It’s just over a month until Christmas 2021.
So far this year has been very rewarding for investors, with share prices, property prices, cryptocurrencies and commodities all rising, though few if any have matched the stellar returns, and the stability, that pink diamonds have offered.
In this week’s market update we touch on a couple of factors for investors to consider as we head into the new year, which reinforce why we remain confident that the market leading returns pink diamonds have offered will continue.
What will happen to markets in 2022?
The end of any year is a great time to take stock of our investment portfolio, as well as cast our minds forward, so we can assess the risks and opportunities available in the markets as we head into 2022.
And while share markets have rallied incredibly well in the past 18 months since the COVID crash of Q1 2020, the outlook ahead is nowhere near so positive, with a range of indicators suggesting another major correction is due soon.
One such indicator is seen below, which is a chart measuring the market cap (or market value) of the S&P 500 index, divided by the Gross Domestic Product (GDP) in the United States.
In simple terms, if the market cap of the stocks in the S&P 500 was USD 20 trillion, and the value of US GDP was 20 trillion, then the ratio would be 1:1, or 100%.
The reason it’s often referred to as the Buffet Valuation Metric is because famed investor Warren Buffett once said it was his preferred way of gauging how expensive, or how cheap the market is at any given time.
As you can see from the chart, it’s currently at its highest level (234%) ever, meaning that relative to the value of US economic input, the value of US stocks has never been more expensive.
Even back in 1999 this reading only hit 175%, just before markets went through one of their biggest crashes on record.
This chart should be seen as a very clear bubble warning sign for investors, because while the share market could go higher in the short-term, it suggests very clearly that there is unprecedented risk in shares today.
Stocks Would Need to Fall 72% with GDP Stable to Get Back to The Trough of the GFC
The Buffett Valuation Metric: Total Market Cap to GDP
While the risk is evident in the chart above, we do not claim to have a crystal ball that tells us specifically when the next major sell-off in the markets will occur.
But data like this makes it clear that the share market party is likely close to ending, and it’s a smart time to either be diversifying a portfolio into hard assets if you haven’t already, or at least considering it.
Data like this is also one of the reasons that we remain so optimistic on the outlook for pink diamonds as we head into 2022.
Bank money is dead money!
The risk of a market crash isn’t the only reason we are confident that the bull market in pink diamonds will continue for years to come.
This week, we watched a very interesting video on Livewire markets titled: “The one thing that could cause market Armageddon”.
The video highlights some of the challenges facing the economy right now, especially with the amount of leverage and risk in the financial system, and how expensive most markets are today.
Amazingly, the commentator notes that interest rates rising to anywhere above 2% will cause distress in the market.
This is a major problem when you consider the fact that inflation rates are way above 2% right now, with the last inflation reading in the USA indicating that prices are rising at more than 6% per annum.
From an investment point of view, the warning contained in videos like this, and in pronouncements from policymakers that interest rates won’t rise for years, is clear.
The value of your savings, and any cash you have in the bank, is going to be eroded by inflation. The real purchasing power of your assets is going to be eroded by inflation as well.
In Australia, you often hear the term; “rent money is dead money”, such is our love affair with property. In today’s day and age, maybe the more appropriate term is “bank money is dead money”, given the lack of interest income we earn on our savings.
Given this backdrop, it’s critical to hold assets that only match the rise in inflation, but hopefully outpace it.
History demonstrates very clearly that rare hard assets, of which pink diamonds have no peer, are one of the best ways to beat inflation.
One month until Christmas
Like all of you no doubt, we can’t wait until Christmas this year.
After a challenging 2021, particularly for those on the East Coast of Australia who’ve had to deal with on-again, off-again lockdowns and restrictions on movement, a chance to relax with family will be more welcome than ever this year.
While we will send out a dedicated email closer to the date, I also wanted to use this opportunity to announce that the Australian Diamond Portfolio office will be closed from December 23rd to January 13th, when we come back to get the new year underway.
As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and we look forward to any questions or comments you may have.