Gathering Intrinsic Value in the Aftermath of the Credit Bubble

I’m a contrarian–and a rebel, and I am fed up with people telling me that the days of America’s greatness are over and we’re all going to have to settle for drab, uncertain, very low-end lives to repent sins of the past and so that the rest of the world can have their “fair share” of good things.  Well, perhaps some people have dug themselves holes so deep they will never manage to get out, but some of us haven’t, and I suppose a lot of W&G readers are in that category or you wouldn’t be here.

For what you care to make of it, here is an oddball way to analyze what you should buy and to diversify your holdings pleasurably, and probably far more safely than what is left to try.  There are two basic choices:  give the other half of your shirt to someone like Edward Jones and see how long it takes to lose it, or put everything into cash, metal, and gold sands, volcano power, or something else totally outside normal stocks and the ken of mere mortals.  Agora Financial comes up with a lot of interesting propositions in areas I am totally ignorant about, so I decided to stick with what I know, which is luxury items and grocery stores.  Huh?

At present fundamentals are roughly as safe as downtown Beirut, and Technical Analysis isn’t working well because volume is controlled by a few enormous funds, while government intervention is playing havoc with individual stocks, whole industries, the value of the dollar, interest rates, and so forth.

What we could use is a way to “read” what volume, movement, and patterns once told us, and some sensible way to decide what will store intrinsic value best.  Never mind profits, just holding on to the current value of what we have will do nicely in a world with 1/4% interest rates on a CD.

If you want to know what the average Joe is thinking don’t pull out your big blue book of ten-year stock charts and start looking for cycles. This is a whole new game and requires modern tools.  Two you need are absolutely free and available 24/7 on your Internet and the other is usually set out on Thursdays, free to pick up.  The hopes and fears of these bad years are to be found on Craig’s List and e-Bay and in what I will always think of as the “Thrifty Nickel,” now called “American Classifieds.” Those will tell you a lot more about economic and psychological conditions than the S&P will. Not a Keynesian in the bunch.  What is fascinating is how the offerings demonstrate traditional Technical Analysis basics, including volume, support and resistance levels, and trends.  Best of all, they are totally independent from the actions of managers of large funds peering at each other in terror wondering what “a prudent man” should be doing.  Glory be, there’s a way to take the pulse of the country at the most fundamental (pun intended, of course) levels, ranging across a wide socioeconomic spectrum.

The prevailing mood of the country, measured by this method, demonstrates two factors clearly:  at ground zero individuals are still having to turn loose of their toys to survive, but there is a sense, through recovering prices in some areas, that the economy is looking up in many eyes.

It may seem a little odd to analyze the economy in terms of what luxury goods in private hands are available and bringing, but consider that those are where intrinsic value was stored when times were good in the past.  Many Americans are being divested of past treasures because the credit-based consumerism of the last couple of decades had most people believing that times would always be good and that their houses were a sure source of ever-increasing equity, much better than old-fashioned savings accounts and paying cash.  They raided their brick piggy banks consistently, and then the housing market smashed.  No savings, upside down mortgages, houses such a glut on the market that in some cases banks have demolished–literally–brand new “MacMansions” complete with the de rigueur granite kitchen counters, rather than see them destroyed by squatters. The stock market plunged half way to ruins and despite a hefty Spring Fling a lot of folks see it going down again sometime soon. That left the Baby Boomers more than a little concerned about what were supposed to be their golden years, and those ten years or so younger in agony over the paper profits despite being warned for a couple of years to get out.  Yes, it cost a nasty sum to get out of the fund a manager had locked you into until ’10, but not nearly as much as leaving it there would have.

Back down in the trenches it is even possible to read a lot from the sequence in which goods have come on the market.   First went the toys bought by young men who put windfalls into bass boats, fancy trailers to haul them, and bigger or extra trucks.  Life was good, jobs seemed secure, no wife or kiddies, buy that value on credit…and then hours started being cut and jobs lost [Painfully close to home—Ed.].

