Last week, in the dusty recesses of the US Treasury website (what do you mean, you don't check it regularly?), a new document appeared.
On first reading, the contents don't appear to be very interesting but closer reading reveals a startling act of financial aggression by Russia against the US. Of course, the Russians tend to get the blame for most things these days. Assassinations, computer hacking, interfering in elections...the media is keen to scapegoat Russia whenever possible. There is one story you won't read about and it's more important than the others however.
There is a document that shows the foreign holdings of US government debt ('US Treasuries'), month by month, country by country. There is a delay in collecting all the information so the most recent month shown is April.
Over the course of April 2018, Russia dumped HALF of all its US Treasuries into the market - $47.4 billion dollars worth to be exact. This was the reason for the blow out in the US government borrowing costs over April by the way. It was the sheer amount of US debt ditched by Russia that left a significant dent and pushed the US ten-year bond yield over 3%, something not seen for over 4 years. Whilst Russia ditched their dollars, they were busy buying something else however. It is something they've been loading up on for a long, long time. I'll give you a clue: It's shiny, heavy and it can't be defaulted on most importantly.
The gold holdings of the Russian government are now more than 1.5 times the value of their US Treasury holdings.
How things change - in late 2009 Russia's US treasury holdings were more than five times the value of their gold holdings. So what do the Russians know that we don't?
Russia is preparing for a change in the monetary system. They wish to move away from the dollar, and the immense power America wields with it. They encourage the use of local currencies between nations, rather than one global reserve currency. They are expecting a multi-polar world, rather than the unipolar system that we've gown so used to. The media may not have reported this story much, but that might be for fear that by doing so, they would exacerbate the problem. Stock markets and housing markets continue to trade as close to historic highs. The rules surrounding lending in the US are being relaxed and the memories of 2008 are fading into the past. I believe they will return to haunt us however.
The real problem will arise when Russia's partner, China, decides to unload its immense US treasury position. They are at the top of the table and hold over 1 trillion dollars of it.
That will make the news, I'm certain of it. It would be worth positioning yourself before this happens. Because it will happen.
James Sanders, London
What we have seen so far are just the opening shots of the coming trade war. Think of it as the Battles of Lexington and Concord that opened the Revolutionary War. Much larger tariffs and penalties are waiting in the wings.
Trump will soon receive a report under Section 301 of the Trade Act of 1974. That report has been almost a year in preparation and will reveal that China has stolen over $1 trillion in U.S. intellectual property. Section 301 of the Trade Act of 1974 is the “nuclear option” when it comes to trade wars.
I don’t want to get too deeply in the weeds here, but Section 301 gives the president broad authority to impose sanctions and penalties. The president will have a completely free hand to impose billions of dollars of damages if not more on China.
Trump could receive this report within days or weeks. Regardless, it is coming soon.
Once the president receives it, the law gives him 90 days to react. But he will likely act within days or weeks upon receiving it. Importantly, Trump does not require Congressional approval to act. Again, the law gives the president enormous flexibility. So, he doesn’t need Congressional backing as he did for, say, the tax cuts. Initial reports indicated that these penalties will be about $60 billion. In fact, Trump used that figure in today’s press conference on tariffs. But that’s just for starters. Trump will wait to see if China is willing to make concessions in other areas. If not, he can easily double or triple that $60 billion figure.
The penalties Trump seeks to impose are not limited to specific sectors but may apply across a wide range of goods and services from China that benefitted in any way from the theft of intellectual property (IP). IP is a very tricky subject with a lot of grey areas.
Trade restrictions on steel, for example, are much easier to implement. Steel is tangible. You can weigh it, track it, etc. Intellectual property, on the other hand, is much more vague, much more amorphous. It exists inside human brains, or on the internet or a computer thumb drive. It can be everywhere at once in a sense.
So it’s much more difficult to identify, quantify, and throw tariffs on than traded products like steel, autos, solar panels or washing machines. Yet intellectual property is more important than ever. We live in a world of technology, a world of the internet, of smart devices, and even cryptocurrencies for that matter. These are all forms of intellectual property.
Now, China has been stealing U.S. intellectual property for decades in various ways. Sometimes it happens when a Chinese scientist comes to the United States and takes what he learns back to China. But a lot of the theft has been done through malicious hacking of U.S. technology companies. These could be big defence contractors like Lockheed Martin or Northrop Grumman. But they could also be small firms with one great innovation or idea. These smaller firms may actually be more vulnerable because they don’t have the defences against hacking or cyber warfare that the big guys do.
