FORTUNE roundtable
GEOFF COLVIN: So what is with these kids and what's in their future and ours when they get older? One shudders to imagine. Who better to ask than Nelson W. Aldrich Jr., writer, editor, and author of Old Money, the Mythology of Old Wealth in America. He joins us from New York. Whether you're rich or poor or in between if you have kids you want to help them wisely. Jordan Goodman is author of America's Money Book; he also joins us from New York. Mr. Aldrich, a lot of ordinary Americans when they seize these programs are appalled by what they see. You've had a lot of experience observing rich kids growing up. What do you make of the current crop?
NELSON ALDRICH: I too am a little appalled because I think the previous generations of rich kids had -- I hate to mention this dirty word -- but they were born into a social class which made some efforts, educational efforts to teach them how to behave as rich people. These children have no notion whatsoever of their powers, the power that money gives them both to destroy them and to do good for others. It seems to be crushing them. The money seems so powerful and they seem to themselves so weak and society looks at them like that, too. They see this mountain of money on one side and these puny little boys and girls on the other hand and the discrepancy is comic or sad or disgraceful to the whole system we live under.
COLVIN: A lot of people when they watch these programs and are appalled by what they see say, "blame the parents." Is that a fair reaction?
ALDRICH: Sure it is. Who else? The only other alternative would be to blame a society that heaps such unequal shares of wealth on such very, very few people who haven't earned it.
COLVIN: Talking about parents, Jordan, everybody with kids or grandkids, no matter how much money, they have agonizes over what to give them, when, with what conditions. First off, what are the biggest mistakes people make?
JORDAN GOODMAN: Well, several mistakes they make. The first thing is, they don't teach their kids about money, so the kids have no idea, when they have responsibility, what to do with it. As you know, I do a lot of radio shows. I was doing one in Texas recently, and I think it was a sophomore from the University of Texas said he writes checks until he runs out of checks, and that's when he knows he's run out of money. And the idea of actually having something behind it was a completely foreign concept to him, you know?
There is more personal financial literacy going on in the schools these days, but nothing close to what's necessary. There's a kind of like, "We don't want to talk about that money thing," and let them figure it out on their own. And then the kids get into debt, particularly in college -- the average freshman has $5,000 in credit card debt today, and they max it out right away. They've never had any experience with this.
COLVIN: Freshmen in college?
GOODMAN: Freshmen in college, they average about $5,000 in debt and five credit cards by the end of their freshman year, most of it usually maxed out, that's correct.
ALDRICH: That's very interesting, because what it suggests is wealth, or the feeling of wealth is incredibly democratized right now.
COLVIN: Jordan, there's another factor I've heard you talk about, a mistake people make that you call the Ferrari factor. What's that all about?
GOODMAN: The Ferrari factor is, you set a up a uniform gifts to minors act account, where the money is basically in the kids' name and at 18, it is his money to do with what they like and they go buy a Ferrari with it in many cases.
COLVIN: How do you avoid making that mistake?
GOODMAN: Well, there are several things. First of all, teaching them about money and the value of money in the first place, and not just handing it to them, but having them earn it a little bit. And then you can put various trusts in place so they don't get the money at 18, they might get it in staggered amounts, at 18, 25, 30; as they become more responsible, supposedly, they're going to be not blowing it all at once. But there are kids out there who will go to Europe, who will buy fancy cars, whatever it may be, just because the money is available and legally nobody can stop them from doing it once they turn 18.
COLVIN: Now what about people of modest means, people who have ordinary incomes and assets and they want to pass along some money to their kids now while they're alive. What's the smartest way to do that?
GOODMAN: There's a lot of things you can do. First thing is, you can give up to $11,000 without gift tax any year to anybody. So a mother can give $11,000; a father can give $11,000; your grandmother, give it your neighbors, whoever you like, without gift tax. Anything over $11,000, the donor actually pays the tax. You'd think it would be the receiver, but it's actually the donor in that case. So that's the first way you can do it.
The second one would be to set up a so-called section 529 college savings account where you can put money in, it grows tax free as long as it's used for college education and that's a good way to put the money aside where you know the kid is going to use it use it for education, and not the Ferrari that he probably would rather use the money on.
Another thing they can do is to actually have the kids earn some money. If you have a legitimate job for a kid he can actually earn a regular salary.
