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Newsletter #30, September 2007

(Please browse our newsletter archives)

Lower interest rates, rising rap music, falling sales of new guitars, and the vintage guitar market

The Federal Reserve's half-point drop in interest rates on Sept. 18 has caught everyone's attention - consumers as well as the financial community. It's the first such cut in four years, and it's also a half-point change rather than the quarter-point moves that we grew accustomed to seeing during Alan Greenspan's twenty years (1987-2006) as chairman of the Fed.

The purpose of the rate cut is to ease troubles in the housing market and also to offset a loss of jobs in the labor market (the first such loss in four years), but the housing and labor issues are not the only indicators that troubled economic times are indeed dead ahead. The war in Iraq is siphoning a billion dollars a week out of the federal budget. Our dependence on China for the majority of our manufactured products now matches our dependence on Arab oil. Our dollar just hit an all-time low against the Euro, and the Canadian dollar is within a penny or two of being equal with the U.S. dollar for the first time in living memory for most Americans. The Fed hopes to hold off a recession with the recent interest rate cut, but inflation may be the price we pay.

Clearly, we may be facing serious economic conditions to a degree that we've never experienced before. So, what happens to the vintage guitar market in uncertain times like these?

First of all, in a market that historically has performed quite well over the long haul, like the stock market or the real estate market, there is no such thing as a bad market from the consumer's point of view. When prices are escalating steadily, it's a good market for investors to buy and sell; when the market stalls or even falls a bit, it's an opportune time for buyers to get into the market at favorable prices. There are no guarantees, of course. As in the stock market, there are bad performers in the vintage guitar market, even in good times, and some "sectors" have left long-term investors quite disappointed.

Beyond the cyclical ups and downs, there are only two serious threats to the vintage guitar market: 1) the lure of easy money from a booming stock market or high interest rates, and 2) waning interest in guitars.

We've weathered the first threat several times. In the late 1970s and early '80s, when interest rates hit 20 percent and higher, guitars weren't nearly as attractive an investment as many financial offerings, including a basic CD (Certificate of Deposit) from your local bank. The vintage guitar market was still very young and unproven. Prices had risen significantly from their 1960s levels, but there was no "track record" established yet - no reason to believe that prices wouldn't fall right back to 1960s levels. In fact, if you looked at the history of popular music for guidance, you would predict a gloomy future for the guitar, because history would indicate that the guitar would soon fall out of favor, just as the five-string banjo, the mandolin, the tenor banjo and the acoustic archtop guitar had successively fallen out of favor over the course of the previous 70 years. In 1980, if you had a guitar already, and you had extra cash, a financial investment would seem to promise a better return than a vintage instrument purchase.

The vintage instrument market weathered another blow from the financial market during the boom in the 1990s, when savvy investors were making a killing in tech stocks, and even the average working man could expect his 401k funds to grow at an annual rate of anywhere from 10 to 25 percent. At Gruhn Guitars, on the other hand, a pre-World War II Martin D-28 - one of the "blue chip" models of vintage guitar investments - was priced the same in 1993 or possibly a bit lower than it had been in '92, and it was a lot harder to sell in 1993 than it had been in '92. The bubble burst, and as the stock market fell, prewar D-28s recovered, along with the vintage market in general.

It's difficult to make a general statement about interest rates as they affect the vintage business. Through the 1980s and 1990s, our business usually went the opposite way of the prime rate, which makes sense. The lower the interest rate, the more money people have available to spend on guitars. And for those buyers who are concerned about the investment value of guitars, guitars look a lot more attractive than paper investments when interest rates are low. So, if you consider only the recent reduction in the Fed rates, you would expect good times ahead for the vintage guitar market. However, in the last few years, prices on many vintage instruments have increased dramatically while interest rates have also risen (though not nearly so dramatically).

Of course, the Fed's interest rate and the state of the stock market are not the only factors that affect the demand for vintage guitars. One would think that when the economy is good, the vintage business would be good, and vice versa. But when the economy is bad, our business can be quite attractive for some buyers. Although people are more reluctant to spend money, their need for extra cash can bring instruments onto the market that otherwise would not be there. Prices may not escalate but a period of stagnant prices may well be the optimum time for investing in instruments.

