Exter’s Pyramid in the 21st Century

Exter's Pyramid in the 21st Century

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.

The Long, Slow Death of Stamp Collecting

The Long, Slow Death of Stamp Collecting

A few weeks ago I helped clean out my grandmother-in-law’s house.  My wife’s grandma, now aged 90, had started to experience failing health and found she could no longer care for her modest house.  As a result, grandma departed for a long-term care facility while her relatives were left with the unenviable task of emptying her home of decade’s worth of accumulation.

Because of my experience with antiques and the Pareto principle, I was aware that about 80% of the dollar value of a home’s contents are normally concentrated in 20% of its objects.  My expectations were tempered by the fact that my grandmother-in-law liked gambling in Atlantic City, sewing, costume jewelry and crystal, more or less in that order.  Still, I went into the situation with an open mind because you never know exactly what you’re going to find.

However, as expected, we discovered very little of monetary value in her home.

But one thing of interest I did find was a couple of old, unused Canadian stamps with the portrait of a young Queen Elizabeth II on them.  Now, I’m no expert on stamp collecting, but I know enough about the topic to understand that vanishingly few specimens are worth significant money.  But I liked the classic Mid-Century styling of these stamps and decided to take them with me on a whim.  After a bit of research I discovered that they were Canadian 4 cent stamps in carmine color from 1963 (Scott catalogue #404).  They were certainly interesting, but not worth more than face value.  They are best used for their originally intended purpose – sending mail in Canada.

This entire episode got me thinking.  Over the last two decades the more desirable investment grade antiques market has definitively split from the less desirable collectibles niche.  High quality antiques have increased anywhere from 2 to 4 times in price over that time while glass, memorabilia and countless other collectible categories have simultaneously collapsed in value.  But which side of this divide did stamps fall on?

It didn’t take me long to find the answer: stamp collecting, also known as philately, is dying, albeit a long, slow death.  Prices for most vintage stamps have plummeted; many now sell for only 5% to 20% of stated catalogue value.  EBay has exacerbated this tendency, revealing that many issues of old stamps formerly thought to be rare or uncommon have actually survived in healthy numbers.  Stamp collectors looking to sell their collections to dealers have suffered similar pricing trauma.  Many dealers simply aren’t willing to buy at all as they are already swimming in inventory that they can’t clear.

Some stamp collectors deny the terminal decline of their hobby by pointing to the record prices that a few ultra-rare, ultra-desirable stamps have garnered at auction.  For instance, the 1856 One-Cent Magenta issued by British Guiana sold at Sotheby’s auction house for a jaw-dropping $9.5 million in 2017.  An example of the world famous U.S. “Inverted Jenny” error stamp, accidentally issued in 1918 with an upside-down biplane on it, recently went for a princely $1.175 million at a 2016 auction.

However, record prices for the world’s rarest stamps actually reflect the rise of the super rich in modern society.  A handful of ultra-rare stamps get caught up in bidding wars between Russian oligarchs, Chinese billionaires or Silicon Valley technology CEOs, each of whom is intent on fulfilling his boyhood dream of owning the rarest fill-in-the-blank (stamp in this case) in the world.  It only takes two obscenely rich bidders competing against each other to send the price of a truly rare stamp into the stratosphere.  Ultra-rare and desirable stamps have effectively become trophies for the super-rich.

But this phenomenon doesn’t do much to reverse the slow death of the broader hobby of stamp collecting.  Every year stamp prices slowly drift inexorably downward while the collector base continues to age.  In fact, the average age of a stamp collector is now over 60 years old.  Rising prices for a few super expensive stamps does not reflect healthy demand for more pedestrian stamps from middle-class stamp collectors.

The grim outlook for stamp collecting is not helped by national post offices’ widespread abuse of commemorative stamps and first day covers.  The tendency to blatantly over-issue modern stamps has contributed significantly to the decline of the hobby.  Treating stamp collectors as a profit center may boost government revenue in the short term, but malignantly erodes the hobby in the long term.  In this aspect, stamp collecting shares parallels with the over-issuance of poorly conceived and designed modern commemorative coins by national mints.

As if postal abuse wasn’t bad enough for stamp collecting, a precipitous decline in the volume of physical mail means that many younger people only encounter stamps with shocking infrequency.  According to the U.S. postal service, when measured from its peak in 2001, estimated first class mail volume has collapsed by over 40% through 2016.  And this trend shows no sign of abating in the near term.  Of the physical mail that is still sent, a significant amount is either metered or uses perpetually unchanging “Forever stamps” (at least in the U.S.).  Combine this with the ubiquitous rise of email, texting and online bill pay and it is easy to see that stamp usage, along with stamp collecting, is gradually dying out.

