05 Aug

MMT and the Rise of Pink Diamonds

On behalf of everyone at Australian Diamond Portfolio, we’d like to share our well-wishes to everyone impacted by the ongoing threat from COVID-19, especially those living with the lockdowns in Victoria.

The impact that it is having at a human and economic level is for many of us totally unprecedented, with the disruption that it is causing likely to take many years to recover from.

From an investment standpoint, COVID-19 related developments both in Australia and overseas reinforce many of the messages we regularly communicate in our ‘In the Loupe’ articles.

Investors will need to think differently, and act differently in the years ahead if they want to build wealth. Cash is set to lose real value for decades to come, stock markets will remain volatile, and property faces serious headwinds, with credit growth at its lowest levels since the 1992 recession, and a massive glut of supply about to hit the market.

All those factors reinforce the benefits of looking at assets like pink diamonds, both as a portfolio diversifier, an alternative asset for long-term capital gain, and an inflation hedge.

That last point is getting ever more relevant with the world looking like it will embrace MMT in the years to come.

MMT is coming

For those new to the concept, MMT stands for Modern Monetary Theory.

There are a lot of technical elements to it, as there are to most schools of economic thought, but in essence, it’s a set of beliefs centred around the idea that the government doesn’t need to charge taxes, or issue bonds (that is, borrow from the public) in order to spend money.

Proponents of it also argue that in theory it’s impossible for a government that issues its own currency to go broke, as they can print as many currency units as required to service their obligations.

In essence they argue that the only real constraint on government spending is the potential for higher inflation.

Given the colossal contraction in economic output caused by COVID-19, skyrocketing unemployment, mass business closures and widening wealth inequality, more and more people are arguing governments should adopt MMT, and print as much money as is required to keep the economy going.

The thing is, when you look at the data, you can see that in effect this is already happening, with central banks drastically expanding their balance sheets to buy government bonds, and therefore finance deficit spending, in the last few months.

The best illustration of this can be seen in the chart below, which plots the rolling yearly change in the US budget deficit, and the rolling change in the value of US Treasury securities owned by the US Federal Reserve.


US Budget Deficit & Fed Balance Sheet Change

US Budget Deficit & Fed Balance Sheet Change

Source: Gerard Minack, Macrobusiness

Over the last twelve months, the US budget deficit has grown by over USD $2 trillion. Over the same time period, the US Federal Reserve has added over USD $2 trillion of Treasury securities to its balance sheet (i.e. it printed the money to buy these bonds).

As Gerard Minack, the economist who produced the above graph noted, “this is in every way pure debt monetisation”

It’s important to realise too that it isn’t just the United States this is impacting, with this next graph showing how far and how fast central bank balance sheets are growing relative to GDP, with the number going from below 40% at the start of this year to approximately 55% today. It was closer to 10% when the GFC hit.


Major Central Bank Balance Sheets

Major Central Bank Balance Sheets

Source: Gerard Minack, Macrobusiness

Make no mistake, governments are now hooked on the drug of central bank money created from nothing. And with seemingly limitless demand for government spending, there will be no easy way to stop it.

From an investment perspective, the message from this is crystal clear.

And that message is that investments into hard assets are going to be one of the best if not the only way to protect and build wealth in the years to come, or for as long as these trends are in place.

Those hard asset investments include pink diamonds.

Relative value is the key!

The effects of loose monetary policy, from zero interest rates to quantitative easing have had a profound impact on asset markets in the last few years, with the adoption of MMT only likely to further distort asset markets in the decade ahead.

We saw this again in July, with multiple markets hitting all-time highs. These included the S&P 500, the price of gold, and the price of a US 10-year treasury bond, with yields on the 10-year closing the month at just 0.55% in nominal terms, and -1% in real terms.

Given these developments, it’s critical that astute investors pay attention to relative value, as in the years to come, many asset markets will look expensive in absolute terms.

We think the appetite for pink diamond investment will continue to grow as more investors come to appreciate this phenomenon, as they will look at the relative value of pink diamonds vs. most residential property markets and vs. the share market and will see more upside potential in pink diamonds.

The closure of the Argyle Diamond Mine will add to this, as true scarcity can only become more valuable in the years to come given we are now operating in a world where money literally can and will be created out of nothing at an unprecedented rate.

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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