Whilst it’s been a quiet week in terms of pink diamond specific news, there has been no shortage of activity in all financial markets, from disappointing job results in the United States, to continued volatility in cryptocurrency markets.
In this update, we wanted to share with you some insights from financial news media that we’ve consumed in recent weeks, with some important takeaways for actual and prospective clients of Australian Diamond Portfolio.
This media is very relevant to the investment case for pink diamonds in the decade ahead, and deals with a range of topics, from the potential for a major stock market crash, to a continued bull market run in commodities, and the almost certainty of more money printing, or Quantitative Easing (QE) as it’s called by central banks, including here in Australia.
We explore in more detail below.
Listen to the experts
Last week, we read extracts from a terrific interview hosted by Livewire Markets, with the one and only Jeremy Grantham, one of the legendary founders of Grantham, Mayo & van Otterloo (GMO as its commonly known), a Boston based asset management firm that oversees more than USD $100 billion in investment assets.
Grantham is one of the true legends of the investment market, managing money across multiple cycles, and famously calling many major bear market tops, and bull market bottoms across his investing life.
For example, in 2007, just before the GFC hit, he was warning of a bubble, with an article in Fortune Magazine noting; “As wonderfully favourable factors cool off, asset prices will be under broad pressure, and risky assets will be under extreme pressure. If the credit crisis gets out of control, this will happen quickly and painfully.”
Markets went on to fall 50% in the coming 2 years.
By March 2009, which was almost the exact bear market low in equities, Grantham had switched tack, with the GMO team issuing a bullish outlook in which they noted; “We now believe the S&P is worth 900 at fair value or 30% above today’s price. Global equities are even cheaper.”
Today, it’s safe to say that Grantham is incredibly worried by what he sees in financial markets, which he believes are in one of the truly great bubbles of his lifetime.
Interestingly, he believes that inflation hedges (of which pink diamonds are one), and commodities as a whole look attractive, whilst US equities in particular, and housing markets, are very risky places to be right now.
In his view, these asset markets are significantly overpriced, with signs of excess speculative behaviour serving as a very real warning of the potential for a major bear market to wreak havoc on the portfolios of many investors.
And in Grantham’s view, the market could break anytime soon, meaning the time to ensure your portfolio is appropriately positioned to protect against this outcome is now.
Interestingly, some research from Morgan Stanley more or less reinforces Grantham’s outlook, and the potential for a major sell off to occur soon.
Morgan’s technical analysts publish a market timing indicator, which looks at a range of factors to determine how overbought or oversold the market is at any given time, based purely on technical readings.
Right now, all five of their market timing indicators are saying “sell”, which is only the 5th time this has happened in the past 30 years. The chart below, which plots the evolution of this market timing indicator over time, shows that it is close to an all-time high.
Combined Market Timing Indicator is in-line with its all time high
The only other times this indicator has been near current readings were back in late 2016, 2007, 1999, and the start of the 1990s. Most of those occasions ended with sizeable corrections, and in some cases major market crashes.
Astute investors should not ignore this.
These market timing indicators, combined with Grantham’s warnings of a major sell-off in equities, and the likelihood of a continued bull market in hard assets, bode very well for pink diamond demand, and pink diamond prices in the years to come.
There is only one way out
Given the risks that Grantham warns of, and the market timing indicators that suggest a major sell-off could happen anytime, it’s not only important to prepare oneself for a market crash, but also what occurs in the aftermath.
And on this score, the lessons from the Global Financial Crisis, and what we saw last year when COVID-19 first appeared, are loud and clear.
Central banks will stimulate, both in the form of low to negative real interest rates, and colossal levels of money printing. Indeed, many aren’t even waiting for a market crash for this to occur, with news articles last week suggesting that here in Australia, the RBA will announce yet another QE programme in July, which will again involve them printing in the vicinity of AUD $5bn a week, so that they can push up asset prices.
Estimates suggest this next package will in total see more than AUD $130 billion created out of thin air and comes on top of the circa AUD $200bn they’ve already committed to creating, most of which has been used to purchase government bonds.
Of course, given this is the RBA’s plan even though they think the economy is improving, any degradation in economic fundamentals will see them simply print more. They know no other way!
Over time, this can’t help but create higher levels of inflation, encouraging investors to seek out alternative ways to both store, as well as create wealth.
Given the risks of a major crash in the stock market, and the ever-present threat of higher inflation, it would appear there are few asset classes that are going to be either safer, or more lucrative to own in the years ahead than pink diamonds.
Indeed, given how uniquely positioned they are to prosper in such an environment, we think the bull market in pink diamonds is just getting started.
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.