The Dangers in Extrapolating GDP Growth Trends — Part Two

How can you spot when there’s absolute belief in a trend?


If the sentence begins with, ‘You can’t go wrong buying…’ or sentiment to that effect, alarm bells should start going off in your head.

Whenever you hear those words, whatever it is that you can’t go wrong buying…tulips, gold, ostriches, Sydney property, bank shares…is close to peak exponential growth.

Once there’s universal belief that all risk has been discounted from the investment equation, that’s the time when the investment poses THE greatest risk.

The narrative becomes so compelling, no further analysis is required…just accept the accepted wisdom.

Here’s a real-life example of how extrapolation can go horribly wrong.

This was the narrative…all of it is true.

  • The Big Apple — New York — was (and will be again) a thriving metropolis.
  • The population on this 23-square-mile island — with locals, workers, and tourists — can exceed four million people on a daily basis.
  • Car ownership among the locals is low. Parking is so expensive.
  • Lots of people need to be transported in and around the city.
  • Hailing an iconic yellow cab is one of the easiest — and if there’s enough of you, sometimes the cheapest — way to get around NYC.

Only a decade ago, you could not go wrong buying a New York taxi medallion (licence). They were a highly-prized appreciating asset.

In 1980 a medallion was selling for US$100,000.

In October 2011, The New York Times reported:

2 Taxi Medallions Sell for $1 Million Each

Source: The New York Times

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Here’s an extract from the article (emphasis added):

Two New York taxi medallions — aluminium plates that grant the right to operate a yellow cab — changed hands this week for $1 million apiece, the highest recorded sale since the city’s modern livery system began.

The sale was the culmination of decades of astonishing growth for the humble medallion, which is nailed to the hood of every yellow cab in the city. When New York issued its first batch of medallions in 1937, the going price was $10 even, or $157.50 in today’s dollars.

Some perspective: The Dow Jones industrial average has risen 1,100 percent in the last 30 years. In the same period, the value of a taxi medallion is up 1,900 percent. That return beats gold, oil and the American house.

That last paragraph is indicative of a market getting close to its peak. Look how well this has done compared to that, that, and that.

The word ‘has’ is small but crucial. What has happened is not necessarily what’s going to continue happening.

Here’s the obligatory exponential chart to prove you couldn’t go wrong buying a NYC taxi medallion…

NYC Taxi Medallion Worth Its Weight in Gold

Source: All Star Charts

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The upward trend continued until 2014, when NYC taxi medallions peaked at a record high of US$1.3 million.

Three years later in September 2017, The New York Times reported:

Taxi Medallions Once a Safe Investments

Source: The New York Times

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This is from the article (emphasis added):

Taxi ownership once seemed a guaranteed route to financial security, something that was more tangible and reliable than the stock market since people hailed cabs in good times and bad. Generations of new immigrants toiled away for years to earn enough to buy a coveted medallion. Those who had them took pride in them, and viewed them as their retirement fund.

Note the language…once seemed a guaranteed route to financial security…this is another take on the ‘you can’t go wrong buying…’ narrative.

Three ‘Deep Value’ Stocks to Watch as the Market Recovers. Discover More.

Nothing is ever guaranteed when it comes to assets whose values are determined by a market. People seem to forget or ignore the simple premise of what expands can also contract. Markets are subjected to various influences.

The most recent update on NYC taxi medallions comes from CNN on 9 January 2021 (emphasis added):

An asset once valued at over a million dollars in 2013, medallions now go for anywhere between $75,000$100,000

From US$1.3 million to US$100,000 or less…how the mighty medallion has fallen.

The magnitude of the price collapse exceeds 90%.

Buying a medallion has been anything but a guaranteed route to financial security.

As reported by NBC News on 17 March 2021:

How Covid Exacerbated NYC Taxi Drivers

Source: NBC News

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Ouch…a US$500k debt on a US$100k asset.

According to one medallion owner interviewed by NBC:

“I have no future, no health care plan, no savings, no retirement, nothing,” Singh said. “I don’t know how we can survive in our old age and who’s going to take care of us.”

The taxi medallions are back to the level first reached in 1980…over 40 years of price growth has gone in the space of eight years.

Those who sold somewhere along the curve of the extrapolation phase, no doubt, at that time, were experiencing seller’s remorse…‘if only I’d held on, I could’ve got more.’

Bet they’re not thinking that now.

This is why the true story of any investment cannot be told until the market cycle has fully rotated.

There’s seller’s remorse in the upside of the cycle AND, then there’s buyer’s remorse (why did I do that, especially with borrowed money) in the downside.

When I read this article in FinanceFeeds on 1 June 2021, it had an all-too-familiar ring to it:

cryptocurrencies still continue to outperform traditional/legacy markets such as oil, stocks, and indexes. The longer-term returns on crypto-assets and their high volatility pique investors interest in a way that legacy markets simply cannot. The demand for this new asset class remains as high as ever.

Remember this from the NYT article in October 2011:

Some perspective: The Dow Jones industrial average has risen 1,100 percent in the last 30 years. In the same period, the value of a taxi medallion is up 1,900 percent. That return beats gold, oil and the American house.

Same language. Same cockiness.

The price of cryptos is THE most extreme example of extrapolation…even greater than tulips, the Wall Street crash of 1929 or the dotcom boom.

The narrative is very compelling. Blockchain is the disruptor to the centralised financial system.

But what happens if there’s a disruptor to the disruptor…a better blockchain?

Won’t happen?

That’s what NYC medallion holders thought about their monopoly.

Buying into a narrative of extrapolation is risky enough, but borrowing into it…well, that’s just plain nuts…ask these guys (the ones suffering from buyer’s remorse):

NBC News

Source: NBC News

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Next week will be the third and final part of the extrapolation series in the dangers of extrapolation.

Stay tuned…


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

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