COLVIN: For your own kid?
GOODMAN: For your own kid, that's correct.
GEOFF: And the IRS doesn't look askance at this?
GOODMAN: As long as it's legitimate, it's fine. You can't pay a 5-year-old $100 an hour to take out the garbage or something. It's got to be a legitimate wage for legitimate work that he's qualified to do. But you could have your kid do filing in your office. There's probably a lot of things you could do if you have a home business, which many people do. It's not only the financial part -- of course, those are deductions for you as a small business -- but it's also having the kid earning some money and then having a sense of responsibility. They're going to send spend that money much differently than if it was just given to them.
ALDRICH: Those are all terrific ideas. I wonder how young you can start it.
GOODMAN: There are child labor laws. You've got to be careful. We can't go exploiting -- although you know, if you put a 1-year-old on the Ivory Snow box, I guess that's not exploitation. (chuckles)
COLVIN: Mr. Aldrich, with all these programs, a lot of people are thinking, what is their significance for the country overall? Does this mean a lot one way or the other? What do you think?
ALDRICH: I feel at this present moment the early years of the 21st century is very like the early years of the 20th century when the great fortunes of the 1880s and '90s were beginning to devolve down on heirs and heiresses, and at that time you had society pages which dealt with virtually nothing else but the antics of the hereditary rich. And you had Mark Twain coming back to this theme again and again with stories of little rich kids who suddenly woke up to find themselves peasants in King Arthur's England. Now we have Paris Hilton being a peasant in Arkansas.
The significance of this for American life is that, in a word, is philanthropy, is charity. Because every one of these -- this cohort of inheritors -- is going to end up on the boards of trustees of all the major cultural, medical, blah, blah, blah institutions of this country. They're going to have to, whether they like it or not, they're going to have enormous responsibility. And they have a chance to do a great deal of good. And in effect, earn the money they inherited retroactively. That is the point that I make.
GOODMAN: But clearly wages are not going up at all as much as expenses in many cases, and that's why you're seeing Americans falling into debt and they're sitting there in their homes saying, "I wish I could be, have some easy money for me." That's why you see people playing the lottery and the Powerball and all those kind of things.
ALDRICH: I just would also add that I have a dim hope -- and I mean that, it's a hope but it's very dim -- that this cohort of rich kids will grow up somewhat similar to the cohort of the 1910s and 1920s. Namely, people like Franklin Roosevelt, Teddy Roosevelt, and so on, who will because they inherited it, didn't have to make it. almost automatically grow up not perhaps despising wealth, but a little bit embarrassed about it. And as we all know from these reality shows, knowing full well that it does not buy happiness. It just buys a chance to do some good for your fellow man. And that's a good thing in a culture like America where money is everybody's dream.
COLVIN: It's a good note on which to end. Gentlemen, thank you very much, Nelson W. Aldrich Jr. Jordan Goodman.
Faber interview
KAREN GIBBS: As you prepare the holiday table and shop for gifts to place under the tree, you might consider putting some of those items in your portfolio. Sure, stocks have had a great run this year, but for some real holiday cheer, how about gold?
Prices are up more than 42 percent. And have you been to the grocery store lately? The main dish on many holiday dinner tables, beef, has seen a 27 percent rise in retail prices.
Investments in things you can touch, and even eat -- commodities -- are on a tear. Record amounts of money are pouring into mutual funds invested in gold and natural resources. This may be the start of something very big, according to Hong Kong-based investor Marc Faber, whose widely read Gloom, boom, and doom report has an uncanny knack for discovering opportunities in all corners of the world. So, Marc, let's get right to it. What's your
take on current market conditions around the world?
FABER: I think in general, I'd take it easy right now because the markets are overheated. There is, in my opinion, much too much speculation, and I think the upside is limited. I would wait for a correction and see how deep the correction might be because what may have happened is that the best of economic growth is already behind that and us next year will be a tougher economic environment than we just had in the last three to six months. So I'd be a bit cautious.
GIBBS: But you do suggest that investors look at either emerging companies, emerging countries, emerging markets that are rich in natural resources?
