Newsletter No. 2, Dec. 10, 2002

The response to our first newsletter has been overwhelmingly positive. I have been deluged with reader emailed comments and questions. All of your comments are most welcome. While it is time consuming, I have been able to respond to all emails thus far and fully intend to continue doing so. You may also feel free to call me at 615-256-2033 from 9:30 to 5:30 central time.

During the time I have been involved in the fretted instrument market from the early 1960's to the present time, the market has undergone fundamental change. When I started out the "folk boom" was in full swing. Groups such as the Kingston Trio, and Peter, Paul & Mary, and performers such as Joan Baez, Bob Dylan, and Tom Paxton were extremely popular and selling millions of records. Traditional Appalachian string band music and bluegrass were being promoted by groups such as The New Lost City Ramblers and folklore societies were actively promoting traditional music on college campuses in the Northeast as well as California. As a direct result of this movement, interest in vintage acoustic instruments was escalating rapidly. Prior to the folk boom vintage guitars were just considered to be old used instruments and were readily available for absurdly low prices. While vintage acoustics were going up in price at a rate of 20 to 25% per year during the folk boom, it is worth keeping in mind that they were starting from such absurdly low prices that in reality what was happening is they were going from almost no value to receiving some recognition. The finest pre-World War II vintage instruments were still selling for prices no more than and frequently less than the cost of an equivalent new one.

The market changed fundamentally in 1964 with the advent of the Beatles, The Rolling Stones, and the whole explosion of rock-n-roll and R&B. Whereas when I started out the University of Chicago Folklore Society sponsored concerts featuring only acoustic music, by the mid 1960s they were sponsoring performers such as Buddy Guy, Muddy Waters, Howlin' Wolf, and the Butterfield Blues band with Mike Bloomfield and Elvin Bishop on guitar. Whereas during the folk boom I saw no market for vintage electric guitars, as soon as Mike Bloomfield starting playing with the Butterfield Blues Band I was deluged with requests for whatever Mike was using on stage. During this brief period it was my experience that the vintage electric guitar market moved in virtual lock step with whatever Mike played. As a result I was first inundated with requests for old Telecasters, but when Bloomfield switched to a 1954 Gold Top Les Paul, that's what everybody wanted. When he switched to a sunburst, the market followed within a matter of weeks. While there has been debate over whether it was Bloomfield or players such as Keith Richards, Eric Clapton, and John Sebastian who first promoted the market for sunburst Les Pauls, I remain firmly of the opinion that it was Bloomfield more than any other who triggered this market. There is no question that there were others such as Clapton who used a sunburst Les Paul as early or even earlier than Mike, but Clapton used a sunburst for only a relatively brief period of time and switched to other guitars such as his psychedelically painted SG, whereas Bloomfield stuck with the sunburst and was strongly identified with it. I did not see any great number of people requesting a guitar like Keith Richards', Eric Clapton's or John Sebastian's during the mid 196's, but I most certainly saw people paying very close attention to whatever Mike was doing. Although Bloomfield never had a hit record, he was idolized by guitar players.

Bloomfield never received an official endorsement from the Gibson company, but I remain of the opinion that he did more to revive interest in Les Paul models than any other player. By the time the Les Paul model was re-introduced by Gibson in 1968, Bloomfield's career was already on the decline but had it not been for Bloomfield, in my opinion, the Les Paul might not have been re-introduced when it was. Some players sell millions of records to the public but are relatively insignificant in influencing other players to imitate their style, whereas others may never have a hit record but influence tens of thousands of players. Bloomfield was one of these.

The advent of the folk rock era as typified by groups such as Crosby, Stills, Nash & Young caused a fundamental change in the vintage instrument market from 1970 through 1975. Prior to that time there had been a market for acoustic instruments and a market for electric instruments, but there was little crossover between the two. During the folk rock era the acoustic guitar market was heavily influenced by a great infusion of rock-n-roll money. Prices of vintage acoustic as well as electric instruments rose dramatically which was certainly good for dealers, but many acoustic collectors complained that they were being virtually shoved aside by the wave of rockers who were dominating the market.

