25 Mar

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.

A chart like this highlights how fragile the economy remains, and also how risk equity investments remain, given most companies can’t grow their earnings.

The second chart, seen below, looks at Bitcoin (which is front page news again), and compares it to the MSCI World equity index.


Bitcoin versus MSCI World

Graph titled Bitcoin versus MSCI World

Note how tops in the Bitcoin price often coincide, or slightly lead, tops in the equity market itself, with the article stating that; “Bitcoin as an example has led all-important tactical and strategic tops in risk markets since 2012! Right now, the parabolic shape of the cryptocurrency looks like a major top is not far away”.

That’s important for two reasons:

  • Well marketed, supposed safe haven like Bitcoin are nothing of the sort, as they are incredibly correlated to the overall equity market.
  • The fact that Bitcoin looks like it may again crash soon is not just a problem for Bitcoin, but is also a bad sign for financial markets as a whole.

In summary, the author, quite rightly in our view, noted that markets are displaying all the signs that are required to indicate a late-cycle bull market (i.e. one that may soon end).

These signs include;

  • Stretched valuations in financial markets as a whole.
  • Exuberance if not outright bubbles in popular segments of the market (think Bitcoin and technology stocks).
  • Data suggesting cash allocations amongst investors are low.
  • Data suggesting net length (exposure to rising asset classes) amongst hedge funds is very high.
  • Little downside protection amongst sophisticated investors, with options market data telling us the number of bets the market will fall versus the market will rise is at a 20-year low.
  • Signs retail investors have piled into financial markets, with trade volumes at 20-year highs.

No one can be sure when all these risk factors will inevitably morph into the next major downslide in financial markets, but that doesn’t mean one shouldn’t prepare for it.

Indeed, successful investing is about preparing for the major changes that will occur in the markets, not simply waiting for them to happen.

And given the next major crash in financial markets will see a profound flight into high quality, genuinely scarce hard assets, the time to be buying them is now.

Pink diamonds provide the shelter

Pink diamonds perhaps better than any other hard asset or supposed safe haven, have always been a great way for astute investors to shelter their portfolio from the storms in financial markets.

After all, other supposed safe havens are either much more volatile (e.g. gold), don’t offer inflation protection (e.g. government bonds), or are likely a bubble that that may crash (e.g. bitcoin), or a combination of all three.

Pink diamonds are none of these things, with a genuine scarcity that is imposed by nature, coupled with a positive demand outlook, all of which expresses itself in steady price growth over time.

Given this environment, we can’t help but be extremely optimistic about the next few years, and what they look like for pink diamond demand, as every day more and more investors assess the risks in broader financial markets and look to reallocate part of their portfolio into hard assets.

In time, the impact on pink diamond prices will be eye-catching.

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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