News

Financial markets appear set to keep investors on their toes for all of 2021, with the first quarter of the year throwing up no shortage of surprises.

The bond market had one of its biggest sell offs in decades, whilst commodity prices and inflation expectations continued to increase. Cryptocurrencies were also very strong across the quarter, whilst supposed safe havens like gold crashed, suffering their worst quarter in twenty years.

Finally, despite the volatility that we saw in some stocks like Tesla, the overall stock market continued to climb, with the S&P 500 in the United States topping 4,000 points in early April.

In the diamond world, we have continued to see strong demand for pink diamonds, in particular those from the recently closed Argyle Diamond Mine, with investors looking to add these to their portfolios.

News that select Argyle Pink Diamonds typically sold via tender are fetching more than a million dollars each at auctions will help keep this unique asset class front of mind for a growing pool of would be investors, all of whom are looking to protect and grow capital in the years ahead.

In this week’s update, we kickstart our Pink Diamond Investment Series by looking at pink diamonds, and comparing them to superannuation, an investment that is of immense importance to every working Australian.

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The last week has seen a number of troubling developments regarding the economy and financial markets, all of which should remind investors of the importance of holding genuine safe haven assets, including pink diamonds.

Some of the developments that caught our eye include:

• An uptick in the number of American’s getting diagnosed with COVID-19, with some 60,000 cases a day being reported (up 10% in the past week).
• The announcement of a 3-day lockdown in Brisbane due to the re-emergence of COVID-19, with other states immediately implementing travel restrictions, potentially ruining the Easter holiday plans of thousands of Australians.
• A huge sell off in stocks last Friday, as highly leveraged Family Office Archegos Capital was hit by a USD $20 billion margin call, forcing it to dump holdings into the market.
• The blockage of the Suez Canal, with one of the world’s largest cargo ships, the Ever Given, stuck for several days, costing the global economy some $400 million per hour.

Some of these issues are only likely to prove short-term distractions, including the Suez Canal blockage, with news this morning that the Ever-Given ship is back on the move, unblocking the canal that sees some 10% of total global traded goods move through it on a regular basis.

The COVID disruptions too are hopefully not enough to send us back into the kinds of lockdowns that we saw last year, especially now that vaccinations are being rolled out across the globe.

Indeed, of all these noteworthy events, it may be the stock sell off that proves the most important for investors, with the ramifications of the Archegos Capital sell down still spreading across the market.

Far from being limited to the hedge fund itself, impacts are being felt in the heart of the financial system, with French Bank Credit Suisse and Japanese giants Nomura Holdings both seeing shares in their companies fall by about 15% on Monday 29th March due to their exposure to Archegos.

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Financial markets have been on the up this week, with the flagship US stock market index, the S&P 500, looking like it may finally touch 4,000 points. Whilst this is making some investors euphoric, with predictions of ever higher prices, the warning signs of a bubble, and the potential for a large crash, continue to build.

Given this, rather than chase the markets higher, astute investors are instead sensibly looking for reliable alternative investments, which not only track financial markets as they move higher but are better placed to withstand the next bout of volatility, which is inevitable.

This week we share some insights from a great article referencing some of these warning signs, and why it reinforces our incredibly positive view on the outlook for pink diamonds.

Shelter from the storm

Earlier this week, we read a great article titled; “Dispelling some common market myths”, written by Justin Braitling of Watermark Funds Management.

The article contained a number of key insights and great charts which highlight where financial markets sit today, and which asset classes look cheap or expensive, relative to historical observation.

This included a chart highlighting the fact that shares are at record levels relative to commodities (something we have discussed before), which is one of the key reasons we are bullish on hard assets like pink diamonds in the decade ahead.

More than that though, the article highlighted a couple of key items, which are incredibly relevant for astute investors, as they help highlight the risks in the market they should be aware of.

The first of these can be seen in the chart below, which shows earnings per share (EPS) for listed companies from the mid 1980’s onward, with three indexes highlighted:

• A World equity market index.
• A World equity market index ex tech, media + telecom stocks.
• A World tech, media, telecoms and Amazon index.

 

Tech earnings have outstripped those of the global market
12m trailing EPS (USD) – Indexed to 100 on Jan-2009

Note the divergence in earnings since the Global Financial Crisis back in 2007-2009. Since then, earnings for the World, and World ex tech stocks have gone nowhere, with all of the earnings growth accruing in the tech space.

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It’s been another interesting week in financial markets, as technology stocks, Bitcoin, and bond markets all bounce around. We are also seeing some worrying signs in terms of a re-emergence of COVID-19, whilst hiccups in the vaccination rollout plan in Australia suggest it may take a little longer than anticipated before things return to normal.

