THE BEST BUSINESS IN THE WORST OF TIMES - THE BILL BONNER LETTER
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THE BILL BONNER LETTER
THE BEST BUSINESS
IN THE
WORST OF TIMES
SPECIAL REPORT 2015
The Best Business
in the Worst of Times
T he young woman caught my eye.
Rather, her eye caught my eye.
Because her eye had a big dark circle
the street to the local finance compa-
ny, also known as Poplar Jewelry &
Loan, aka a pawnshop.
“Nah... that’s too big.”
Meanwhile, the young woman went
to the counter with a bag in her hand.
under it, as if she had been slugged We would also divide the labor be- From it, she drew out a video game.
recently. tween us. EB would keep his attention I know that for certain because that’s
I was about to settle on the Girl- on the figures. I would try to draw what the guy behind the counter said.
friend Abuse Hypothesis when I no- the measure of the people behind the “We’re not taking any more video
ticed that the other eye had the same counter… and in front of it. games,” he declared. “We’ve got too
big dark circle. It was unlikely that she I was thus engaged when the young many of them already.”
got socked in each eye in exactly the woman came in. The store was busy The girl didn’t flinch, pull a face, or
same way, so another hypothesis was already, with several customers en- complain. She seemed used to disap-
needed. gaged in some form of negotiation... pointment. She put the video game
“Meth addict,” was EB’s judgment. One – a reedy man of about 40 with back in the bag. She left.
I didn’t think I had ever met a meth a wispy beard, in baggy shorts and a While this was going on, EB was
addict, so I had no idea what one Hawaiian shirt – had handed over a uncovering the secrets of the pawn-
looked like. large ring, with a blue stone in a silver shop business. Not only had he
“Look at the teeth,” EB continued. setting, to the plump young man be- already figured out the margins, he
“Their teeth go black... and then fall hind the counter. had engaged one of the attendants
out... It seems to eat away at the bones “Yeah... it’s not real,” said the young in a conversation about how the
of the jaw.” man without a pause. “It’s not real sil- business actually works.
EB is the researcher. I’m just an ver. It’s silver plated. It’s worthless.” “It’s a funny business,” he began.
observer. Its owner studied the man talking. “We have four guys behind the count-
We’ve looked at the strange dis- Then, he took his eyes back to the big er. Between us, we can give you a good
tortions wrought by zero or negative ring. It was as if he couldn’t believe it. idea of what almost anything is worth.
interest rates. Most of this “free money” Or didn’t want to. He stared blankly It takes time, though. It takes a few
is available at the top end of the wealth for a few seconds. years. But after a while, you begin to
pyramid. The rich use it to get richer. “OK...” get fast at it.
But what happens at the bottom? He took the ring back and went out “What people don’t realize, though,
With EB Tucker, my lead research- the door. is that it’s not a business of buying
er, I decided to have a look. Our re- Over to the other side, a large cou- and selling merchandise. It’s a busi-
search mission was simplicity itself. ple were shopping for an engagement ness of helping people finance the big
We would drive to the suburbs, buy a ring. events and misfortunes in their lives.
piece of jewelry – in this case, a wed- “How about this?” said the man to Most of our customers are repeat cus-
ding ring. And we would take it down his future bride. tomers.”
1
The Bill Bonner Letter
A guy’s truck breaks down. He has EB and I were exceptions. We were
been out of work for a few weeks. He looking for investments that were
has no savings. And no credit card. There are a good in good times... and better
And a credit rating lower than his when times weren’t so good. Sensing
body temperature. What can he do? couple of not-so-good times ahead, we were
What he does at Poplar Jewelry &
Loan is to come in with his guitar and
advantages to looking at pawn.
some amplifying equipment. (The being down low The Advantages of
place was full of Gibsons and Stra- Lending to the Lower
tocasters.) He doesn’t want to sell it. on the ladder: Rungs
He just wants to put it up as collat-
eral against a loan. The loan amount
You have less far “What I like about these businesses,”
EB explained, “is that they are finan-
will be about 60% or 70% of the to fall... and the cial firms... lenders... but with none
retail value of the used equipment... of the risk that most lenders face.
which is about 40% of the value of the number of Payday lenders have to make sure the
equipment if it were new in a shop. borrower doesn’t get fired. Subprime
He paid $1,000 for it. The pawnshop potential auto lenders face a whole different
knows it could sell it for $400. It gives
him $250. And he’ll pay about $290 a
customers is problem: Their collateral has wheels.”