From 1970 through 1975 Gruhn Guitars was known as GTR, Inc., and was a small business located at 111 Fourth Avenue North in a building measuring a total of 20 x 60 feet on one floor. It was a funky building with a leaky roof, termites that swarmed each spring, and a very funky heat and air system. The first fifteen feet were set up as a showroom while the rest consisted of repair, storage and an office. While the shop might not have been much to look at, the clientele was a virtual Who's Who of the industry, including clients such as Billy Gibbons, Eric Clapton, Crosby, Stills, Nash & Young, The Rolling Stones, Roy Acuff, Johnny Cash, and a great host of others. There were very few other vintage shops worldwide and certainly no Internet. The economy of the early and mid 1970s had its great ups and downs. There was a recession in 1970 when we opened the shop and a rather severe recession again in 1974, but the music market was thriving and baby boomers were buying guitars.

The folk rock era ended after 1975. The period from 1976 through the early 1980s was, in my opinion, one of relative stagnation in the guitar market. Many of the baby boomers dropped out of the market after they hit age 23 to 25. For well over two hundred years the musical instrument market had focused primarily on males of dating age from 13 to 25 years old, and on a smaller group of retirees who often played the music that was popular when they were of dating age. The music business from music promoters and record companies to musical instrument manufacturers placed little emphasis on trying to market to middle aged people. It was assumed that customers would buy from age 13 to 25 but that the typical male buyer would drop out of the market after acquiring an expensive wife, children, house, car, and upward mobility in a job. They were expected to work their fingers to the bone until they retired after which they could then take up hobbies.

Whereas vintage fretted instrument values had been escalating steadily from 1960 through 1975, from 1976 through 1983 they were relatively stagnant. The music market in general was very listless during this period. Whereas previously there had been an active folk boom followed by a rock-n-roll boom followed by a folk rock era, from 1976 through the early 1980s there were numerous musical movements in funk, punk, folk and pop, but none of them seemed to have much staying power either in volume of sales or duration of time. Whereas guitar had been the dominant instrument of 1960 through 1975, from 1976 through the early 1980's many bands de-emphasized or even eliminated the instrument. Generation X did not seem to embrace the guitar to the extent that the baby boomers had.

During this period I often was wondering if I was becoming the great expert on buggy whips after the invention of the automobile. It almost seemed that people didn't care about the instruments that were my great love. The economic conditions of the early 1980s when the prime interest rate rose over 20% and the dollar went sky high added to business woes. Not only was this a tough time for Gruhn Guitars, Inc., but companies such as Martin, Fender, Gibson and Guild suffered greatly. While Martin is a vibrantly strong company today, during the early 1980s they were on the brink of disaster. Gibson, Fender and Guild had been acquired by major holding companies. By the early 1980s these holding companies viewed their investment in guitar companies as a liability.

Starting in 1984 an unprecedented new phenomenon occurred which transformed the guitar business. Baby boomers re-entered the market when they had their mid-life crisis starting at age 40. No previous generation had ever done this. The market had always targeted the youth group and a smaller group of retirees. For the first time in history the market for both vintage instruments and high-end new instruments was dominated by middle aged buyers. I do not know of anyone who anticipated this development in advance, but it certainly had a profound impact on my business and obviously has revitalized the entire industry. Fretted instruments are obviously sold to people of all ages but from 1984 to the present the baby boomers have played a major role in shaping the market in a manner unprecedented in any prior time.

I have come to believe that the baby boomers are fundamentally different from any previous human generation. Boomers are the first generation in all of human history to grow up from birth onward with antibiotics. Penicillin was first introduced in 1945 and numerous other "wonder drugs" soon followed. As a direct result baby boomers are the first generation in all of human history to grow up with a full expectation of living to be at least 80 years old or more. This results in a fundamentally different attitude toward life in general than any previous generation. The parents of the boomers grew up in their youth with no antibiotics and also grew up during the Depression. They had a very different attitude toward money and mortality.

