, a search for the term “trench watch” on the popular online watch site Chrono24 returns just 33 results out of over 474,000 watches for sale in total!

Frankly speaking, it is a wonder that any of these historically important World War I artifacts have survived intact for today’s vintage watch connoisseurs to enjoy.  But before I speak further about the details of trench watches, a short history lesson is in order.

 

The Great War

At the opening of the conflict in August 1914, the British diplomat Sir Edward Grey famously remarked that “The lamps are going out all over Europe; we shall not see them lit again in our lifetime.”  And in their place sprang up the bonfires of war, with all its accompanying horrors: disease, famine and deprivation.

The war split the great European powers into two opposing factions.  On one side was the Entente (also known as the Allied Powers) – Great Britain, France, Russia and, later in the war, Italy and the United States.  On the other side stood the Central Powers – Germany, Austria-Hungary and the Ottoman Empire.  Millions of young men from these countries (and many other smaller belligerents) dutifully marched off to war when called to serve.

But the realities of modern warfare circa 1914 were quite different than anyone had expected.  Military men and politicians on all sides had almost universally predicted a short, glorious war dominated by the Napoleonic cavalry charges of the early 19th century.  However, the invention of the machine gun in the late 19th century had largely invalidated traditional military tactics when no one was looking.

As a result, World War I quickly devolved from dynamic cavalry battles to static trench warfare.  Conditions were almost unbearably awful for all participants.  Soldiers lived in a maze of zig-zagging trench systems intended to provide interlocking fields of fire while also minimizing the concussive force and shrapnel damage from the inevitable lucky artillery round.  Mud, often ankle-deep and ice cold, was an omnipresent problem in these trenches – so much so that the malady known as “trench-foot” quickly entered the popular lexicon of the day.

 

No Man's Land - Flanders Field - Final

The worst part of the war for the average infantryman wasn’t the trenches, as horrid as those could be.  No, it was the death that awaited them outside the trenches when they were ordered “over the top” for a mass charge into the enemy’s waiting machine guns.  In between the two opposing trench systems lay “no man’s land” – a cratered, treeless moonscape filled with barbed wire that could easily be raked by enemy machine gun fire or bombarded with artillery shells.  Snipers, hand grenades and (later in the war) poison gas rounded out the omnipresent dangers on a World War I battlefield.

In spite of these travails most soldiers performed admirably, bravely charging into no man’s land on the orders of their commanding officers.  A common saying at the time about the British army was that it was “lions led by donkeys”.  This refers to how the British generals, like Douglas “Butcher” Haig, repeatedly ordered bloody charges across no man’s land, unmoved by their apparent futility.

 

Every Second Counted on the World War I Battlefield

In this grim new world of trench warfare, timing was paramount.  A handful of seconds might be the only thing separating a soldier from life – and a jubilant homecoming – and death – just another corpse on the battlefield.

For example, if a commander ordered his unit over the top a mere 15 or 20 seconds too early during an infantry assault, the outcome was often total annihilation for the unfortunate group.  Enemy machine gunners would naturally target any isolated unit out in no man’s land and wipe it out.

Seconds also counted for a new artillery strategy introduced during World War I called the creeping barrage.  In this new tactic, a volley of artillery fire was laid down on enemy position.  But instead of being static like artillery fire was early in the war, the creeping barrage methodically “walked” the rounds through no man’s land, then through the enemy’s perimeter defenses before finishing deep in the enemy trench system.

In order for the creeping barrage to be effective, friendly infantry forces had to charge just behind the incoming shells.  This meant that they would arrive at the first line of enemy trenches just as the barrage “walked” further into the enemy lines.  By using this technique, infantry soldiers could (in theory) avoid the murderous volley of machine gun fire that normally cut units to ribbons in no man’s land.

But in order to work, the timing of the creeping barrage had to be absolutely perfect.  If you charged out of your own trench line too soon, you would be torn to shreds by your own artillery fire.  If you waited too long, the enemy infantry that had taken cover during the artillery salvo would have time to come out of their bunkers and man their machine guns nests while you were still traversing no man’s land.

And of course, it wasn’t just the common infantryman who needed to know the time down to the second either.  Everyone from staff officers to pilots were dependant on a reliable watch in order to be able to coordinate the tremendous complexities of a modern war waged on an unprecedented, global scale.

