13 Jul

Warning signs are clear!

Despite our best wishes, it looks like the disruptions caused by the spread of COVID-19 are here to stay. In New South Wales, we are now likely facing a prolonged period of lockdown, while other states are likely to keep borders shut and/or restrict the free movement of people until a much larger percentage of the population are vaccinated, which is months away at best.

While it might feel like we are stuck in Groundhog Day given the ongoing COVID-19 restrictions, and the blanket media coverage of every case diagnosed, the investment world, and the threats and opportunities it provides for our portfolio, is moving on.

To that end, we wanted to share a couple of insights this week which reinforce the risks posed by traditional asset classes, and why pink diamonds remain a great way to both protect and grow wealth in the decade ahead.

Two warning signs for investors

It’s hard to believe, but the stock market in the United States has now doubled since the first quarter of last year, when the original COVID-19 panic caused global markets to tank.

It’s one of the fastest and most impressive stock market rallies on record, with the year on year increase in the S&P 500 (the main stock index in the United States) to the end of June almost equalling the highest ever year on year move seen in 50 years.

Sadly though, this stock market rally hasn’t been fuelled by a genuine economic recovery or a huge increase in earnings or capital investment by the companies that make up the S&P 500.

Instead, it’s been fuelled predominantly by some of the most expansive monetary policy in history (i.e. central banks have been printing money faster than ever before), a huge increase in leverage, and a boom in share prices for the more speculative companies on the market, many of which aren’t even profitable at this stage.

Below, we share a couple of charts which highlight how significant these factors have been.

The first, which you can see below and is built using data from Bloomberg, Lohman Econometrics and FINRA shows the S&P 500 price index in the top panel, and the year on year change (in percentage terms) in the amount of margin debt used by investors to buy stocks in the bottom panel.


Margin Debt YOY Percent Change vs S&P 500

Margin Debt YOY Percent Change vs S&P 500

Source: Lohman Econometrics, FINRA, Bloomberg

As you can see, the year on year increase in margin debt is now tracking at about the same levels that it was back in the year 2000, and again in the year 2007.

Both of those periods ended in major stock market crashes, with investors typically losing 50% or more of their money, depending which area of the stock market they had concentrated their holdings in.

That is warning sign number one, as investors are typically only ever confident enough to leverage themselves to the hilt to buy stocks when they are certain the markets can’t or won’t fall.

Which is exactly when they tend to.

Warning sign number two can be seen in this next chart, which highlights the market capitalization, or market value of all publicly traded companies that are currently making losses, not profits, in their day to day business operations.


Total Market Cap of Money Losers

Total Market Cap of Money Losers

Source: Kailash Capital, LLC

Again, as you can see, this has now gone, “off the charts”, with the total value of companies that fit this profile now approaching USD $6 trillion, more or less triple where it was back in 1999, when the NASDAQ bubble burst.

Matt Malgari, who works for Kailash Capital, and who created this chart noted that; ‘Warren Buffett’s two rules for investing are simple. First, don’t lose money and second, never forget the first rule.”

He then went on to note that; “the chart shows that the market cap of loss-making firms is now over $6 trillion dollars. We believe this mania for loss making firms will end like all the prior ones with speculators taking catastrophic losses.”

In the short-term, the above data points don’t necessarily mean a lot, in terms of if the stock market will be up or down next week, or even next month.

But for astute investors, they are clear warning signs that markets are in a huge bubble, and that when they crash (which they always do eventually), the losses suffered by retail investors will be enormous.

You don’t wait until a storm hits or your house is broken into before you buy insurance. You buy it ahead of time, knowing that it will pay off when and if a crisis hits.

It’s no different when it comes to investing.

And given the very obvious risks that exist in traditional asset classes, the time to move capital into safe haven assets, including pink diamonds, is now.

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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