☀️☕️ Diamonds aren’t Forever

📝 Focus

• Diamonds aren’t Forever

📊 In the Markets

• HK dives; China tanks; Lagarde says Summer, not Spring; US consumers spend and spend

📖 MoneyFitt Explains

• 🎓 The Hang Seng Index

💸 Personal Finance Corner

• Futures 101: The Investment That Could Lose You Everything and More!

📝 Focus

Diamonds Aren’t Forever

De Beers, the world’s top diamond producer, has slashed the prices of its diamonds by an average of 10%, with some categories down much more amid plunging sales in a market which was at a virtual standstill in 2023, according to Bloomberg. The Nikkei reports that the benchmark polished F colour, VS1 clarity diamond, was around $9,200 per carat in mid-December, down 24% from its most recent peak in August 2022 and the lowest since 2009.

Initially fueled by pandemic-driven luxury spending, diamond demand surged from 2020 to 2022 as locked-down consumers spent on themselves. Pelotons, Lululemon pants, big screen TVs and diamonds. But economic reactivation led to a glut of inventory as demand plunged, exacerbated by rising inflation in the US (and a pivot to “experiences”) and a confidence-sapping property crisis in China, two of the largest markets for diamonds. (The demand trajectory is much like other luxury goods, also once seen as immune to cycles. MFM: “Luxury slowdown.”)

The biggest drop of 25% was seen in “select makeables,” large diamonds of between two and four carats that can be cut into smaller polished stones for high-quality but not flawless engagement rings. These prices had already been cut by about 40% in 2023, hit by intensifying competition from lab-grown synthetic diamonds, which are priced some 80% lower than natural diamonds and which themselves saw a slump in prices as capacity outstrips demand. Such diamonds account for about 9% of diamond exports, up from 1% before 2018.

And then Russia. In 2022, it mined 42 million carats of diamonds, far more than second-placed Botswana’s 25mn and third-placed Canada’s 16mn. (One carat is 0.200 grams.) Though Russia produces more rough diamonds that are for industrial use rather than gem quality, it is reasonable to assume that Russia’s diamond production is being used to circumvent sanctions using alternative trade routes through Central Asia or the Middle East, exploiting the difficulties in tracing a diamond’s origin, potentially adding to the global glut in supply.

..... ▷ Diamonds are actually relatively common compared to other gemstones. The perception of diamonds as rare has been largely shaped by the controlled release of rough diamonds to the market and extremely successful advertising campaigns.

Diamonds are made from carbon, which is a plentiful resource. While gem-quality diamonds are somewhat rare, the majority of diamonds are industrial-grade.

The diamond industry, particularly under De Beers' influence, meticulously crafted an image of diamonds as symbols of love and commitment. In 1947, De Beers launched the iconic "A Diamond is Forever" campaign, associating diamonds with eternal love (and engagement rings.) 

This eternal slogan was recognised by Ad Age as the greatest advertising slogan of the 20th century. 

..... ▷ De Beers also controlled the supply chain, maintaining scarcity to enhance the perceived value of diamonds. Over time, this created a robust demand, transforming diamonds into coveted status symbols. 

However, the industry has evolved, facing challenges like ethical concerns (“blood diamonds”) and the rise of lab-grown diamonds, prompting shifts in consumer preferences and marketing approaches.

..... ▷ Some view diamonds as lacking in intrinsic investment value compared to traditional financial assets given that the resale market can be illiquid, and values subjective. 

Unlike commodities with standardised pricing, a diamond’s value can depend on various factors, making them challenging as pure investments compared to traditional investments like stocks, bonds or precious metals, though there is value in uncorrelated diversification and history of stored value in physical form.

..... ▷ De Beers was founded in 1888 by Rothschild-bankrolled British colonialist, businessman and supporter of the apartheid system Cecil Rhodes, the founder of the British South Africa Company (which named an entire country after him.) It specialises in diamond mining and trading and was once considered a monopoly, controlling 80-85% of the rough diamond market, though by 2000, that was down to “only” 63%. Currently, De Beers is 85% owned by Anglo American (which counts J.P.Morgan, the man, among its founders) and 15% by the Government of Botswana.

🇸🇬 Singapore: Let’s Get MoneyFitt!

📊 In the Markets

Hong Kong's Hang Seng Index 🎓 plunged again, following Tuesday’s 2.2%, with a 3.68% collapse on Wednesday to its lowest level since November 2022, led by declines in real estate and consumer non-cyclical stocks.

The Hang Seng China Enterprises Index closed down 3.9%. (The 50-stock HSCEI is exactly what it sounds like: shares of Chinese mainland companies listed on the Hong Kong Stock Exchange and traded in the USD-pegged HKD, sometimes still called H-shares.) Other than one (1) day in October 2022, it’s now at its lowest since December 2005 and 74% off its all-time high in October 2007.

The mainland Chinese CSI 300 did better than either the HSI or the HSCEI but still dropped a painful 2.18%, an almost five-year low. Besides the slight miss in China's fourth-quarter GDP, ever more disturbing data keep appearing about the (maybe) terminally ill property sector. 

In December, new home prices fell 0.4%, the largest monthly drop in nine years, despite a series of policies from Beijing to stabilise the market. Even more startling, yet also somehow unsurprising, property sales measured by floor area fell by 23% YoY.

Bazooka, please.

South Korea's Kospi slid 2.47%. Japan's Topix (down for just the second day this year) closed off 0.3%, outperforming the region handily. Apparently, Chinese fund managers have been buying Japanese ETFs hand over fist.

European markets were down for the third day running on Wednesday, with the pan-European (not just EU, not just eurozone) Stoxx 600 down after ECB president Christine Lagarde pushed back against expectations of interest rate cuts over the spring and Dutch central bank president Klaas Knot said “Knot so fast!” to markets still over-optimistic about imminent €-rate cuts. 

All sectors and major markets were down, with the UK the worst of the lot. The benchmark FTSE dropped 1.5% as December inflation unexpectedly rose to 4% YoY (i.e. compared with December 2023), faster than the average best guesstimate of The City’s Finest at 3.8%.

To put things in some perspective, traders around the world are writhing in pain because the interest rate cuts they have been pricing in for this springtime will probably happen in the summer.

The good news was bad for US stocks and bonds, sending them down from the open on Wednesday. 

Stronger-than-expected December retail sales data again showed remarkable consumer resilience amid high interest rates, inflation and total savings that have fallen back to pre-Covid times (above). Increased spending on clothes, general merchandise and automobiles, much of which was heavily discounted that period, offset lower spending on electronics, furniture and personal care stuff. (And yet many Americans see the national economy as weak, according to the new Axios/Harris Poll Vibes Survey. Election Year!)

The strength of consumer spending has dashed market hopes from late last year for interest rate cuts in March that drove that early Santa rally and which, even at the time, looked premature. Fed officials saying just that were dismissed for weeks by bullish traders as “well, they would say that, wouldn’t they?”

Meanwhile, a 0.3% rise in Meta kept the major Big Tech stocks, often referred to as the "Magnificent Seven" (which generated 2/3rds of last year’s gain in the S&P 500)  from all being in the red.