So for a military man during World War I, a good watch was an absolute necessity.  But the old style pocket watches that had dominated fashion up until 1914 were ill-adapted to the demands of this new type of warfare.  A pocket watch required two hands to operate efficiently.  Removing the watch from a pocket occupied one hand, while opening the watch face (if it was a hunter case), winding it, or resetting the time used a second hand.  This situation was unacceptable to fighting men who not only needed to be able to reference the time quickly and easily, but also needed to have their rifles in hand at all times.

 

The Advent of the “Wristlet”

The natural solution to this problem was the wristwatch, or wristlet as it was often called at the time.  Now, wristwatches weren’t invented during World War I.  They had already existed for a number of years, albeit as a relatively uncommon style of timepiece with effeminate connotations.  In other words, wristwatches were widely considered to be a woman’s watch prior to 1914.

World War I trench watches both masculinized and perfected their predecessor wristlets.  Initially, the trench watch took the form of a conventional pocket watch with wire lugs attached at the 6 and 12 o’clock positions (or, alternatively, the 3 and 9 o’clock positions) to allow for the attachment of a leather strap.  This facilitated wearing the watch on the wrist – hence the name wristlet.

But watch manufacturers soon found that certain modifications were needed in order to get the most out of this radical new watch design.  One of the first changes was the relocation of the winding crown from the 12 o’clock position (where it resides on most pocket watches) to 3 o’clock, where it remains to this day on nearly all wristwatches.

The addition of radium lume to the watch hands and numerals on the watch face also proved to be indispensable.  Radium is a naturally radioactive element which, when combined with zinc sulfide, produces a glowing, phosphorescent material that could be applied like paint.  Radium lume enhanced trench watches were a boon on the battlefield, where it was common for soldiers to need to precisely know the time in preparation for night actions.

As an added bonus, although the glow from a radium lume dial was easy to make out for the watch’s owner, it was much too faint to be visible to enemy snipers hundreds of yards away.  This was in stark contrast to lit matches, which gave away the position of many an unfortunate soldier during the war.

Trench watches also had to overcome the rough realities of battlefield conditions.  Dust, mud and water were omnipresent hazards in trench warfare.  As a result, many watch manufacturers dedicated substantial resources to making their trench watches as dust-proof and moisture-resistant as possible.  They soon discovered that screw-back cases were generally superior to hinged-back or snap-back cases in terms of water and dust resistance.  However, plenty of hinged-back and snap-back trench watches were manufactured during the Great War due to their reduced complexity and lower cost.

Borgel Screw-Back Case Exploded

One of the best known and most highly prized of the World War I era, water-resistant trench watch cases is the Borgel case.  First patented by François Borgel in Geneva, Switzerland in 1891, the Borgel case was a screw-back case design that proved to be ideally suited to the rigors of trench warfare.

It should be noted, however, that although Borgel screw-back cases were relatively water-resistant by early 20th century standards, they are not water-proof by modern standards.  Please don’t wear your 100 year old trench watch in the pool, shower or Jacuzzi, as you are likely to ruin a wonderful timepiece!  True water-proof watches didn’t come into existence until the creation of the legendary Rolex Oyster in 1926.

Another issue that trench watches had to overcome was the propensity of their glass crystals to shatter.  This was especially problematic due to the ubiquity of artillery salvos on the battlefield.  Exploding shells would not only send primary shrapnel in all directions, but could also spawn secondary shrapnel – fragments of wood, steel or even bone dislodged from anything sitting close to the initial explosion.  Secondary shrapnel had a lower velocity than primary shrapnel and was, therefore, less likely to cause mortal wounds.  But it could still easily break the glass crystal on a soldier’s trench watch, rendering it inoperable at a critical moment.

Watch manufacturers solved this problem in two ways.  First, they equipped traditional mineral glass crystal watches with shrapnel guards – a cut-out metal grille that protected the watch face while still allowing the user to tell the time.  With their battlefield connotations and iconic styling, trench watches with shrapnel guards are cherished by both militaria collectors and military watch aficionados alike.

The second way that watchmakers improved the survivability of trench watches was through the development of the so-called “unbreakable crystal”.  These were watch crystals made from clear celluloid plastic instead of the normal mineral glass.  Contrary to the name, unbreakable crystals weren’t truly shatter-proof – just much more robust than mineral glass.

