Do you remember Scrooge McDuck?
Scrooge was the incredibly wealthy uncle of Donald Duck, the famed Walt Disney character. Scrooge was also a miser, bathing in vats filled with coins but never spending a dime. For Scrooge (and most of the kids who read the early Disney comic books), wealth was a palpable thing, something you kept in a closet or vault.
But it isn’t.
Wealth is conditional. Something of value in one place or culture may have no value in another. Something of value in one time can be dirt cheap in another. There is absolutely no such thing as secure wealth.
This is not an easy idea.
Most of us like to think that there is some level of money where we will feel very secure and we’ll stop worrying about money. When we’ve ‘got it made’ we won’t even think about money anymore.
Well, dream on.
The root of all wealth and all perceptions of value is income. It is income today and expectations of income tomorrow. Wealth, itself, does not exist. Wealth is an abstraction that represents promises of income.
This is not an epistemology break.
I’m writing this because a rising volume of terrorized e-mail is filled with questions about “where did my money go?” as if it could be tracked down, bagged, and returned.
In fact, wealth and value can disappear.
Let’s start with the market equivalent of the tree falling in the forest. Suppose you built a house deep in a desert. You hauled all the building materials, you imported the labor, you drilled the wells and installed the solar electrical panels, and you stocked the freezer. You’d have your own private fortress. It would cost you a fortune.
Query: How much is it worth?
Answer: Next to nothing. No one needs it and the services it provides have no value to most of the people on the planet. Many people placed a similar value on condos in Houston and Dallas only ten years ago because both cities had more condos than people who needed them.
The same thing happens in business.
I was once a director of a small conglomerate that owned a machine tool company in Rochester New York. Jerry, the manager of the division, loved equipment. He collected automatic screw machines the way some people collect old Jaguars and Faberge eggs. If it could cut, grind, and fill the air with the delicate scent of machine oil, Jerry wanted to own it.
Jerry bought equipment for pennies on the dollar when other shops were going out of business and selling equipment at auction. He put it in a warehouse, cleaned it up, and waited. When business turned up and companies like Kodak and Xerox needed to make new metal parts by the thousands, Jerry sold equipment at a large profit.
People put a high value on equipment when they expect to use it to make money. When they can’t use it to make money, they won’t buy it. What matters is income, flows of money. Nothing else counts. Today, and probably for the next year, you’ll be able to buy servers and routers for next to nothing in San Francisco and other dot-com hot beds.
You can see the wealth/income connection very directly in the market value of bonds. Issue a bond with a 12 percent coupon when the market demands it and your bond will be worth $1,000. But if interest rates decrease, the value of your bond will rise because the value of an income flow has increased.
Which brings us to the present.
Wealth was created when we developed expectations of fabulous future income. We invested in new technologies and expanding telecommunications services that promised to change our economy. It was all glorious and good.
What we didn’t do is identify the actual future sources of income for those businesses. That’s how we could value Amazon, just over two years ago, at more than the combined value of two companies that control about 65 percent of book distribution in the United States— Barnes and Noble and Borders.
Sadly, the income never materialized— so all the “wealth” that had been created to represent imagined incomes disappeared.
Will wealth reappear in the future?
Yes. Some will be real and durable; some will be illusion. The real wealth will be directly connected to one thing. Magnificent and compelling sources of income.
That’s what we need to watch for.
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Karolina Grabowska
(c) Scott Burns, 2022