SPECIAL BULLETIN

How Will Rare Coins Fare If Stocks Implode?
( April, 2000 )

Early in 1999 I posed a similar question and although there is no guarantee that my forecasts will prove 100% accurate, the economic and financial market developments over the last several months are painting a clearer picture of the possibilities.  We truly live in historic times.  Although many vested interests on Wall Street will argue otherwise, U.S. stocks have never been more overvalued or so critical to the retirement plans of Americans.  The recent volatility in the stock market is classic late-stage behavior for a bull market, and the record one-week decline in the NASDAQ market is just one indication that the speculative nature of trading stocks has reached a level that could cause serious damage to both unwary investors and the U.S. economy.  I think most investors have to agree that the daily price swings, both up and down, are unsettling, and the old saying goes, "If you can't take the heat, then get out of the kitchen!"  Unfortunately, many investors will stay at the party too long, and the financial hangover is likely to be both severe and prolonged.

If I'm forecasting a Wealth Effect in Reverse, where many investors feel poorer due to a decline in their financial portfolios, how could the U.S. rare coin market fare any better?  Historically, the rare coin market has performed best in periods of strong economic growth when liquidity was ample (both availability and cost of money) and consumer confidence was high.  This was certainly the case in the 1980's, and particularly in the late 1980's.  So at the risk of over-simplifying the equation, I am going to list the key ingredients to the health of the U.S. rare coin market as economic stability, liquidity, and confidence.  However, the premise I am going to make is that two out of three of these factors will not be in the direction that has historically been favorable for rare coins, yet the numismatic market will enter one of its strongest periods ever.  What collectors and investors have to realize is that we are in one of the most unusual and unfortunately strained periods in global financial history.  If you don't embrace this conclusion currently, I am sure with time and hindsight that you will.

Let me try to convince you first of the two factors that I see turning negative in the months and quarters ahead that will perversely turn investors toward alternative investments such as U.S. rare coins.  Economic stability is about to become unstable as we enter a marked slowdown in the U.S. economy due to the inevitable bear market in stocks that we have probably already entered, the Federal Reserve's continuing efforts to slow a red-hot economy with monetary restrain (i.e., higher interest rates), and a basically over-leveraged consumer, corporate sector, and don't forget the Federal Government.  There was no true surplus last fiscal year since the National Debt grew by $90 Billion any way you slice it. So here comes the dreaded "R" word as in recession, and this could be severe depending on the degree to which the stock market bubble implodes.  But once enough Americans have a strong taste of what a true bear market is like, and they feel the betrayal of the sheep having been led to the slaughter by Wall Street & Company, the word "stock" (except for soup stock) will carry negative connotations for the majority.  Many retirement plans will be turned upside down.  This is not folklore I am forecasting, but a repeat of history for a species that has not evolved past the emotions of fear and greed.  So in a sense, and I hope the reasoning is not convoluted, the lack of stability will turn investors toward an asset class that has historically, even with its own severe bear markets, proven a store of wealth century after century and appreciated well beyond the rate of inflation.

This environment that I see unfolding, of course, also embodies a reduction in confidence as to the viability of financial assets to protect wealth, and this area encompasses not only the equity market, but also the currency market with the U.S. Dollar.  No nation can rely indefinitely on foreign investors to finance current consumption and investment with record Trade Deficits without an adjustment or devaluation eventually being forced upon it.  When consumers and investors are virtually on a high from the heady equity gains of the last 5 years that are unprecedented in U.S. investing history, it will take a severe decline over a protracted period to wean them from their current addiction to stocks.  And I can see a major bear market unfolding that wipes out over 40% of the wealth of Americans' equity balance sheets over a period exceeding 5 years.  However, this gradual loss of confidence in the viability of paper assets such as stocks and the Dollar to retain their value, as a minimum expectation, will force investors back into C.D.'s, money markets, and assets that benefit from either an increase in inflation or a loss of confidence in financial assets.  I am convinced that U.S. rare coins will benefit from this shift in investor sentiment and preferences.  To assume that many rare coins are too expensive to attract the average investor ignores the selective bull market that has been underway since late 1997 in the most expensive sector of the market, key-date and ultra-rarities.  I can only assume that some of this money is coming from astute, seasoned, and well-heeled investors that have been careful students of investing history, and would rather diversify their investments before the tide turns.  Furthermore, savvy investors know a bargain with many rare coins still 60% below their 1989 all-time highs.

This brings me to the third ingredient, liquidity, that will be in ample supply because we have a Federal Reserve that fully understands the prior mistakes made during periods of U.S. financial distress.  Although the Fed will continue to tighten credit until there are visible signs of an economic slowdown, eventually the Fed will have to abandon its traditional fight against inflation and flood the economy again with cheap money.  However, I think it will be pushing on a string at that point due to the loss of confidence and the debt burdens existing that need negative interest rates to be amortized.  We all must remember that the U.S. rare coin market is not much greater than $3.5 Billion in capitalization or total value, so it will not take much diversion of investment funds from current income and/or stock liquidation proceeds to create a major bull market.  If $2 Trillion of stock market wealth can be destroyed in one week, just think what a diversion of just a fraction of one percent from a $7 Trillion equity market and $9 Trillion economy can do for numismatic prices.  One-tenth of one percent equates to around $80 Billion.  If this sum is even on the high side, one can see the potential for 3-fold to 5-fold increases in numismatic prices.

So the bottom line is ....... A major bear market in U.S. stocks based upon the current strained situation of the global financial system and markets has a better than 50% probability of creating a major bull market in U.S. rare coins.  This must truly be a New Paradigm.