Celluloid, the world’s first thermoplastic, was originally commercialized in the 1860s and 1870s.  However, this wonder-material wasn’t patented for use in watch crystals until 1915, coming to market one year later in 1916.  Unfortunately, celluloid is unstable over long periods of time, with a tendency to yellow and warp.  Therefore, as a rule, surviving trench watches don’t retain their original unbreakable celluloid crystals.

 

Trench Watches for the Troops

Trench watches were in huge demand throughout the duration of World War I.  Millions of troops on all sides of the conflict desperately wanted – no, needed – to have a wristwatch in order to be better soldiers.  But with the exception of select signal corps members, wristwatches were not issued as standard military kit – a soldier was expected to buy his own.

Trench Watch Advertisement 1

The problem was that a good trench watch was expensive!  Period advertisements show that the lowest price a British soldier could realistically hope to pay for a wristwatch was somewhere around £2.  Better quality timepieces with more features often retailed for between £4 and £5.  If you wanted something truly extravagant, like a solid karat gold case, you could expect the price to be even higher.

To put these sums in perspective, the average British infantry private received a meager salary of 1 shilling a day during the Great War – only £1.5 per month.  So a trench watch was beyond the reach of most enlisted men.

British officers, on the other hand, were much better paid than their subordinates.  A British infantry lieutenant could expect to draw a princely salary of 8 shillings, 6 pence a day, or £12.75 per month – more than 8 times what a private earned!  So the officer corps – lieutenants, captains, majors and colonels – constituted the main source of demand for trench watches during the conflict.

This didn’t stop average enlisted men from coveting trench watches, though.  Some members of the lower ranks received wristwatches as gifts from friends or family, while others scrimped and saved in order to be able to afford one.  A considerable number of trench watches were also “liberated” from captured enemy soldiers or even looted from corpses strewn about the battlefield.  A wristwatch might also be gambled or bartered away during the exigencies of war.

 

Trench Watch Characteristics

Trench watches were produced by every major watch company of the time and probably all of the minor ones too.  Established Swiss and American firms had the highest production volumes, with other makers contributing smaller numbers.  Some of the brands commonly seen among antique trench watches include modern-day heavyweights like Omega, Rolex and Longines.  The primary American makers were Waltham, Elgin and Illinois.  Other notable manufacturers were Zenith and Cyma.

Because wristwatches were just emerging prior to World War I, watchmakers of the time didn’t use special, wristwatch-specific movements for trench watches.  Instead, they adapted existing pocket watch movements and simply implanted them into wristwatch cases.

Trench Watch Advertisement 2

These movements were usually smaller, women’s-sized pocket watch movements (such as 3/0s, 0s and 6s) out of necessity.  However, larger movements housed in over-sized cases (generally between 36 and 39 mm in diameter) were occasionally used.  15 or 17 jeweled movements were common in higher quality trench watches, while cheaper, more pedestrian examples would typically employ lower-jewel movements.  Seconds functionality was also highly prized in a military-grade trench watch – usually sub-seconds at the 6 o’clock position.

Trench watch cases were generally made from the same materials as pocket watches of the time.  An expensive solid karat gold watch might grace the wrist of a senior officer, while gold-filled or sterling silver examples would be more common among junior officers.  Steel or nickel-alloy base metal cases were also produced for soldiers looking for the cheapest, most utilitarian option available.

Trench watches almost always had either black or white enamel dials, or some combination of the two.  White enamel dials, in particular, were ubiquitous, often with radium outlined or enhanced hour markers and/or numerals.  This allowed maximum contrast between the numerals and the background, which was vital to easily telling the time during the chaos of combat.

While both Roman and Arabic numeral dials can be found on trench watches, the latter tend to dominate.  This is because Arabic numerals are easier to read at a glance under difficult conditions, with little possibility of confusion.  In addition, some watch manufacturers highlighted or outlined the 12 o’clock number (regardless of whether it was Roman or Arabic) in red to help soldiers remained oriented.

 

Trench Watches After the Guns Fell Silent

At the end of World War I in November 1918, blessed peace came once again to Europe.  Workers returned to their factories.  Farmers returned to their land.  And soldiers returned to their wives.  But the world of watches had changed forever.