All of these trends contribute to a distinct lack of youth interest in stamp collecting.  And children who do not collect stamps eventually become adults who do not collect stamps.  Many stamp collectors have traditionally started as children who then abandon the hobby in their teenage years when other pursuits became more enticing.  However, those exposed to stamp collecting early in life often circle back to philately again once they reach middle age or retirement.  That circle of life in the stamp collecting community is now in terminal decline.

Now, let me be clear here; I don’t think that stamp collecting is going to completely disappear.  Yes, the numbers of active philatelists will probably decline dramatically in the future.  And if you are hoping to make money by investing in stamps or selling your existing collection, you should probably reconsider.

However, there is a silver lining here.  If you love stamps just for the pure joy of collecting them, then your chosen hobby is likely to become significantly less expensive in the future.  Just don’t expect a lucrative financial return from your vintage stamp collection.

1950s Sheaffer Snorkel Statesman Fountain Pen & Mechanical Pencil Set

1950s Sheaffer Snorkel Statesman Fountain Pen & Mechanical Pencil Set
Photo Credit: PalsterPro

1950s Sheaffer Snorkel Statesman Fountain Pen & Mechanical Pencil Set

Asking Price: $90 (price as of 2017; item no longer available)

Pros:

-Mid Century elegance is on full display with this vintage Sheaffer Snorkel Statesman fountain pen and mechanical pencil set, produced sometime between 1952 and 1959.

-The Sheaffer Snorkel line of fountain pens took their named from the pen’s long, thin ink refill tube.  Vintage Sheaffer Snorkels are considered to be very robust pens and work wonderfully as daily writers if you are so inclined.

-The body of both pieces is made from jet black resin accented with gold-filled trim.  This gives a streamlined, understated look that conveys the best aspects of Mid Century design.

-The Sheaffer Snorkel Statesman was a mid-range pen in the Snorkel line.  Even so, it still sold for the not insubstantial sum of $15.50 in 1956, which is equivalent to about $139 in 2017 dollars.  The Statesman pen and pencil set was even more expensive; it would have cost you $22.75 in 1956, or around $205 today.

-This Sheaffer Snorkel Statesman pen and pencil set has the classic White Dot of excellence near the top of the cap.  After its introduction in the 1920s and through the 1930s, the Sheaffer White Dot meant that the pen had a lifetime warranty.  However, in the 1940s, Sheaffer changed it to a marketing symbol that indicated a “symbol of satisfaction” or a “mark of luxury”.

-This Sheaffer Snorkel Statesman fountain pen has a palladium-silver (F4) nib.  Most nibs on high quality vintage fountain pens are made from 14 or 18 karat gold.  Palladium-silver alloy nibs were a reaction by the 1940s fountain pen industry to wartime rationing.  By the 1950s, these special alloy nibs were used in some mid-range models to reduce costs.  Of course, right now palladium is just as expensive as platinum!  What a difference 60 years makes!

–Vintage fountain pens are eminently accessible to the antique collector or investor working on a tight budget.  Many different excellent models can be found in the $100 range, or even a little bit lower.

-This vintage Sheaffer Snorkel Statesman fountain pen and mechanical pencil set comes with its original box, which is always a nice bonus.  Considering its great condition and classic styling, I would say this set is well priced at $90.

 

Cons:

-The seller does not disclose if this fountain pen and mechanical pencil set has been serviced recently.  I think the safe assumption is that is hasn’t.  Therefore, a prudent buyer would set aside funds to replace the rubber ink sac and seals in the pen, which are prone to degrade over long periods of time.  In addition, new leads should be sourced for the pencil.  This would drive up the total cost of the set.

-The Sheaffer Snorkel Statesman was, ultimately, a mid range pen.  The highest end model in the Snorkel line, the Masterpiece, had either a 9 or 14 karat solid gold cap and body, coupled with a solid 14 karat gold nib.  The Snorkel Masterpiece is a much more desirable fountain pen than the Statesman, all else being equal.  Of course, it also costs a lot more money as well, provided you can find one.

-If you purchase this beautiful pen and pencil set, you are left with the conundrum of whether to use it on a regular basis or stash it away to keep it pristine.  If you choose to use it, you may end up reducing its value slightly over time due to wear and tear.

My Life as a Financial Cassandra

My Life as a Financial Cassandra

One of the most interesting figures in ancient Greek mythology is the Trojan woman Cassandra.  According to legend, she had been granted the gift of prophecy by the Greek god Apollo.  But when she later displeased the god, he cursed her to never be believed in spite of her prophetic gift.  This twisted curse later figured prominently in one of the best known tales of ancient Greek mythology – the destruction of the walled city of Troy.

