Ever wonder how the great illusionists (magicians) do their stuff? I do, and to be truthful, I know damned well that the building did not disappear, but he made it happen. I know that gal wasn't really sawed in half, because she was still whole after the trick was completed, but how did he do it? I know that one, because a friend of mine in high school was an amateur magician, and I was his stooge in several tricks. Illusions are neat stage shows, and magicians and their "patter" (their glib talking as the trick proceeds) is all important to the illusion. The patter seeks to divert attention to something other than the actual illusion, or excite the audience. Magic is fascinating, because of its absolute fake situation which appears absolutely real. Magic shops have multitudes of tricks that can be bought by would be magicians, to entertain. Entertain they do.
Magicians are different from escape artists. The Great Houdini was an escape artist, till once he failed to escape, and died in the effort. Escape artists make me cringe, because they may fail, and no one wants to see a slow death by suffocation. Magic shows, on the other had are great fun, because you know it is all an illusion, no one will get hurt, and the magician is colorful and entertaining. So what is an "illusion?" My dictionary says it is, "(1) A false idea or conception, and (2) An unreal or misleading appearance or image." About sums it up, doesn't it? A magician indeed does give you a false idea, and a misleading appearance. There are several types of illusions besides the magician's tricks. Out in the desert, there are heat waves, which can give on the illusion of seeing water just ahead, or even an oasis, when none exists. A frozen lake may have ice so thin that a human will fall through, and there are fiberglass bricks that look so authentic that the effect is as if they are real. Stage props and movie sets are often mere building fronts or facades, which give the illusion of the real thing. And in film today, (unfortunately) there are "special effects," which attempt to thrill, but only bore me. As a matter of fact, I suspect the reason I love 30's and 40's black and white films the most, is because they deal with plots and drama, rather than special effects.
By far the greatest illusion currently in vogue, are the various forms of illusionary wealth. The appearance of wealth in America today, and to a far lesser degree in the world at large, is what kind of car one drives, and one's home. The illusions are rife, because most often neither are paid for, and much is owed on them. Still, when one sees some dude driving a new BMW, and living in a nice neighborhood, the illusion is one of achievement and wealth. Credit is so plentiful today, that one can be literally bankrupt, and still have possession of the wheels and abode, often for long periods of time. Before credit cards, 100% auto finance, and high value mortgages, authentic wealth could indeed be judged by appearances in most cases. Before I was born, and before the crash of 1929, wealth had become very illusionary, but after the crash, and for many years afterwards, there wasn't much wealth of any kind. In major cities, there were no suburbs to speak of, and people lived and built in the cities. Neighborhoods were wonderful, and in those neighborhoods where the finest largest homes had been built, were all great. Wealth was not illusionary.
The saddest part of the post WWII period, was the white flight to the newly created suburbs. It was, and is understandable, but the consequences are horrific. These include filthy air, huge oil consumption, and endless auto expense, because of endless commuting, plus both parents having to work to make the payments on the illusionary wealth. The resulting juvenile delinquency because of un-parented and latch key kids is terrible. Makes me glad I am 70! The illusion of wealth today, with heavily mortgaged suburbia and financed autos, is comparable to any stage magician's tricks.
The illusion of wealth has been burst several times in America because of stock crashes. When, in January and March of 2,000, most thought the boom would go on forever, it didn't. The illusion of wealth was burst when it is estimated that $5 trillion in illusionary wealth, disappeared almost overnight. Millions, who thought they were set for life, discovered that they would have to work for the rest of their life, and had no retirement portfolio. The wealth was illusionary, and never actually existed at all. The corporations weren't showing profits comparable to their stock price increases. The P/E ratios were outrageous or there were none at all. The wealth was illusionary, and disappeared in a virtual instant. When gold and silver went heavenward in 1980, their value was also illusionary. Their price increase was caused by good old Jimmy Carter's mismanagement of just about everything, the Iran hostages, OPEC's stranglehold, and Bunker Hunt's attempts to corner the world's silver supply. Gold was being mined for $50 an ounce and selling for $850, so great was the demand. Silver likewise. It was all illusionary, and those who got out at either the top or close to it, profited greatly. Same with the stock market in 2000, and even 1929. Many smart people did.