Old style pocket watches, which had dominated timekeeping for more than a century, looked hopelessly outdated beside the sleek new trench watches.  Wristwatches, with their convenience and forward-looking design language, were in vogue.  And pocket watches, with their ponderous sizes and large movements, were out.  Pocket watch sales declined dramatically throughout the 1920s and 1930s, finally tapering off more or less completely in the 1940s.

The wristwatch was ascendant, albeit demilitarized and reimagined for the Roaring 1920s – a decade of unparalleled wealth, fashion and glamour.  But due to massive over-production during the war years, retailers continued to sell World War I trench watches from old inventory well into the 1920s and even up to the early 1930s.

 

Post Script

A few years before her death at the age of 95, my beloved grandmother, who had been by my side during so many antiquing adventures, confided in me about her very earliest childhood memory.  On November 11, 1918, she distinctly recalled marching around outside her family home banging her mother’s pots and pans together to celebrate the end of World War I.  It was the first Armistice Day and my grandmother was 5 years old.

May she forever fly with the angels, along with all those lost to us in the Great War.

 

Read more in-depth Antique Sage vintage watch investment guides here.

 


Antiques Are the Anti-Bubble Asset Class

Antiques Are the Anti-Bubble Asset Class

One theme that keeps smacking me in the face again and again over the past few years is just how pervasive our current Everything Bubble is.  It has worked its tentacles into almost every conventional asset class in the market today.  They are all overvalued to some degree, with the worst offenders – the WeWorks, Ubers and Netflixs of the world – totally reliant upon a perpetual stream of fresh investment dollars from zero-interest rate crazed mouse-jockeys in order to continue operating.

So I was intrigued when I read an article on the popular financial commentary site Zero Hedge that introduced me to the concept of anti-bubble assets.  According to this theory, every financial bubble throughout history has also produced an anti-bubble – a boring, cheap asset class that is neglected in the rush for everyone to be part of the historic investing “new paradigm”.

I’ll quote Kevin Duffy, co-founder of the Bearing Asset Management hedge fund and originator of the anti-bubble thesis:

“One of the things we know from past bubbles is that you often get anti-bubbles. This was clearly the case in the year 2000 when you had the new economy bubble on one side, and the old economy anti-bubble on the other side. When tech stocks peaked in March of 2000, a lot of the value stocks bottomed at the same time.”

I can absolutely attest to the validity of this idea, because I experienced it firsthand.  In late 1999/early 2000, I was fresh out of college and new to the financial industry.  When I looked at the markets, it didn’t make any sense to me that Webvan (a money-losing online grocery delivery service) was trading at a market cap of over $1 billion while the staid tobacco firm of Philip Morris was trading at a lowly P/E of 5 and a fat dividend yield of over 8%!

I drooled over the concept of purchasing Philip Morris for the juicy dividend yield, but alas, it was not to be.  Being straight out of college, I did not have two dimes to rub together and nobody was going to loan money to a penniless 22-year old so he could speculate in the stock market.  As you can probably guess, Philip Morris went on to make its shareholders as rich as Nazis while Webvan went bankrupt in 2001.

But this ordeal underscored to me just how hopelessly irrational markets can become in extreme bubble environments.  And our current bubble is no exception.

Today’s Everything Bubble makes the late 1990s dotcom bubble refugees look like chump change in comparison.  Right now Tesla has an improbably large $151 billion market cap.  Netflix sports an eye-watering total valuation of $188 billion.  And Uber, even after being mercilessly punished by the stock market for being a piece of hot garbage, still retains an astounding $60 billion market cap.  Webvan – the biggest failed IPO of the dotcom era – has nothing on our current crop of bubble darlings.

So now that we know where the bubble is, the real question is where is the anti-bubble?  What asset class or classes will allow us to safely double or triple our money over the next 5 to 10 years?

And while there can ultimately be no assurances about future investment returns (as the famous 1930s economist John Maynard Keynes once observed, the market can remain irrational longer than you can remain liquid), buying anti-bubble assets certainly stacks the proverbial deck in our favor.

According to Kevin Duffy, precious metals, short-selling stocks, retailers (Ed. note: in light of the Covid-19 pandemic, going long retailers seems like a busted thesis) and active investing are the mirror images of today’s Everything Bubble.  These are the asset classes/ideas that simply don’t get the time of day from otherwise intelligent, rational investors.

