question of what type of pricing environment we can reasonably
expect in the overall U.S. economy in the months and quarters
ahead is germane to the health of the rare coin market.
Historically, as we have expounded within these electronic pages
many times in the past, U.S. rare coins have done best in times of
noticeably rising prices, i.e., in inflationary times. Now,
anyone who shops for food, heats a home, operates an auto
or SUV, pays for life and/or health insurance, pays property
taxes, rents or buys a home, in essence, just about all of us, has
to look at the government published CPI data with
skepticism. Many of us suspect that this data was overtly
manipulated for political reasons during the Clinton Dynasty, but
we all want to be reassured now that we are under new
management with Dubya. However, until new methodologies are
employed (and maybe totally new staff), the hedonic adjusted data
is going to miss the mark in emulating real life. As a
businessman, I know my costs of operation are going up about twice
the purported 3.5% year-to-date 2001 CPI annualized rate in many
categories. But this is the obvious, in-your-face
evidence. Let's look at the not-so-obvious arguments in the
other direction before we return to support the argument for
are equally (and possibly more compelling) arguments on the side
of a pronounced deflation in the United States. I am going
to list the most significant ones in order to put them into
Loss of financial wealth in excess of $4 Trillion since March,
2000 in NASDAQ stocks alone.
Corporate junk bond defaults approaching the recessionary level of
5% to the tune of several $100 Billion lent to evaporating
telecom's and dot.com's.
Personal bankruptcies in excess of 1 Million filings for the last
3 years during supposedly one of the strongest economies
ever. What percentage/dollar volume of credit card debt and
home mortgage debt will go bad during the current recession?
Hundreds of Billions of Dollars lent by the United States directly
and through the IMF to such low-grade credits as Russia,
Argentina, Brazil, Malaysia, Turkey, etc., etc., etc., that don't
have a snowball's chance of ever being repaid.
The greater than 50% probability that we are in a multi-year
secular bear market that will diminish U.S. financial wealth by
another $4 to $5 Trillion.
Derivative positions on interest rate swings, currencies,
equities, and don't forget gold and silver bullion that exceed
$100 Trillion that have a better than 35% probability of going the
way of Long-Term Credit Management.
are huge numbers, many times the size of the U.S. economy's annual
production of goods and services of some $5 Trillion. These
magnitudes alone and because many of these deflationary areas can
be reasonably estimated today, if not in the future, leads me to
believe that we are more likely to experience an overall
am as tired of being Chicken Little as my peers are of hearing my
pronouncements of "The Sky Has Fallen", but the
recession we are in (probably since September of 2000) is not
going to be mild and short. The misallocation of resources,
in this case capital-money-dollars, has been so extreme in this
cycle, that many peg as beginning in August, 1982 (including Sir
John Templeton), that the corrective process need be as extreme in
magnitude and duration to get back to balance. People
laughed at me when I started withdrawing from the financial
markets beginning in the Fall of 1997, but those same people are
not laughing today. What heady profits I left on the table
since that time (after 16 years straight of being in equities)
have been balanced by dividends, rare coin profits, and the
absence of speculative stock margin debt, a tonic absorbed by many
latecomers to the Greenspan Bubble. The late Will Rogers put
it so aptly when asked about buying stocks and he smirked that he was more interested in
the return of his principal
than the return
on his principal.
that we may not see the results of this unprecedented
disappearance of wealth or assets immediately, but it is hard to
imagine that the net effect on the U.S. will not be a significant
retrenchment in most spending for capital investment and
consumption. Nothing is linear in life, not even the NASDAQ,
so I think we are in the initial adjustment phase where business
activity is slowing faster (due to gross overcapacities) than
personal consumption. The populace is badly spoiled at being
able to have every want fulfilled with credit, but as layoffs
mount, this avenue for instant gratification will reverse and
lenders will tighten accordingly along with borrowers. And
in addition to moving in distinct phases, the painful adjustment
period ahead will also exhibit the simultaneous push/pull of
inflation and deflation.
