The Bear’s Lair: The Age of Pointless Excess

The Financial Times last week gave an account of the new “pencil” tower at 111 West 57th Street that made me glad I am not a billionaire. For one thing, if by inordinate wealth I were compelled to purchase an apartment on the upper floors of that building, the weight of my book collection – all 291 volumes of “Punch” magazine and some remarkably heavy 17th Century “bokes” –would fully counteract the dampening weight in the basement, that protects the tower from swaying too much in high winds. If my library were so resident, in a typical New York storm the entire structure would become unstable, swaying wildly from side to side and perhaps in a New York rush hour showering immensely heavy volumes from a height of 1,100 feet on the heads of passers-by on 57th Street, killing hundreds. A true tragedy, and an epitome of the folly of modern life.

Compare, conversely, Thomas Babington Macaulay’s description of the palace in Old Jewry, at the center of the City of London of Sir Robert Clayton, the Restoration’s most accomplished banker:

“containing a superb banqueting room wainscoted with cedar and adorned with battles of gods and giants in fresco.”

One can picture the room in one’s mind’s eye, located no more than 15 feet above ground level, and proclaiming to the world the greatness of Clayton and the solidity of his bank, which was headquartered on the ground floor. Modernity compels me to admit that the house’s sewage system, constructed in 1671 like the house itself, would be appallingly lacking by modern standards – though so would that of Macaulay’s doubtless more modest London townhouse; in that respect, little was learned between 1671 and 1848.

We can all therefore agree that modern plumbing is a true advance in civilization, preventing city dwellers from perishing from cholera in their 30s. However, in other respects, it is unclear in what respects 350 years of progress have improved the lives of even the very richest. The pencil tower has a nice view over Central Park, but in Clayton’s time even a magnate like him, resident in the very epicenter of London’s financial district, could walk to open countryside. If he wished to have parkland at his door, he could easily do so in a landscaped country house that if he wished could be located within half an hour’s carriage ride of his business. In practice Clayton’s country house was about 20 miles from his business, probably 3-4 hours’ journey on 17th century roads, but it had the additional advantage of having the pocket borough of Bletchingly attached – an amenity alas not available to today’s billionaires!

Like most “pencil towers” 111 West 57th Street has some disadvantages if you actually try to live in it, rather than simply hold it as an investment through a shell company. An earlier but less extreme building on Park Avenue, also 1,400 feet tall, recently featured in the New York Times as a home of leaks and non-functional elevators – apparently the wind sway at the top of the tower, dampening weight or not, is sufficient to bring the elevators to a halt in a high wind, stranding residents 1,000 vertical feet from their home or the street. The walls creak like the galley of a ship, alarming if you are in a 17th century barque facing the North Atlantic, even more so if you are marooned in a potential “Hindenburg” in the New York skyline. Water sometimes pours down the elevator shafts, bringing the elevators to a halt for weeks at a time. A Russian oligarch’s wife expressed horror at the defects of the building for those forced, as she was after Covid-19 hit, to reside there in person. The Russian oligarchs may be 100 times as rich as Sir Robert Clayton, even when you take account of the changing value of money over 350 years, but they do not live one tenth as well.

This is thus a puzzle, but its explanation is as usual one of economics. Excessively lax monetary policies since 1995 have inflated asset values beyond all belief, making the very rich far richer than they have ever been in human history. In the early days of the Industrial Revolution, say around 1825, the richest man in Britain was almost certainly the Marquis of Stafford, who had an income of around £100,000 per annum. Multiply that by the rise in the gold price since then, of around 370 times, convert into today’s dollars, and you get an income of $50 million per annum. Capitalize that at 3%, the lowest interest rate available in 1825, and you get a net worth of less than $2 billion – in other words, the Marquess of Stafford was only around 1% as rich as today’s top tycoons and oligarchs.

Compare that with Sir Robert Clayton, an exceptionally rich man for his time, but with an annual income of only around £10,000 at its peak, worth only some £15,000 in Stafford’s time, some 140 years later (oh, the blessings of a Gold Standard, that can produce such stability)! In other words, Stafford was about six times as rich as Clayton, which Clayton himself would have regarded as appropriate – he was after all merely a knight and Lord Mayor, not a member of the high aristocracy like Stafford. Even in Clayton’s time, there were a few aristocrats that were richer. The richest, the 2nd Duke of Buckingham, with income of £25,000 per annum and estates managed by Clayton, was so extravagant that he died bankrupt, though Clayton managed to postpone that dire event by about two decades.

However, in a world of ultra-high asset prices such as we have today, it is worth building “Trophy” skyscrapers, 1,500 feet tall, that make no sense as buildings, but command an extraordinary capital value because of their position as trophies. Naturally they do not in fact work very well – thus all the creaking, the water leaks and the non-functional elevators – but they do not need to; they exist not to be lived in but to be bought and sold at extraordinarily high prices. Provided their inhabitants are not foolish enough to live in them, everybody is happy – the buyer, who gets to on-sell his asset at an even more exorbitant price a few years later, and above all the developer, who is able to take a relatively small plot of land, build to an extravagant height using “bells and whistles” but no especially expensive construction technology, and then sell the result at a huge markup, because of its scarcity value as a “trophy” asset.

It is sad to think that Russian oligarchs and other billionaires are not getting value for money. Fortunately, as interest rates rise, asset prices will inevitably decline, probably messily as in the early 1930s, after which for a decade or so income will reign supreme over asset value. Of course, the Russian oligarchs and other billionaires, especially those who are foolish enough to be leveraged, will lose most of their money in this collapse. But the pittance they will have left will probably enable them to live pretty well, and they may well find the trophy-less life more enjoyable – at least the walls of their modest country houses won’t creak.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)