Although I’m not going to take issue with Mr. Duffy’s largely accurate assessment of our broken markets, I would like to extend the definition of anti-bubble assets slightly.  I believe that in addition to gold and silver bullion, antiques, gemstones and fine art have also been wholesale abandoned in the rush to find the next Lyft, Beyond Meat or SpaceX.

Antiques, art and other hard assets are definitely perceived as boring has-beens at this point in the economic cycle.  But I like boring.  The perception that an asset is boring is what allows us to buy it for an obscenely low price.  Boring is what produces outsized investment returns over the course of a decade or two.

And this leads us to my next point.

When bubbles burst, you want to be sure to have some money laying around to take advantage of the bargains that are sure to materialize.  But I’m not convinced it is either feasible or wise to hold a 100% cash position.  This is where having some antiques and hard assets in your portfolio can be invaluable.

You see, antiques, gemstones and art, while not money, all share important similarities to money.  Money must possess five attributes in order to function properly as a medium of exchange.  It must be acceptable in transactions, durable, portable, scarce and easily divisible.

This list got me thinking about an article I wrote a few years ago titled The Five Aspects That Influence Art’s Desirability.  In that article I defined 5 attributes that antiques and fine art had to possess in order to be considered investment grade.  Those characteristics are quality (of materials and construction), portability, durability, scarcity and stylistic zeitgeist (how closely a piece matches the style of its era).

As you can easily see, investment grade antiques share 3 out of 5 of the properties associated with money: durability, portability and scarcity.  Right now nobody cares even a little bit about that fact, but the day is coming when they will.  The Everything Bubble will burst one day.  And when it does, bubble assets will plummet in value.

But people who have the foresight to invest in money-like, anti-bubble assets such as antiques, gemstones, fine art and bullion will do quite nicely.  Conversely, people who don’t buy today’s boring assets will eventually wish they had.

 

Read more thought-provoking Antique Sage investing articles here.

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Welcome to the Greater Depression

Welcome to the Greater Depression
Photo credit: Carol VanHook

I haven’t written much over the past couple of months.  That’s because I’ve been watching in rapt awe as the financial markets first dropped like a rock and then quickly recouped most of those losses in a ludicrously improbable rally.  The unfolding economic deluge, coupled with absolutely bizarre market dynamics have been fascinating to follow, if not somewhat disconcerting.

I had been expecting a financial crisis of some description for quite some time.  I just didn’t expect it to be triggered by a pandemic.  Much like the Spanish Inquisition, no one expects a pandemic.

So I’ve decided to put pen to paper here and record some of my observations on our current economic predicament.

But first things first.  We are absolutely screwed, financially speaking.  The long-feared Greater Depression has arrived.

On that cheery note, it is obvious to me that the entire Treasury yield curve is headed to zero sooner or later.  This has already happened for everything out to about 3-years until maturity, all of which currently trade for yields below 30 basis points (bps) – equal to 0.3%.  It is only a matter of time before whatever yield remaining in the long end of the Treasury curve gets slowly squeezed out – like a tube of toothpaste.

This might seem fantastical considering that the U.S. 30-year Treasury was trading for well over 2% as recently as the beginning of this year.  But we need look no further than Japan, which seems to perpetually be about 10 years ahead of the rest of the world (economically speaking).  Their entire yield curve is negative out to 10-years until maturity, with the Japanese 30-year bond trading at less than 50 bps.

An outcome like Japan’s was long thought to be impossible in the United States, but since the Covid-19 pandemic struck, a convergence with their experience seems to merely be a matter of time.

 

U.S. Treasury Yield Curve - May 2020

 

And this very neatly brings us around to my second thesis.  We have officially entered the Greater Depression.  The collapse in demand and output we are currently experiencing in the economy is without precedent unless one references the Great Depression of the 1930s.  Cumulative unemployment claims over the past 6 weeks from mid March to late April 2020 have totaled a staggering 30.3 million claims.

This puts the unemployment rate in some states (8 to be exact) at more than 15%!  If that doesn’t qualify as a depression level event, then I don’t know what is.  Yes, some of these unemployed people will head back to work when the stay-at-home orders are finally lifted, but far fewer than many hope.

With the country facing its long-telegraphed Greater Depression, you might think that the stock market would finally get a clue.  You would be wrong.  The S&P 500 is currently (as of early May) just 16% off its all time highs, hovering around the level of June 2019.  So let’s get this straight.  Financial Armageddon arrives and the stock market reacts by giving up its last 1 year of gains (in the context of a 10 year bull market), but not a penny more.