Financial firms servicing the lower
month later to get it back. growing. depths of American households face
This customer is not a great credit special challenges.
risk. On the other hand, unless the Their clientele are often unreliable,
pawnshop makes a mistake, it is more not charging for the service?” we with disorganized lives and chaot-
than covered. And if the regular cus- wondered. ic, seat-of-the-pants finances. The
tomer comes in every month to pawn “This is a repeat business. We want transaction amounts are low, too.
and reclaim his stuff, he will pay an good customers. If you have a good Unlike Goldman Sachs, which might
annual rate of interest of 243%. experience, you’re likely to come charge $10 million... or $100 million...
We verified these figures by pawn- back.” for organizing a single act of insane
ing the gold wedding ring we had The National Pawnbrokers Associa- leverage, pawnshops deal with many
just purchased for $500. The fellow tion confirms his story. About 80% of small transactions, each one sad or
behind the counter didn’t miss a all pawn loans are repaid and repeat even pathetic. And each one requiring
beat... He took it. He put it in a machine customers are the core of that busi- time, attention, and some measure of
that measured the gold content... and ness. They often borrow against the financial risk.
weighed it. same valuable item each time they The pawnshop business seems a
“This is 14k gold. It’s only half the need emergency cash. funny thing to consider as an invest-
gold per weight as a gold coin, for If life rationed its misfortunes ment. But there are a couple of ad-
example. So, you’ve got a ring with more equally, a regular customer vantages to being down low on the
about $178 worth of gold. I can sell it would be an anomaly in a pawnshop. ladder: You have less far to fall... and
for $200. So, I’ll lend you $120. But for some people, misfortune seems the number of potential customers is
“If this is your first time here, I’ll do to arrive as regularly as a monthly growing.
this at no charge. You bring me back magazine. Cars break down. Jobs are Last month, it was announced that
$120 in 30 days, and you can have lost. Marriages break up. People get the employment picture had held
your ring back. It would normally be sick. steady, with only 5.5% of the work-
$144 to get it back.” Few people go to a pawnshop look- force now out of a job. This sounds
“How do you make any money by ing for an investment opportunity. like good news. It suggests that the
2
The Bill Bonner Letter
lines of people waiting to see some- airplane flight. You are almost the ladder... and into Poplar Jewelry &
one at Poplar Jewelry & Loan and forced to use one of the electronic Loan.
other pawnshops will become short- check-in terminals. And if efforts to Both health care and education
er. People with good jobs rarely need raise minimum-wage standards gain function as protected monopolies.
desperation finance. traction, this trend will accelerate. They face little competition from
It was only on the surface that the And while these income figures are abroad. As a result, prices rise much
report seemed glossy. A closer look “real” levels – that is, already adjust- faster than those of imported goods.
shows that the economy only add- ed to inflation – many major expenses Health care spending – in real terms –
ed 126,000 jobs. This is the weakest are growing fast, pushing the “middle continues to rise about twice as fast as
growth in over a year. Wages are also class” further toward the bottom of other costs. With higher health care
stagnant. Showing just a 2.1% in-
crease over the previous year.
Despite the heroic efforts of the
Fed, full-time employment has only
returned to the level of 2006. During
that time, however, millions of people
have gotten married, divorced, been
born, died... and approximately 5% of
the population has fallen out of the
full-time employment numbers. The
population rose. The number of full-
time jobs did not.
Instead, people had to make do with
more part-time work and pick-up jobs,
the kind of employment that leaves
you in need of episodic financing.