FABER: If I was a U.S. investor, I would diversify some of my money into different currencies. I'm not saying the other currencies
are much better, but at least there is some diversification. Because in this country, the policy of the Federal Reserve is for a weaker dollar bill, print money. And I think that investors should also have some precious metals, gold, for instance, or silver or mining companies. They should also own some oil companies. I would also advise investors to hold some securities in Asia, in the Asian markets, because the valuations are low.
GIBBS: Commodities have been kind of depressed over the past 20 years. You think it's their time in the sun. How do individual investors participate in a commodities run? How would you suggest them doing that?
FABER: Sophisticated individuals could buy commodity futures. They can also buy a commodities index. They can also mirror commodities
by buying, say, a basket of oil and energy stocks. They can also buy mining companies, plantation companies and, in general, resource-based industries,
basic industries, paper, lumber. They would benefit essentially from rising commodity prices.
GIBBS: You're on record as saying we might see gold at $1,000 an ounce., but not all of us can buy gold bullion. But a lot of us wear gold as jewelry, and there seems to be certainly as we're coming into the holiday season, a pick up in demand for that. Can you address that demand side?
FABER: Some people argue, "Well, gold has basically no economic value," and to these people I always mention, if you have a girlfriend and you keep on giving her copper rings, and I have a girlfriend and I keep on giving her gold rings, I keep the girlfriend longer. That's for sure.
GIBBS: I agree with you there.
Talk about some of the other raw materials. there also seems to be some percolation in the demand for the softs, whether it's the cotton, the sugar, the cocoa. Cotton I think is at five-year highs.
FABER: Yes, exactly. I mean some commodities have had huge moves, admittedly from a very low level. rise in commodity prices was due principally to the incremental demand coming from China, because the other countries the global economy was essentially weak in the last two years. And I think the Chinese economy now is overheating, so there may be a slowdown, and the demand for commodities next year may not be quite as strong as expected. And therefore I expect some kind of a pull back in commodity prices, but long term, I think for the next 10 years, you will have rising commodity prices.
GIBBS: Can you explain coffee in more detail? It's not just that cup of Joe I fix in the morning.
FABER: Well, basically coffee is a very interesting commodity. It's a very large commodity in terms of volume. To give you some statistics, in Switzerland, on a per capita basis, people drink 50 times more coffee than in China. Now I don't think that the Chinese per capita consumption of coffee or meat or other food items will go to the Swiss level or the American level, but it could go to the level that people drink coffee in Taiwan, in South Korea, in Japan. And that would mean that the demand for coffee in China would increase very substantially, and that would drive prices higher.
GIBBS: Well, how does an individual investor invest in coffee?
FABER: I think the best way is to kind of just buy coffee futures. An alternative is obviously to invest in countries that have a very large agricultural base. Argentina would be one. The other one would be Brazil, and then obviously Indonesia, and to some extent Malaysia. In the case of Brazil and Argentina, the stock markets have been very, very strong following the crisis 18 months ago. They've risen very strongly, and so they're overbought at the present time and I wouldn't necessarily buy them. But say if they corrected significantly, I think that would be something to look at.
GIBBS: Have investors here in the United States been kind of suckered into believing that stocks is the best investment class over the long term?
FABER: Everything that goes up is always highlighted and emphasized that in the long run it will always go up, and then things change. The bull market in bonds that lasted for more than 23 years is now ending, or has ended. And the huge bull market in stocks, 1982 to 2003, has also come to an end. It doesn't mean that stocks will collapse. They may move sideways like between 1964 and 1982, but the big performance you had in the '80s and '90s, that I think is over.
GIBBS: The U.S. markets have been said to be the engine that drives the world, and certainly it has been affecting the Asian markets. If we do see a sideways stock market here in the United States, what does that mean for the Asian markets?
FABER: I think that from here onwards the Asian markets, along with commodity prices, will outperform the United States, because the valuations are so much lower. I could buy you a portfolio of Singapore shares, Malaysian shares, Thai shares, that would have a dividend yield of between 5 and 7 percent and price/earnings ratios of around 11 times earnings, which is much lower than the price/earnings ratios we find in the U.S. stock market. And the growth prospects of Asia are much better. We have 3.6 billion people in Asia, 56 percent of the world's population. Our industrial production is 50 percent higher than in the U.S., and we have the three fastest growing economies in the world, China, India, and Vietnam.
GIBBS: Mark Faber, it's been a fascinating discussion.
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