This makes no sense whatsoever.

It makes even less sense when you consider that wide swaths of corporate America are quickly going bankrupt.  The entertainment, vacation and leisure sectors, including cruise lines, casinos, hotels and resorts are on the fast track to going broke.

Brick and mortar retail companies are in the same predicament.  Lord & Taylor, J. Crew, Neiman Marcus and J.C. Penney are among the national chain stores that have declared bankruptcy (or soon will) due to coronavirus-induced economic disruptions.  And that last great department store stalwart, Macy’s, probably only has 2 or 3 years left before it joins them.

Now, don’t misunderstand me.  I’m not saying that all physical retailers or entertainment-oriented firms are going to disappear, just that there will end up being far fewer of these companies in existence after our Greater Depression concludes than there are right now.

The transportation sector is facing similar headwinds.  Many airline companies are headed to bankruptcy for obvious reasons.  And world trade has taken quite a hit as well, which is causing tremendous pain for trans-oceanic cargo shipping firms.

These trends are highly unlikely to reverse, too.  The world is de-globalizing, a process that will take many years, but appears to be virtually unstoppable at this point.

If this news wasn’t bad enough, the entire energy sector is currently on life support.  The price of WTI (West Texas Intermediate) crude oil plummeted below $20 a barrel in late April 2020 – commensurate with price levels last seen in 1979 and 1986!  Natural gas prices aren’t doing much better, bumping along late 1990s lows.  Oh, and those values aren’t inflation adjusted – just pure nominal goodness.

So yeah, a lot of oil & gas contract drillers, energy service firms and oil & gas exploration and production companies are going to go to corporate heaven pretty soon – along with all the bonds and stocks they’ve issued.  In fact, it is a safe bet that many companies – perhaps most companies – involved in drilling for oil and gas in the shale fields of the United States will be forced into bankruptcy.

The deflationary impulse from these events will be absolutely massive – an outcome not even remotely discounted in the securities markets at the current time.  The price of energy feeds into almost everything else that the global economy produces.  With oil and gas plumbing multi-decade lows, the prices of many goods will have a tendency to decline.

Now many people are quite worried about inflation right now.  This worry is misplaced, at least in the near term.  Yes, I am aware that the Federal Reserve has just printed $2.5 trillion over the past couple of months (with the promise of more where that came from).  But this is like throwing money into a black hole where the global economy once stood.  Those freshly printed dollars simply disappear forever into the maw of nearly unlimited liquidity demand.

The total value of securities that will ultimately become valueless due to our Greater Depression is certainly greater than $10 trillion, and probably more than $20 trillion.  The Fed’s new $2.5 trillion infusion doesn’t go very far in this context.  And their next $2.5 trillion won’t do the trick either.  They would have to print tens of trillions of dollars to effectively stoke inflation.  And while that might be a distinct possibility towards the end of the 2020s, I don’t see it as being a realistic outcome over the next few years.

But make no mistake – bad times are coming for the dollar, albeit several years (or longer) from now.

The U.S. dollar, along with every other fiat currency in the world, is slowly losing its ability to transmit value over time.  The importance of this development cannot be overstated.  The governments and central banks of the world have fully embraced debasement (generally in the form of MMT) as a painless solution to their economic problems.  But money printing is like an addictive drug.  At first it seems like an unmitigated good, with no negative repercussions whatsoever.  It is only later, when it is already far too late, that the printing press demons make themselves known.

Right now you can still find U.S. dollar denominated CDs paying around 1.4% or 1.5%.  But that won’t be the case forever.  As the March 2020 liquidity crisis recedes into the rear-view mirror, banks will pay depositors progressively lower and lower interest rates.  The natural floor is the Fed Funds rate, which is currently hovering between 0% and 0.25%

And even though the Fed has sworn up and down that they will not pursue negative interest rates, there is still a good chance that they will panic and cut below zero at some point in the future.

So what is an investor to do?

I believe the answer is tangible assets: precious metals, antiques, gemstones and fine art.

Due to the Greater Depression, there are tremendous bargains available in the world of antiques.  For example, I recently purchased a magnificent set of 12 French .950 fine silver teaspoons from the 1860s or 1870s on eBay for only $13.75 a spoon.  To put this value in context, I remember frequenting an antiques store in the late 1990s where a fine set of one dozen sterling teaspoons by Frank M. Whiting (a well-respected name among antique silver collectors) sold for $12 each.  And I thought that was quite a deal at the time.