The only things that are usually not illusionary, are tangible things, but even they can be misleading. Real estate prices today, in most areas, are in a large part illusionary. When a home cost $100,000 to build on a $50,000 lot, and a few years later sells for $500,000, it can be considered illusionary in value. Still, if one built and sold at those prices, a huge profit could be made. Actually, there are few things, if any, whose prices could not be illusionary. Real estate? Sure. Gold and silver? Yes, as 1980 illustrated. Stocks? You betcha. So where are we to place out trust? How can we weather storms of illusionary wealth, and not get wiped out? It's not easy, but a few things must be considered.
- Gold and silver are excellent buys today, as few are buying compared to the storm of demand that is in the immediate future, which will drive prices ever so much higher. There could well be a "silver squeeze" in May, which might well make silver to go $10 per ounce. It is still a bargain if you have a place to store it. Gold will go way up too, and especially when the next terrorist strike occurs and the dollar becomes a bigger laughing stock.
- Real estate in some large cities, and California especially, may be a bit risky, and perhaps today is equal to gold at $850, and silver at $54 in 1980. The reason real estate wealth might be illusionary, is because of high unemployment, which is probably closer to 14%, than the "official" 5.6%. Interest may go up, more jobs go overseas, and economic times much harder than those presently in evidence, might cause hundreds of thousands of foreclosures, flooding the markets, and causing prices to plummet.
- Stocks, except mine stocks, are now greatly overbought, and their price-earnings ratios (P/E) are far too high. Experts predict a large correction. I have often wanted to have a P/D ratio, or price-dividend, because "earnings" are not dividends.
- Currencies are a risk which can change with alarming suddenness. Suppose one went long on euros, which seemed to be a wise thing to do a few weeks ago. Today, it was a mistake, as the dollar has gone up for some strange reason. Same with the yen. Government manipulations of everything are at all time highs, in a futile effort to preserve their solvency and reputations.
One can get hurt in any investment today, yesterday, and throughout history. Tulip bulbs could have proven to be a bonanza if one had gotten out in time. Their prices were illusionary, as a tulip bulb costing thousands of dollars was ridiculous. When huge increases in an investment's value seems far too much, it often is! When you have bought a stock for $4 and it has gone to $50, take a profit rather than risk a crash. If you bought a home at $50,000 and it can now be sold for $500,000, take a profit and rent while you wait for prices to go down. Will they go down? No one knows where or when, of course, but it seems a safe bet they will.
The greatest illusion of all however, is the world's dependency and trust in their various currencies. Be they Swiss francs, French francs, Mexican pesos, Russian rubles, or Japanese yen. They are all illusionary in value, because they have none. Real estate is a tangible thing, as are gold and silver. If they are paid for and give comfort, don't sell. If you bought gold for $400, and did it as an investment, certainly do not sell at $450. If you bought silver at $7, don't sell at $10, unless you need the dollars. Real estate is not "fungible," whereas gold and silver certainly are. Real estate is dependent on neighborhoods, demand, and many other things not applicable to precious metals. One can hold enough gold in both hands to equal the price of an average home in suburbia. That gold can be carried about and moved with ease anywhere in the world, and that home can't be moved at all. Real estate may go down because of over-supply and declining neighborhoods. Gold and silver do not depend on either.
There is no such thing as a 'sure thing,' but if I were to hypothecate on a 'sure thing,' I would bet on gold and silver, with an emphasis on silver if you have the place to store it at no cost. I'm on vacation till March 26th. Protect yourself.
March 18, 2004
Don Stott has been a precious metals broker since 1977, has written five books, hundreds of columns, and his web site is www.coloradogold.com
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