24 Jun

Market Legends Are Worried

Financial market volatility has picked up in the last couple of weeks, as investor nervousness about the risks in an extremely overvalued stock market continue to rise.

Meanwhile fears over the continued spread of COVID-19 are also rising, including in Australia, with Victoria having to back-track on plans to ease restrictions for businesses and households.

This is due to a worrying spike in cases occurring over the past few days, with health officials warning of a potential ‘second wave’ of infections.

Indeed, despite our hopes, it appears that COVID-19 cases will continue to rise for the foreseeable future around the globe, which poses a huge challenge to the economic recovery we are all hoping for.

As an example of the ongoing challenge, consider the chart below, which shows the year on year change in restaurant bookings in the United States (via the website OpenTable).


US Restaurant Bookings
YoY Change in OpenTable Seated Diners

OpenTable restaurant booking graph

Source: OpenTable, Bloomberg.

You can see the huge plunge between late February and March, and the gradual recovery from late April through to May and most of June, as restrictions began to ease.

It’s the drop-off at the end that is the real concern, as it highlights that either:

  • Fears (justified or otherwise) over COVID-19 are still keeping people at home.
  • People’s financial circumstances are still so dire that they aren’t willing or able to go out and spending money.

Neither is a positive sign, with data points like this highlighting the fact that it will be years before economies in the developed world return to normal.

Market legend issues warning

The economic circumstances we face likely would not pose such a big threat to our investment portfolios if markets had suffered meaningful corrections and were more attractively priced.

If you think back to when the GFC hit, the US economy was in shocking shape in 2009, but the S&P 500 had fallen over 50%, so the market had to some degree ‘priced in’ the pain.

This time around that hasn’t really happened, even though there was the very sharp sell-off for a month between late February and late March. Markets are now more expensive than they were at the start of the year, whilst the economic threat remains.

Little wonder investment legends like Jeremy Grantham of GMO are voicing their concerns, with the following headline from a June 21st Marketwatch article highlighting his fears.

Marketwatch quote

In recent interviews and publications, Grantham has stated that: “My confidence is rising quite rapidly that this is, in fact, becoming the fourth, real McCoy, bubble of my investment career. The great bubbles can go on a long time and inflict a lot of pain but at least I think we know now that we’re in one. And the chutzpah involved in having a bubble at a time of massive economic and financial uncertainty is substantial.”

Grantham also noted the following; “the current P/E on the U.S. market is in the top 10% of its history. The U.S. economy in contrast is in its worst 10%, perhaps even the worst 1%. In addition, everything is uncertain, perhaps to a unique degree.

In essence he is saying that stock markets are about as expensive as they have ever been, despite the fact the economy is in about as bad a shape as it’s ever been.

Tellingly, Grantham noted that he thinks investors should have zero exposure to the US equity market now, such is the risk of significant capital loss.

As more and more investors come to appreciate the headwinds market legends like Grantham are warning about, they will look to diversify and protect their portfolio.

Whilst each investor is different, as a general rule this will include reducing exposure to shares, bonds and cash, and increasing their allocation to hard assets, including pink diamonds.

Don’t fight the trends – profit from them

As we’ve often said to readers of ‘In the Loupe’, there is little any of us can do as individuals to influence these megatrends that are taking place around us. All we can do is position our portfolios so that our investments are not only protected from these trends, but actually benefit from them.

To that end, we very much agree with a headline we saw in leading Australian financial news site Livewire Markets, titled “Don’t fight the Fed, invest in commodities instead”.

From our perspective, that is exactly the way clients of Australian Diamond Portfolio should be, and indeed are approaching the market today.

We know that even though interest rates are below the rate of inflation, that money printing will continue. We know that bonds are already delivering negative real returns, and equities are as expensive as they have ever been relative to fundamentals.

Given that knowledge, the only logical thing for astute investors to do is to invest in hard tangible assets that are:

  • Limited in supply.
  • Have a history of strong price performance.
  • Highly desired by investors the world over.

There are few assets that tick all three of the above boxes the way that pink diamonds do. Little wonder we are so optimistic about the outlook for this unique asset class in the decade ahead.

As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and look forward to any questions or comments you may have.


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