Farmers in trouble from rising fuel, feed, and power costs had to start turning loose of “extra” tractors and implements, almost unheard of in the annals of mechanized mules which are good for many, many decades of service.  It is amazing how many tractors seem to be needed; we’ve got four and still don’t always have just the right one for an atypical job.  Given the choice of giving up a perfectly good 1954 John Deere or his youngest, some men might have wistful thoughts before listing Big Red for sale.  This is part of knowing both the value and price of everything as well as what people set the most store by, not useless information.

The $150/barrel crude oil hit independent truckers an unbearable blow, and many small firms had no choice but to shut down.  I have trucker friends who said it wasn’t worth the wear and tear on their rigs at what they would make on a job with Diesel rising four dollars.  The man we got Black Dog #5 (the pride of the now defunct Long Shot Trucking Company) from had tears in his eyes when he had to sell the Dawg, his joy and the last “tractor” to go, and spent half an hour pointing out all the glories of that beautifully-maintained beast that will haul a dry van box with 55,000 pounds of goods in it after he had clinched the sale.  What we paid for it is practically a sin, but he couldn’t hold out “until times get better.”

Then the “We’ll travel when I retire” dream popped, and motor homes and big travel trailers started coming up for sale, along with golf carts, and finer cars.  Reduced income, 401Ks in the cellar, houses that can’t be sold without the most horrifying loss, “down-sizing,” and something had to give.

This time last year we bought six used motor homes and travel trailers in excellent shape for fifty dollars a running foot, never more than a hundred.   These days the price is more apt to be $150/rf. The high-end models still aren’t selling, and little is as sad as a dealer’s lot, but either all of the more modestly priced rooms on wheels have changed hands or those who own them are feeling a little less frantic.

Grandma’s sterling silver that was only used at Thanksgiving has been all but a glut on the market for months…Silver has a special place in my heart, and the thought of treasures that have been in the family for perhaps a couple of centuries cast on the altar of believing things would never change, the house would always provide extra income hurts. Silver is rising dramatically on e-Bay; it requires more and more knowledge and research to find bargains.   Last month I was buying sterling flatware at roughly $10-12/utensil, and tonight people are asking $15-$17 for standard patterns. The latest trend is also turning loose of fine china at bargain basement prices.

I still won’t buy the classic hedge of postage stamps (very fragile, don’t know enough), loose diamonds (not sure the IDC can maintain inflated prices; am buying sapphires and rubies), or antiques other than jade and bronze (more portable, sturdier.)  This weekend good antique furniture appeared in large amounts suddenly, although the prices are “overly sanguine,” shall we say?

In some ways storing intrinsic value in items like the last two may not sound exceptionally bright, but that’s one of the hazards of shopping.  You find things you just can’t resist.  I have a printout on my desk right now for a 1985 XJ6 Jaguar we’re going to go look at tomorrow: one owner, always garaged, 138,000 miles, custom wheels worth two-thirds of the asking price, engine you could eat off of, all of the touches for which a real Jaguar is famous, and she’s got to go.  He’s asking $1200 for a very luxurious car with at least another hundred thousand miles in her. In short, it is a grand time to want to buy cars if you have cash, even new ones.

A classic Rockefeller story is of purchasing a yacht early in the thirties for a thousand dollars a running foot, which, he said, “Seemed like a very good price for a yacht.”  Indeed, it was…and he had the cash at the right time.

The moral of this tale is to use what you know best to manage your cash correctly now.  Other than that, put it in gold, silver, survival supplies and equipment…and even a few things that merely make your eyes light up.  Life is short, and beautiful objects of intrinsic beauty will gladden your heart and are a lot more pleasurable than giving in to that urge to get back into the market.

I saw in 1992—when the interest rate dropped to a shocking four per cent—that in years to come widows and retirees were going to be in for very bad times.  Why didn’t anyone else who isn’t a professional analyst?  Why didn’t they believe their “men of affairs,” as financial advisors used to be called?

I expect that this will turn out better than a prospectus promising that if we buy six stocks two will fail, three will do reasonably well, and one will give us thousand per cent returns.  If I’m wrong, I’m buying at 25 cents on the dollar in a lot of instances, and a Jaguar will always be a Jaguar.  The world seems to be one giant yard sale, and I submit that traditional luxuries will recover sooner than Government Motors will.

Linda Brady Traynham

May 14, 2009

The Daily Reckoning