Economic ups and downs have been a fact of life since ancient Greece and Rome, but antibiotics were something new. Even in ancient Greece and Rome it was known that a person could live to be 80 years old or more, but if a Greek or Roman lived to be age 40, he did not assume that that was mid-life for him personally. He could get a cold, which would turn to pneumonia, and he would die, or he could stub his toe, get an infection and die. No one took life expectancy for granted. If one goes to a turn-of-the-century cemetery and looks at gravestones, one will note that even in 1900, half the tombstones are for children. Life expectancy in 1900 was barely over 40 on average (meaning that half didn't make it that far). The re-entry of baby boomers into the guitar market starting in 1984, in my opinion, was no coincidence. Baby boomers are the first human generation from Australopithecus to the present that would have been in a position to have a mid-life crisis such that they would want to go out and buy little red sports cars, tennis and racquet ball equipment, guitars and other toys when they hit age 40.

The guitar market picked up rapidly from 1984 through 1992 with prices escalating 20 to 25% per year during this period. Whereas guitars and other vintage fretted instruments were at least as good if not better than the stock market as in vestments from 1960 through 1975 and were certainly better than money in the bank, from 1976 through 1983 money in the bank or in the stock market would have been better than a portfolio of fretted instruments. From 1984 through 1992 the guitars and other fretted instruments again would have been better than money in the bank or most stocks. I saw a slow-down in the guitar market starting in 1993, particularly with high-end vintage acoustic instruments such as pre World War II Martin Ds. These instruments continued to be valuable, but prices actually deflated for a while, whereas the stock market took off like a rocket. In my opinion, this was a direct result of the life cycle of baby boomers who were now rapidly approaching age 50. Whereas they had a mid-life crisis at age 40, when they reached their late 40s they had the " Oh my god, I haven't saved anything for retirement and what am I doing with all this stuff?" crisis. At the same time the government came along and said "We would like to help you by setting up IRA, Keogh, and other tax deferred retirement plans for you." As a direct result of this demographic and psychological shift, money was diverted into the stock market dramatically driving up stocks, mutual funds, and real estate investment trusts but depressing other markets. After an initial downturn in 1993 and 1994, the guitar market gradually regained its strength but stocks, mutual funds, and real estate investment trusts continued to out-pace many fretted instrument investments during this period.

According to my "antibiotic theory of the market," the stock market crash starting in the year 2000 was right on schedule, since the oldest baby boomers hit age 55 in that year. At that point in their life cycle they were beginning to think about early retirement or at least living on some of the interest income they were accruing if not actually taking some of the principal. Unfortunately by this time the market fundamentals in the stock market had been driven so far out of line with net worth to earnings ratios that the market was no longer sound. The pundits who declared that the old style economy was dead and standard net worth to debt or net worth to earnings ratios no longer mattered were proven wrong. It is my opinion that as much as anything the market collapse was due, however, to the fact that in reality the market had been a Ponzi pyramid scheme supported by new money being injected into the market for demographic and psychological reasons rather than sound financial decisions. The 55-year-old baby boomers were no longer at their peak earning potential and were in fact looking over their shoulders seeing 35- to 40-year-olds getting the promotions rather than themselves. Had penicillin and other wonder drugs not been introduced starting in 1945, all of this might be different, but I for one am certainly thankful for these drugs because I know without them, I wouldn't be here today.

From 2000 to the present the investment market in stocks and mutual funds has certainly been troubled, but fretted instruments have done remarkably well. Some such as sunburst Les Pauls, Loar-signed F-5 mandolins and pre-World War II flat head Gibson Mastertones have doubled in price in the last two years. Fretted instruments in general from 2000 to the present have been a far better investment than the stock market.

Today's marketplace is highly competitive. There are numerous dealers with stores and Internet sites as well as guitar shows and eBay giving customers a wide variety of choices. While the Internet has made it possible for people to communicate more freely than every before, it is worth keeping in mind that good service is remarkably old fashioned and not something that can be replaced by technology. Restoration and repair can't be done on a web site and knowledge and integrity remain old fashioned and very low tech. At Gruhn Guitars we have a staff of seven full time repairman who devote their entire effort to servicing the instruments we have for sale. We take in no outside repairs since it takes the full effort of the entire repair staff to service what we have. Our sales staff takes great pride in providing the highest level of service available anywhere. Unlike eBay or any other Internet auction site in which sellers have no loyalty to any customer beyond the highest bid of the moment, we are looking for longterm relationships. We look forward to providing good old-fashioned, personalized, low-tech service to you.

Sincerely,
George Gruhn