In ancient accounts of the fall of Troy, Cassandra is one of the few people to recognize the danger that the besieging Greeks pose.  In fact, she attempts to intervene several times on behalf of the Trojan people to avert the disaster, only to be thwarted in every instance.  The Trojans ridiculed Cassandra, believing her prophecies to be insane.  The naive Trojans are eventually tricked into accepting the gift of the Trojan horse.  The Greek soldiers hiding inside the hollow horse spill out at night to pillage and burn the doomed city while Cassandra is forced to helplessly sit by and watch.

I feel, in many ways, that I am a modern-day parallel to the Cassandra of ancient Greek myth.  I have watched in horror over the past 20 years as a relatively stable, prosperous U.S. economy has been gradually deformed and hollowed-out by serial bubbles blown by the malicious Federal Reserve.  And yet I have been powerless to do anything about it.  I am a present-day financial Cassandra.

My life as a financial Cassandra started back in late 1999.  The first internet bubble was in full swing at the time.  I was a freshly-minted college graduate who had just landed his first job at a Boston-based mutual fund company.  I was learning everything I could about the financial markets, but a couple things puzzled me endlessly.

First, I couldn’t understand why everyone was in love with “new economy” technology stocks.  They seemed hopelessly overvalued to me.  But the investors buying them – including my company’s fund managers – could see a future of endless growth that was invisible to me.

Instead, I salivated at the prospect of buying the old-fashioned tobacco company Philip Morris which sported a shockingly-high dividend yield of 10% at the time.  Ironically, I had no money to invest myself and couldn’t convince anyone else of the value of the company.  Being a financial Cassandra has rarely been so frustrating.

In retrospect, Philip Morris has been a phenomenally good investment since 2000.  If you bought Philip Morris back then and held to today without selling, you would have received massive dividends over the years.  In addition, you would also be the proud owner of shares in four valuable Philip Morris successor companies: Altria Group, Philip Morris International, Kraft Foods Inc. and Mondelez.

The next memorable period during my career as a financial Cassandra occurred in the spring of 2007.  I could foresee that a financial crisis of some form was going to hit the economy, although I didn’t know exactly when.  Everyone else thought I was crazy.  My co-workers were talking about a permanent economic expansion driven by the ever upward spiraling housing and stock markets.  Predictably, I could convince no one of my views.  My co-workers and I eventually agreed to amicably disagree on investment strategy.

So I went searching for the most secure future cash flows I could find – U.S. Treasury bonds.   However, I also wanted the longest duration Treasury securities I could get as well.  This would enhance my profits if my forecast of an economic crash came to pass.  After much research, I eventually opted for zero-coupon, 30-year U.S. treasury strips.  Zero coupon bonds make no periodic interest payments, but instead issue one large final payment at maturity.

Buying long-dated U.S. treasury strips was so unorthodox at the time that the bond broker I spoke to when I placed the trade actually tried to talk me out of it.  I politely declined his free “advice”.  The global financial crisis unfolded about a year later.  I closed my U.S. treasury strip position for an 80% gain in only 18 months.  Being a financial Cassandra can be very profitable, if you can be patient and ignore the ridicule that comes with it.

And now, in 2017, I am staring at the third major bubble period of my life as a financial Cassandra.  This bubble is absolutely huge and the accompanying stock market insanity is breathtaking.  We are clearly headed for another economic disaster.

As an example of the absurdity of current stock valuations, media streaming company Netflix currently trades at more than 200 times earnings.  This is even though the technology darling has nearly saturated the domestic U.S. market, greatly diminishing its prospects for future growth.  In addition, the company’s profitability will always be constrained by content owners who will seek to arbitrage away any excessive revenue Netflix derives from an increasing subscriber base or rising subscription prices.

Another bubble stock, Tesla, looks like a raging Ponzi scheme with a staggering $61 billion market capitalization, which is larger than either Ford’s or General Motors’.  Its CEO, Elon Musk, could have reined in the company’s expansion when it was still a niche, luxury electric car manufacturer.  Tesla would have been a much smaller company under those circumstances, but it also would have had a reasonable shot at being profitable.

Instead, Musk chose to let it turn into a cancerous monster, growing without any limit using cheap capital market financing.  Unfortunately, the company is far too large and unwieldy to salvage now, particularly after its ill-advised Solar City acquisition.  Absent an unlikely buyout, it is only a matter of time until a financial crisis closes the capital markets and forces Tesla into bankruptcy.

Not all investments are doomed in the next financial bust, though.  Tangible asset like precious metals, investment grade antiques and fine art have been largely overlooked during our latest bout of bubble insanity.  These enticing investments have track records hundreds of years long proving they are sound investments.  And it takes far less money to get started buying art and antiques than you might think.

Of course, I can convince very few people of these opinions.  Such is the curse of a financial Cassandra.  But I implore you; please learn from my past.  Paper assets are grossly overvalued right now while fine art and antiques are perhaps the world’s most under-owned asset class.