Another chart, shows what this
has done to incomes. Everyone
beneath the top 20% of house-
hold incomes has lost ground for
14 years. The middle quintile –
where there are about as many
people better off as worse off –
has real household income equal to
what it had a quarter of a century
ago.
Importantly, from our point of
view, we see no evidence that this
trend – toward lower real incomes –
is going to change anytime soon. In
fact, it’s likely to become stronger.
Outsourcing was the big trend 20
years ago. Now it’s automation. You
see that when you check in to an
3
The Bill Bonner Letter
costs and stagnant or lower real in- possessions. That’s in addition to one money (or otherwise boost credit).
come, the average person is paying a of the most robust homeless popula- The economy takes up the new pur-
higher percentage of his daily budget tions I have ever seen.” chasing power and confuses it with
on doctor bills. Towson, Maryland, where we found real demand. Sales go up. Prices rise.
And at American universities, it is Poplar Jewelry & Loan, is not Venice A boom follows.
not unusual for administrative costs to Beach. But it is not a down-and-out But it is a fool’s boom. Jean-Baptiste
have risen 300% while student enroll- community, either. It’s a middle-class Say explained why more than 100
ments only went up 15%. Nor – as you suburb of Baltimore with shopping years ago. “Say’s Law” tells us that
can see from the chart below – is this malls, restaurants, car dealers, hous- real demand can only come from
“investment” a particularly good one. ing developments, and all the other production, not from printing-press
Even a college diploma is no sure things you’d expect. money or expanded credit.
protection from the downdraft of this But “middle class” is a slippery It is not called “Say’s Good Idea” or
economy. term. Recently, the slope has become “Say’s Suggestion.” It’s “Says Law”
slicker. It’s becoming easier to slip because it is like the law of gravity.
The Slipping Middle Class out of the comfortable middle-class You can pretend it doesn’t exist. You
EB offers some observations from life into something more difficult... can ignore it (for a while). But like all
his current home, Venice Beach, more desperate. natural laws, it eventually has the last
California: Incomes are flat or falling. Expenses word.
“We’re headed toward a society with are rising. Debt cannot increase demand be-
no middle. Extreme high and low end What can they do? cause it is just an arrangement be-
but limited mobility. Just like Central On the evidence, they fill the gap tween people. The saver transfers his
American countries. with debt. That has been the modus savings to someone else. There is no
“In Venice, the average home price operandi for the last 30 years. increase in demand – just a shift from
is now $1.5 million. A lot of those sales The Fed is feeding this. Every time one person to another... or from one
are for tear-downs. But the number of “demand” slacks off, the Fed appears time to another. In order to increase
people living in their cars is extremely with more credit. real purchasing power, real output
high. I live on Rose Avenue... On the The idea of creating and enhancing must increase. People have to pro-
way to the coffee shop in the morn- “demand” with new money is hard- duce more. And earn more.
ing, I walk by the cars... People are ly new. It is by far the easiest way to Demand comes from real incomes.
just sleeping in them with all of their simulate demand growth. You print And productivity drives, more or less,
4
The Bill Bonner Letter
incomes. And capital investment
drives productivity. When you spend
less than you make, you’ve created
capital. But by discouraging saving,
this funny money pinches off capital
investment, innovation, and produc-
tivity.
Instead, money is used simply to
make more money – bypassing the
whole sequence of saving, investing,
and productivity growth and income
growth that normally drives the
economy forward.
Buybacks, M&A, carry trades... art
auctions.
