01 Apr 2021

The Pink Diamond investment series

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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25 Mar 2021

Pink diamonds – shelter from the storm

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

Graph titled 'Tech earnings have outstripped those of the global market'

Source: Goldman Sachs

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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17 Mar 2021

Stimulating pink diamond prices

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

Chart of Federal Surplus of Deficit as Percent of Gross Domestic Product

Sources: OMB, St. Louis Fed.

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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09 Mar 2021

Pink diamonds: the answer to market volatility

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.

Worst bond bloodbath since 1994 - Australian Financial Review headline.

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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04 Mar 2021

The opiate of high pink diamond prices!

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.

Headline from Financial Review reading 'Cheap money addiction will be hard to shake'.

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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25 Feb 2021

The pink diamond super-cycle!

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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17 Feb 2021

Follow the legends

It’s been another week of frustration in Australia, especially for our friends, family, clients and colleagues in Melbourne, as another COVID-19 induced lockdown impacts Victoria.

Our sympathies go out to the people impacted by this, both directly and indirectly, with a special thought for all the small business people whose expected Valentine’s Day trade was disrupted by this turn of events.

Its impact on the economy is already being felt, with consumer confidence figures falling this week, with the Australian economy likely to struggle for the majority of 2021.

In this week’s market update, we share the latest news on pink diamond pricing, and some thoughts on the economy, financial markets and investing from one of the world’s best known and most successful investors.

As you will see, if events play out as he thinks they will in the years to come, then pink diamonds are set to dazzle.

Pink diamond prices held their value in Q4 2020

Ever since the Argyle Diamond Mine closed, we have noted a marked increase in the price for pink diamonds, particularly the higher quality categories that we focus on sourcing for our clients at Australian Diamond Portfolio.

In this we are not alone, as all the discussions we have had in recent months with our contacts in the diamond trade also note that prices for Argyle pink diamonds in particular have picked up noticeably of late, with this bullish trend now spilling over into all higher-grade pink diamonds.

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10 Feb 2021

100 billion reasons to buy pink diamonds

It’s been another interesting week in financial markets, with employment data out of the United States suggesting the economic recovery most forecasters expect to see in 2021 may not be as strong as hoped for.

Meanwhile, cost pressures continue to build, with the oil price rising back above USD $60 a barrel for the first time in a year, whilst expectations of future inflation rates continue to increase.

These developments are positive for the pink diamond story, with this market update reviewing in detail a decision made by the Reserve Bank of Australia (RBA) last week which helps explain why this will be the decade of diamonds.

100 billion reasons to buy pink diamonds

In early February 2020, the RBA had their first board meeting of the year. Following on from this meeting, as is custom, the RBA released a statement explaining their latest views on the global and domestic economy, looking at trends in employment, GDP growth and the like.

By and large, the RBA painted a relatively positive outlook, noting that In Australia, the economic recovery is well under way and has been stronger than was earlier expected. There has been strong growth in employment and a welcome decline in the unemployment rate to 6.6 per cent. Retail spending has been strong and many of the households and businesses that had deferred loan repayments have now recommenced repayments.”

So far so good one might be tempted to think.

However, whilst the above represents the words the RBA chooses when it comes to describing the economic outlook, we are more interested in their actions.

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03 Feb 2021

Budgeting on higher diamond prices

It’s hard to believe that we are already into the second month of the year, with 2021 so far looking like another difficult year in terms of the economy, and freedom of movement for us all unfortunately.

Whilst we in Australia have gotten accustomed to reading about significant lockdowns in Europe and other parts of the world, it struck closer to home this week with the news that the city of Perth and some parts of Western Australia have gone into a five-day lockdown, after a case of COVID-19 was detected in a hotel worker.

Whilst we understand the rationale (not to mention the politics) behind lockdowns are complicated and sometimes divisive, there is little doubt regarding the economic outcome of these decisions, which must be reckoned with eventually.

Output and employment will be negatively impacted, while more small businesses will suffer. There is also the fact that the government will see both a hit to taxation revenue and an increase in welfare payments, which only serves to boost already ballooning national debt levels.

To get a sense of the problem as it stands today, consider the table below, which looks at the Federal Budget, highlighting expected tax revenue, and planned expenditure both in this financial year and forecasts for each financial year to June 2024.

Budget forecasts

Source: Australian Federal Budget

As per the above, in this current financial year, the government is expected to run a deficit of more than AUD $200 billion, equivalent to 11% of GDP. Four years from now, the numbers will still be more than AUD $65 billion, noting that this is based on incredibly optimistic forecasts for the growth of the Australian economy over this time period, with the numbers likely to come in lower than hoped for.

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28 Jan 2021

Euphoria for Pink Diamonds

We hope that you had a lovely break over Christmas and the New Year.

We’d like to welcome you back to our regular In the Loupe market updates, which will again be published on a weekly basis this year.

Speaking of this year, and whilst the calendar has ticked over into 2021, much of what we’ve seen take place in the first few weeks of January represents a continuation of the issues that plagued us in 2020.

These include continued problems with COVID-19, mutations of which are beginning to develop, and spread across the developed world. This means lockdowns are likely to continue, with economic activity continuing to suffer as a result.

Political tensions are also still evident, despite the change in the White House, which is particularly relevant for Australia given our reliance on commodity exports to China (more on this below).

Most importantly, we are seeing a continued euphoria in markets that is now completely divorced from economic reality: Whether it be Bitcoin, shares in companies such as Tesla or GameStop, or the proliferation of capital being raised via Special Purpose Acquisition Vehicles (SPAC), there are numerous examples of investor exuberance in the markets today.

Perhaps the best way of visualizing this is looking at the chart below, which shows movements in the CitiGroup Panic and Euphoria Index from 1987 through to the start of 2021.

 

The Panic/Euphoria Model

Euphoria / Panic graph

Source: Haver Analytics, Pinnacle Data, and Citi Research – U.S. Equity Strategy

There are multiple inputs into this model, but in essence, it is a very easy way to visualize the ‘mood’ of the market at any point in time, and whether or not investors are feeling optimistic (euphoric) or pessimistic (panic) on the whole.

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© 2021 Australian Diamond Portfolio. All rights reserved. Diamond image on investment guide cover © Rio Tinto 2021.

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