In other words, even though more than 20 years have elapsed, nominal prices have barely budged!

Another example of undervalued tangibles can be found in the coin market.  I recently bought a couple mixed rolls of 90% silver U.S. State quarters/America the Beautiful quarters for almost no premium over circulated junk silver.  Each $10 face value roll consisted of 40 coins in outstanding proof condition.  Under normal circumstances, proof coins intended for collectors should always trade at a premium versus similar non-proof issues.

But due to the fallout from our Greater Depression, these wonderful coins are being treated as bullion pieces (for now anyway).

Sure, there will be a bit over 100 million specimens struck between the two series when the America the Beautiful series finishes up in a couple years.  This isn’t a particularly small mintage.  But guess what?  Those hundred million coins are enough for…wait for it…about 4/5ths of a single coin for each U.S. household.

And they are downright rare when compared to the Washington quarter mintages typically found in junk silver rolls and bags.  For instance, in their last year of regular production, there were over 1.2 billion silver Washington quarters struck in 1964.  Even if you assume a brutal attrition rate of 90%, there are still more 1964-dated Washington quarters in existence than there will ever be of silver proof State quarters and America the Beautiful quarters in the two series combined!

In the future, coin collectors looking back at this period of American history won’t care about any of the nasty copper-nickel clad coinage struck for circulation.  Instead, they will gravitate towards precious metal bullion coins and select commemorative pieces (like the America the Beautiful quarter series) struck in silver or gold.  And because the silver proof mintages for the State quarter/America the Beautiful quarter series are spread over a hundred different designs spanning 20 years, collectors will have fertile ground to build an interesting, attractive and attainable collection.

So why not pick up a roll of these undervalued silver coins for only $160 to $180 each (subject to fluctuating bullion prices) while you still can?  It sure beats earning nothing in a savings account or spinning the roulette wheel in the crazed stock market.  The Greater Depression might mean that conventional assets are a losing proposition, but it doesn’t mean that tangible asset investing is dead.

 

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Practicing the Art of Financial Self-Defense

Practicing the Art of Financial Self-Defense

If you live long enough, you get the honor of witnessing some pretty stupid things.  And nowhere is this statement truer than in the arena of investing.

In the late 1920s, know-nothing shoeshine boys were giving their customers hot stock tips.  Everyone knew that the stock market was a sure thing – an easy path to riches.  Only a few years later the Dow Jones Industrial Average crashed by 89% during the Great Depression.

An entire generation of investors was wiped out.

In the mid 1960s, Nifty Fifty companies like Xerox, 3M and Polaroid were widely considered “one decision stocks” – with the only correct decision being to buy (and hold forever).  The DJIA peaked at nearly 1,000 in 1966 during the height of the mania…and then proceeded to move sideways for the next 17 years.

The index only irrevocably surmounted the stubborn 1,000 barrier in late 1982.  Some of the Nifty Fifty names even went on to declare bankruptcy eventually!  So much for buying and holding forever.

In the mid 2000s, people caught house-flipping fever.  Many thought they had discovered the perfect wealth building plan: buy multiple houses simultaneously with no money down and then sell them to some other sucker at inflated prices.  During this time, Ben Bernanke of the Federal Reserve loudly declared that “we’ve never had a decline in house prices on a nationwide basis [since the Great Depression]”, implying that a widespread housing bust simply couldn’t happen.

Over the next decade, nearly 8 million homes were foreclosed on in the U.S., destroying the hopes and dreams of millions.  Ben Bernanke failed upward during this debacle, becoming the Chairman of the Federal Reserve.

In 2017, tech junkies, fraternity bros and anarchists everywhere were enthralled with the idea of crypto-currency in the bizarre belief that all the old rules surrounding money had changed.  But as far as I can tell, a crypto-currency is a digital guarantee that you own nothing…nothing tangible anyway.  Bitcoin, the undisputed king of the crypto-currencies, peaked in December 2017 at nearly $20,000 a unit.

It now trades for just over $7,500 – down over 61% – with the supply of greater fools running increasingly thin.  There will be more losses here for sure.