Artificially stimulated demand –
from low interest rates or newly print-
ed money – actually depresses real
demand. Real demand requires the te- And if our analysis is correct, there will anyone really miss it?
dious process of saving and investing will be a lot more of it. As present pol- I don’t know. But the more of this
in new productive capacity. icies diminish real capital formation, kind of money the central banks emit,
EZ money discourages long-term depress demand, and encourage spec- the more people down near the bot-
capital investment. The Bureau of ulation, more people will be knocked tom of the middle class will need the
Economic Analysis reported first- off the comfortable middle-class old-fashioned kind of money. And the
quarter GDP grew at a measly rate of rungs of the ladder. more we long to find solid, down-to-
0.2%. Declining levels of fixed invest- You may have noticed, too, that the earth businesses that won’t blow away
ment is still one of the biggest prob- latest inflation report did not bring when the next strong wind blows.
lems. Instead of investing with the good tidings to marginal households.
aim of producing more wealth, folks It showed prices rising at a 2.8% an-
use the cheap credit to speculate, nual rate. This implies that the de- The Only Lenders Will Be
drive up stock prices, and produce mand for debt – at the lower ranks of the Pawnshops
quick and easy gains. Starved for real the middle class – is growing. The public debt of the G7 econo-
investment, production actually de- At the top, money has become ethe- mies has grown 40% since the crisis
clines... and with it goes real demand. real... cheap... almost unreal. The of ’08 – to 120% of GDP. Total global
Phony demand doesn’t stimulate central banks tap on the keys of their debt-to-GDP has gone up 20%, even
real demand; it suppresses it. computers. Huge amounts of cash as the private sector attempted to de-
Or, as sociologist Hans-Hermann money – in the form of electronic leverage. Interest-rate derivative con-
Hoppe put it in a 2013 debate last notations – fly down the wires at the tracts now tote to some $584 trillion,
year with New York Times columnist speed of light... and then onto laptops up $20 trillion in the last six months.
Paul Krugman, “If printing press and iPhones via means we haven’t yet In Europe, the official central bank
money really could make people been able to understand. interest rate is now below zero.
wealthy, tell me why, Mr. Krugman, This is “funny” money. As we no- In Japan, the bond market has prac-
poverty still exists.” ticed last month, no one earned it. No tically ceased to exist. Private buy-
Poverty does still exist. By our ob- one saved it. And no one lent it to a ers have almost dropped out. Nearly
servation, there’s plenty of it around. credit-worthy borrower. If it is lost, three of every four government bonds
5
The Bill Bonner Letter
are funded by the central bank. Even one knew exactly what was in it. And “And what will happen to last
so, yields are still microscopic, with when real estate prices headed down, month’s Never Nevers then? Yelp,
the 10-year recently trading at 0.42%. they were shocked to discover what LinkedIn, Twitter? There is no net in-
U.S. corporations are borrowing – tripe it was. come. Maybe they’ll go the way of un-
as measured by bond issuance – at a “The real problem in 2008 was the built Florida condo projects after the
record pace. In 2007, corporate bond income-producing potential of the last boom.”
issuance saw $1.1 trillion of new real estate had stayed about the same But EB tells me the pawn business is
bonds issued last year, the total will
reach $1.4 trillion. Corporate debt is
higher than ever... and growing faster
than any other kind of debt.
About half of this money is used to
buy back shares. And most of that gain
– seen by shareholders as rising stock
prices – will disappear in the next
bear market. The trick, as I discussed
last month, is to find a way to take the
money... and put it into something
that doesn’t disappear when the going
gets tough.
This month we have gotten half the
way there. We have found a finance
industry that not only won’t disap-
pear when the credit bubble ends; it 2005
will get better.
“The problem with most financial
businesses,” EB explains, “is that they
inflate the value of their own collat- while the price doubled or even tri- different. The margins are good. The
eral. You can see that right now. Wall pled. When there wasn’t a new lend- business is solid.
Street finances billions... trillions... in er with better terms available, buyers In good times, that is, when credit
M&A, buybacks, and takeovers. And were only willing to pay a price that is bubbly, they probably realize their
the more money it pumps into the sys- matched the property’s income po- worst results. Why would you pay
tem for these transactions, the higher tential. That’s what happens when 243% interest to a pawnshop when
the value of the underlying stocks and the music stops. you can get credit much cheaper else-
bonds. As the value of their collater- “But this time it’s different... sort where? But then, when the economy
al goes up, they lend more and more. of. Speculative capital is finding its softens... and the part-time work is
And then, when the credit cycle turns, way into the equity market. It’s in less frequent... and the major, main-
they’re surprised to find their collat- the hands of fewer owners. And those stream lenders are tightening up, you
eral somewhat, uh, impaired.” owners are making huge capital gains may not have a choice.