I have us heading into The Great Depression of the Not-So-New
Millennium, let's look at some very strong forces at work to
re-inflate the economy and the general level of prices:
Our central banker, Mr. Greenspan, is determined to mitigate these
deflationary forces by rapidly slashing the cost of money and
standing ready to serve as the "lender of last
resort". Throw good money after bad. Crank up the
printing presses. Money, in all its diverse forms today,
will be allowed to be created in limitless quantities to provide
liquidity to a system that risks becoming illiquid at any moment
due to the defaults of businesses, consumers, and speculators.
The Government Sponsored Enterprises (Fannie Mae, Freddie Mac,
etc.) will continue to expand their
balance sheets at a breakneck pace in the pursuit of heady annual
bonuses and add Billions of Dollars of fodder to the money supply
in the process, outside of the control of the Fed and, currently,
Congress. Up until the point when mortgage defaults start
setting new records, of course.
Energy prices are probably headed to the moon in the next decade
as the U.S. is caught with its knickers down thanks to the lack of
an energy policy during the Clinton Dynasty. It will take a
minimum of 3 to 5 years to bring new oil/gas resource production and
electric generating capacity online, so just pray that the missiles don't
replace the rocks in the Middle East. We will pay dearly in
many ways for our current biased policy in this region.
Due to the provision of cheap credit for new and refinanced
mortgages by Greenspan and the GSE's, residential and commercial
real estate prices are now seeing annual gains matching the 1989 /
1990 peaks in the previous cycle of 8% to 10%. However, as
the boom turns to bust, many
homeowners are likely to have negative equity in the next several
years with minimal 5% down-payments common today. Sound
A strong Dollar policy which has conveniently exported our
inflation for the last ten years plus is likely to come to an
abrupt end as U.S. credits sour along with our stock market and
our interest rates attempt to mimic Japanese levels.
Imported goods, those that we are so addicted to, are likely to
rise significantly even as overseas exporters strive to hold or
reduce prices in the global slowdown, recession, or worse.
Food prices are likely to rise due to the widening threat of
contaminated meat in Europe, the reversal in the acceptance of
bio-engineered crops, and the re-emergence of severe global
weather systems, not to mention the disruptive effects of
progressive global warming.
how I have failed to quantify the dollar effects of impending
inflation while the figures just rolled off my keyboard for the
current deflationary forces. The deflation is here and now
(and growing!), and can thus be quantified, while the inflationary
elements are building steam. So we have a true conundrum
that defies simplistic analysis, but readily reveals its main components. Since the elements of deflation appear to
outweigh the elements of inflation, current and projected, the
question remains how it will affect U.S. rare coins and
gold/silver bullion coins and bars.
think as the financial markets continue to ravage investors'
portfolios and nest-eggs, alternative investments will continue to
be sought after. And this means seeking out both neglected
and undervalued asset classes. Think of the historical
performance of these rarities that will never be produced again,
and think how the number of collectors and investors grows with
the population, at a minimum. While some recent coin shows
in 2001 have produced mediocre responses from participants, I think we are
still in a transition period. Long bear markets don't always
turn into bull markets in dramatic fashion, the so-called
"V" pattern. (This "V" is now being
forecast for the U.S. economy by economists that have been as
accurate as Clinton was truthful.) Gold and silver
bullion prices haven't helped, but those markets are not free,
they are as manipulated as Wall Street has been for years.
There is abundant, growing, and verifiable evidence to support this
thesis. Bullion prices will eventually aid the U.S. rare
coin market, and one more financial upheaval that decimates faith
in our markets, our government, and/or the U.S. Dollar will set
them free. Such an upheaval is lurking in the inflation
versus deflation conundrum.
will label the U.S. rare coin market today in a Stealth Bull
Market, because overall prices are holding, while specific types
and series such as the $2.50 Indian Gold series minted from 1908
through 1929 are doing very well indeed. Patience serves
both collectors and investors well over the years. This is a
time for patience. Foresight is also invaluable. Now is
a time for being able to
recognize that the light at the end of the tunnel is indeed a
speeding train. Buy And Hold ..... an axiom that lends itself
more to numismatics today than to any financial asset available.