 

Bitcoin Price Chart

 

In 2020, we are grappling with the largest bubble in history – the dreaded Everything Bubble.  The coronavirus just popped this bubble, but the stock market still hasn’t gotten the message.  When it finally does, look out below.

All of these incidents are historical examples of just how emotionally unhinged investors can be.  It is also an object lesson in why you should practice financial self-defense.  Participating in a bubble can feel wonderful on the upside, but the dream of riches always gives way to the nightmare of reality at some point.

This is why I heavily rely on historical precedent when constructing my personal investment portfolio.  And right now the most undervalued, overlooked asset class by far is portable tangible assets – things like antiques, bullion, fine art and gemstones.

But the concept of financial self-defense also dictates that a portfolio must be well-balanced.  One simply can’t load up on a single asset class to the absolute exclusion of all others.

So in my opinion, the best financial self-defense tactic is to tier or layer your assets.  In this context, tiering your assets means to diversify across different asset types with different cashflow, liquidity and safety characteristics.  This strategy should give you the financial flexibility to buy undervalued assets, while riding out whatever economic disasters may come.

The first asset class vital to the art of financial self-defense is cash.  This can take the form of a checking account, savings account, savings bonds or even physical cash.  Cash is the most liquid of the asset classes and allows an investor maximum financial discretion.  In other words, whoever has a fat pile of cash when a crisis hits will be able to buy investments cheaply when others are forced to panic sell.

Cash is a very underrated asset at the moment.  The stock market has done so well since the last recession that a lot of investors believe that “cash is trash”.  A corollary to this is the misguided notion that you must always be fully invested, usually in an equity index fund.  But this anti-cash stance couldn’t be more unwise.  The ideal time to build a strong cash position (if you don’t already have one) is before a crisis strikes.  The second best time is right now, regardless of the macro situation.

A word of warning though – don’t rely on credit as a substitute for cash.  In a liquidity crisis, common types of consumer credit, such as bank overdrafts, credit cards and payday loans, may very well no longer be available.  As the old saying goes, “A banker will offer you an umbrella when it is sunny, only to take it back at the first sign of rain.”

The second tier of assets in a properly diversified, financial self-defense portfolio is conventional investments.  These include stocks, bonds, mutual funds and ETFs – paper assets that are commonly encountered in IRAs, 401-Ks and brokerage accounts.

Conventional paper assets are generally very convenient to buy and sell.  However, liquidity in this asset class can disappear shockingly quickly in a financial crisis.  But because – pre-coronavirus – it had been more than a decade since our last financial crisis, many people foolishly forgot this fatal flaw of the paper asset markets.

Due to the all-pervading Everything Bubble, I have difficulty recommending anything other than token allocations to most stock and bond sectors at this time.

The third integral part of any financial self-defense plan is real estate ownership.  This is most commonly recognized as owning your own home.  But it can also include owning residential rental properties or raw land.

Unfortunately, due to the Everything Bubble real estate suffers from the same overvaluation problem as stocks and bonds.

That leaves us with the final (and in my opinion best) layer of our financial self-defense cake: portable tangible wealth.  As noted above, this asset class consists of antiques, bullion, fine art and gemstones.  These are items that have been broadly recognized throughout history to possess substantial value, a large portion of which is often intrinsic.

For centuries the middle class and wealthy relied heavily on portable tangible wealth as a discreet and effective store of wealth that could be passed down from generation to generation.  For example, in 18th century Georgian England a house full of art and antiques was considered both a cultural and financial prerequisite for admission into the upper class.

These assets also served as a vital backstop against poverty when all else failed.  Many a European noble family resorted to selling the family silver or jewelry when financial bets went wrong.  Now this outcome might not have been ideal, but it did put food on the table at a time when there was no social safety net.

However, these historical lessons have largely been forgotten today.  Instead, we live in a world where many people put their savings in the stock market, which we are told by the financial media will provide 10% returns from now until forever (hint: it won’t).  Others stay 100% in cash, earning a paltry 1% or 2% a year while inflation eats it all up.

Most households are woefully under-allocated to alternative assets such as antiques and bullion.   Even a small addition to the average person’s portfolio would go a long way to blunting the risks associated with more traditional asset classes.  Financial self-defense counsels us to hold a broad basket of assets, with an emphasis on what is currently undervalued.  So you can feel reassured that when you buy a fine Edwardian diamond pin or a set of sterling silver flatware, history is on your side.

 

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