In our latest update below, we look at recent news regarding the US $1.9 trillion stimulus program announced by Washington, and why this stimulus, combined with rising inflation expectations, suggests we will see much higher pink diamond prices in the years ahead.

Stimulus for everyone

One of the biggest economic developments of the last few weeks has been the announcement of the USD $1.9 trillion economic stimulus package from the Biden Administration in the United States.

For a population of just under 330 million people, the package works out at just under $6,000 for each and every American citizen, and involved a range of measures, including;

• Direct payments of up to $1,400 to most Americans.
• $300 per week unemployment insurance boost until September this year.
• Child tax credits.
• $25-$30 billion in rental assistance.
• A 15% increase in food stamp benefits.

Whilst this stimulus package will provide welcome relief for millions of Americans, markets themselves are instead looking ahead at an arguable more important initiative, which is Biden’s plan to unleash an infrastructure stimulus plan that will cost anywhere between USD $2 and USD $4 trillion over the next decade.

Bear in mind this infrastructure stimulus package is being proposed in a country that is already running a deficit of up to 15% of GDP, a number that is absolutely unprecedented in the last 70 years (see chart below).

 

Federal Surplus of Deficit as Percent of Gross Domestic Product

Whilst there is no doubt the US economy could do with some revitalised infrastructure, and there will be some economic benefits that accrue from an initiative of this nature, there are only two ways for this package to be funded.

Taxes on company earnings will need to rise (a research note from Goldman Sachs suggests up to USD $1 trillion in higher taxes may be on the way), or the Federal Reserve will need to continue to print money.

In reality, it will likely be a combination of the two, with this scenario boding very well for pink diamond prices in the decade ahead.

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In this article we look at the recent bout of volatility in financial markets, highlighting moves in the bond market (which doesn’t get as much attention as the stock market, even though it is arguably more important) and in high profile companies like Tesla, which have recently come under severe selling pressure.

This is relevant for pink diamond investors for the simple reason that these market moves highlight the importance of holding stable assets in a portfolio, which hold their value even as other markets fall apart.

Volatility is back

In February and the first few days of March this year, the bond market has come under severe selling pressure, with yields (which move inversely to prices) rising at one of their fastest levels on record.

In the United States and Australia, bond yields rose by as much as 50% at one-point last month, and have now risen by 70% for 2021 as a whole, with the bond market having its worst month in 25 years, as per this late February headline in the AFR.

The key driver of the bond market sell-off has been market participants repricing their expectations around the economy, with a consensus beginning to form that we will see much higher rates of economic growth, supported by the USD $1.9 trillion stimulus package recently passed in Washington.

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It’s hard to believe we are already into the third month of 2021, with the continued uncertainty and short lockdowns from COVID-19 making many people feel like last year never really ended.

Despite the two steps forward one step back feel approach, as individuals, business people, workers and investors, we can feel more confident that we are heading in the right direction on the COVID-19 front.

For despite a couple of hiccups, vaccinations are beginning to roll out in Australia, whilst in the Unites States, hospitalisations, confirmed cases, and the number of people dying from the virus have all thankfully dropped dramatically in the last few weeks.

Given this backdrop, it pays to turn our attention to what a ‘post COVID-19’ world looks like from an investment perspective.

And when one does that, it is clear that the challenge to protect and grow wealth using traditional assets in the decade ahead remains profound, which is one of the reasons we remain so bullish on pink diamonds.

The curse of low interest rates

In mid-February, the AFR ran an article with the URL “the opiate of low interest rates”. Titled; “Cheap money addiction will be hard to shake” the article was authored by Satyajit Das, a well-respected former banker and author.

Pink diamonds are the opiate

Given this background or ever lower ever interest rates and more money printing, there are a handful of truths that we think will become more evident to investors looking to protect and grow wealth in the years ahead. These include;

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This week has seen some welcome relief on the COVID-19 front, with the short lockdown in Victoria coming to an end, and a vaccine rollout commencing in Australia.

Hopefully the worst is behind us, and we can all get back to business, and more importantly, life as usual, mingling freely with our colleagues, friends, family and loved ones.

In this week’s market update we look at a report from Goldman Sachs on the potential for a huge boom in commodity prices, which would be ultra-bullish for pink diamonds.

We also share some thoughts on the Australian dollar, and why a large decline in the years ahead may be on the cards, using history as a guide.

If that were to happen, it would be great for the pink diamonds our clients at Australian Diamond Portfolio have already invested in or are looking to purchase in the period ahead.

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