EB continues: “That is what hap- while the income produced by the un- Your marriage goes bad. You have
pened in the crisis of ’08. Wall Street derlying businesses stays about the an accident in your car. You get fired
had lent heavily against the value of same. When the easy money dries from your job. You need money. And
housing. Then, it had sliced and diced up, buyers will be willing to pay a fair the only people who will lend to you
the credits, and repackaged them price for the actual income produced are the pawnshops.
into a kind of derivative spam. No by the business. “Cash America International (NYSE:
6The Bill Bonner Letter
CSH) is the largest publicly traded gasoline, barely more than minimum “Great.” He didn’t elaborate.
pawnshop operator,” EB tells me. “In wage… barely worth picking up at all. “Do you take credit cards?” Then, I
2009, the company’s sales grew by 9%. Still, I was curious. realized... why would someone with a
The next three years, its revenue grew I walked into the shop. The same valid credit card want to borrow from
by 15%, 22%, and 14%, respectively. crew were behind the counter. But this a pawnshop, at what amounted to an
But CSH traded down in 2009 just like time there were a couple more. These annual rate of 243%?”
the rest of the market. It traded down were older men. One wore a special “We take debit cards only.”
while its sales improved.” lens for inspecting jewelry. There may be easy money and mad-
“But what about its collateral?” I Business was booming. Some cus- ness at the top, but at the other end
asked. “Doesn’t it go down in value, tomers browsed amid the pawned rings of the credit pyramid, people “keep
too?” and bracelets. A middle-aged, appar- it real.” No one has much money. No
“Not really. You saw what happened ently middle-class woman had brought one gets it easily. No one has delusions
to our gold ring. Five hundred dollars in a bag of jewelry. One by one, the man about the way the money world works.
at the jewelers – which was a fair price, with the magnifying class examined Girls with drug problems need cash.
retail. The same ring is priced at $200 the rings, bracelets, and necklaces. Guys with truck problems need to get
at the pawnshop. The pawn lenders al- “No... back on the road. A man looks in the
ready have the lowest prices in town. “No... empty glass of his broken marriage and
When money gets tight, people go “Oh, this one is gold... finds a treasure at the bottom – a sur-
to them to get better deals. Business “No...” plus gold wedding band. These people
gets better on both sides. More people The woman’s face was expressionless. aren’t clever. They cannot manipulate
pawning their goods. And more people Another short woman came in. She the system. They don’t understand it.
who want to buy them.” was accompanied by her short, plump They just get by as best they can. In
After the requisite 14 days had daughter, who carried a set of golf good times and bad, they need short-
passed, we returned to the scene of clubs. term financing.
the pawn to reclaim our ring. We had “These were my husband’s,” she said Lenders – such as Poplar Jewelry &
gotten $120 for it. It cost $144 to get with a hard-bitten New Yorkish accent. Loan – are a solid business relatively
it back. And it was worth $178 in gold “It’s all new and it’s all here. And I got untouched by the hallucinations and
content. everything in here. Even his balls... heh deceptions of ZIRP, NIRP, QE, and
You can do the math; the trip would heh.” Reverse Repos. They will be an even
take us about an hour, all considered. No one laughed. It’s all business in better business, I imagine, when the
As long as you don’t consider how Poplar Jewelry & Loan. dream ends.
much it cost in the first place, it would We presented our claim ticket.
net us all of $34. Minus the cost of “How’s business?” we asked.
Customer Care: Call (800) 681-1765 9 a.m. to 5 p.m. ET, www.bonnerandpartners.com.
The Bill Bonner Letter is published by Bonner & Partners. Registered office: 14 W Mount Vernon Place, Baltimore, MD 21201, United States.
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review investment prospectuses, when available, and should consult investment counsel before investing.
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