The second major threat to the vintage guitar market, and to the market for new guitars as well, is one that we are not so experienced in. You would have to be over 80 years old today to remember a time when the guitar wasn't the dominant fretted instrument in popular music. For the last 50 years, it has been the dominant instrument, period, in our musical culture - except for a brief period known today as the Great Synthesizer Scare of the'70s. In the late 1970s, those veterans of the musical instrument industry who feared the guitar would fall out of favor no doubt felt their fears had become reality with the arrival of disco music and the development of electronic keyboard instruments. The guitar was by no means obsolete, but it was no longer the lead sound, or even a necessary element, for a record to be a hit. Silly us, we think to ourselves today, for ever believing that the guitar could be supplanted by a keyboard. But think again. Or better yet, listen to the top 10 records on Billboard's Hot 100 chart this week (9/17/07). Eight of those ten records are rap/R&B/hip-hop styles, and they have no guitar. They have a synthesizer and a drum track, but no guitar whatsoever. The only two hits in the Top 10 with guitars are the two that are by women. Fergie's "Big Girls Don't Cry" is acoustic- and electric-guitar based, and her video even shows the band strapping on guitars. The other guitar record is Pink's "Who Knew," which is the only one of the Top 10 that would qualify as a rock record, so if you're thinking the guitar will never die because rock 'n' roll will never die, think again.

Granted, the Top 10 is not representative of all the music that people are playing. It includes the most popular records of the moment but not always the most influential. In the Top 50, there is plenty of rock and country music. Rock and roll - whether classic, metal or alternative - is guitar-rooted and likely to remain so. Country rhythms are guitar-based and are likely to remain so. Bluegrass music will certainly remain a stronghold for guitar, mandolin and banjo. Still, there's no denying that demand for new guitars is down. Guitar retailers have been singing the blues about slow sales since the first of this year. At Gruhn Guitars, our selection of new instruments is not as representative as that of most dealers, but we've seen a significant slowdown in this area, too. An article in the upcoming issue of The Music Trades will confirm it.

Is this slowdown in new guitar sales simply a matter of overproduction and market saturation? After all, with record numbers of new guitars having been sold in the last few years, it is reasonable to assume - especially with eBay and craigslist providing convenient, low-commission sales outlets for individuals - that there are now record numbers of used guitars being sold and that they are now eating into new guitar sales.

Or has the guitar peaked? If it has truly peaked, we're confident that its decline will be long and slow and hard-fought. We would rather believe that the fickle and cyclical nature of public taste will swing back to the guitar, or that future guitarists will, as Eddie Van Halen and the dive bombers did in the 1980s, create new guitar sounds that will bring popular music back around to the guitar. After all, the guitar's popularity is based on its versatility and its portability. The only instrument more portable and more versatile is the human voice - which would explain some of the success of rap music.

At Gruhn Guitars, we are finding that "player grade" instruments with "issues" have slowed down, but prime-condition collectibles continue to do very well. So, what will the vintage guitar market do in the next few months? Our answer is the same as it would be if we were asked what the stock market will do. As we would tell anyone who is inclined to take a stockbroker's advice, if the broker truly knew where the market was going, he wouldn't have to be brokering stocks for a living. The same goes for us. For example, in a recent Q&A in our column in Vintage Guitar magazine, we chronicled prices on Loar-signed Gibson F-5s. We found that starting in the late 1960s, they doubled in price about every five years. At any time during the last 30 years, we would have predicted that they could not sustain such a growth rate, and we would have been wrong. And today, despite the historical record, we still find it hard to imagine that Loar F-5s could double again within the next five years.

We can make the most educated of guesses about the future of the vintage guitar market, based on decades of experience and success, but if we were able to accurately predict the future from month to month or year to year, we would be rich and retired by now. At present, sales remain strong at Gruhn Guitars, and we remain more comfortable investing in vintage fretted instruments than in anything else we know.

George Gruhn and Walter Carter