With this stolen intellectual property, China has been able to build up companies like Huawei, a large technology and telecommunications firm. And its defence industry has made enormous strides because of stolen intellectual property. Because intellectual property is so amorphous, the president could look at a wide variety of Chinese industries and say:
“You know those electronic products you’re assembling, like smart phones? They wouldn’t be so smart if you hadn’t stolen some of our intellectual properties. So, we’re going to throw a tariff on them.”
These penalties will have a much broader and deeper impact than the steel and aluminium tariffs, or those on washing machines or solar panels. China has issued a pro forma denunciation of the fines and tariffs but have not announced any specific retaliatory measures in the immediate aftermath of Trump’s actions.
China will retaliate for U.S. sanctions not with their own tariffs, but with asymmetric financial warfare including diversifying reserves away from U.S. Treasuries into gold and European bonds, and with restrictions on U.S. direct foreign investment in China. Both sides can continue the trade war in cyberspace with ongoing reciprocal theft of intellectual property and intrusions into critical infrastructure.
I want to mention one other trade weapon the president has at his disposal, something called CFIUS. CFIUS stands for the Committee of Foreign Investment in the United States. It does not have to do with trade specifically, but with what’s called direct foreign investment. That’s when a foreign entity from China or Europe or anywhere else buys a U.S. company. Generally, the U.S. has been very open to direct foreign investment in the same way we’ve been open to trade.
But there’s always one big exemption, which is national security. And the 1974 trade act, which I mentioned earlier, does provide a national security provision to limit direct foreign investment in the U.S. CFIUS is designed to protect U.S. companies from foreign takeovers where national security could be compromised.
Nobody cares if a company from a friendly country like Canada wants to buy a nonstrategic asset like an ice cream company in the United States. No one thinks that involves national security. But if the Russians or the Chinese wanted to buy AT&T, that’s a completely different story. That would not be allowed because that’s a critical part of the infrastructure of the United States. That’s a simple example of how CFIUS can be used for national security reasons to protect against foreign acquisitions of U.S. companies.
The president has already announced that he’s going to be very aggressive in preventing Chinese acquisitions of U.S. companies. So that’s another arrow in Trump’s trade war quiver. He’s using them more aggressively than at any time going back to the 1980s — maybe even the 19th century.
What are the practical implications of tariffs, IP penalties, and all these trade war developments?
First, Chinese companies that export to the U.S. will be hit with tariffs. But U.S. companies like Boeing that import materials from China will be affected also. Further, U.S. companies that export to China will get hit with retaliation. And U.S. companies looking to expand in China will be denied permission. Likewise, many Chinese companies looking to expand to the U.S. will be denied permission under CFIUS. And U.S. companies that are hoping for a Chinese buyout offer may not be able to sell to a Chinese company.
But it goes beyond China. You can take those examples and just substitute South Korea or the Eurozone. Will a South Korean company be able to buy a U.S. company if there’s a trade war going on? Maybe not. So, the trade war is going to ratchet up and get much more intense. Wall Street has its head in the sand. This trade war is not going away anytime soon. It will last for years, likely intensify and be a major headwind for stock prices.
Investors need to prepare immediately for the fallout from this massive escalation in the trade wars.
I would like to say I wrote this, but I didn't. Sadly someone far smarter did. Jim Rickards is not a man to ignore. Let's hope he's not right this time.
James Sanders, London
When I was young, turning 17 years of age was a real target and the countdown to it started many years before. 17 is the legal age you can learn to drive in the UK, and for me this meant being able to drive to the snooker club, pub and my lovely girlfriends house. What more could a 17yr old lad want or need? Not much as it turns out.
No more public transport, no more delays. Just the freedom and chance to explore the world from the comfort of a warm car with my own music playing. The reality was somewhat different, and rather less romantic, but that’s another story.
As I said to my own son recently, you should never spend too much on your first car. As an inexperienced driver, it’s almost inevitable that you will have a bump, and it’s better that the metal you bend is cheap rather than glossy and expensive. That comes later.
Back in the 1990’s, it was all about the stereo, speakers, alloy wheels and performance of the (tiny) engine that meant everything to teenagers discovering the freedom, thrill and danger of driving.
Is it still the same today? Will it be the same in 5 or 10 years? I don’t think so, in fact, I’m certain of it.
The car used to be seen as a possession. Something to be proud of, to maintain, clean and in many ways, it conveyed your status to others. Of course, much of that is still true and the prices of certain classic cars has rocketed in recent years and many have become fantastic investments for their owners, although I would consider selling today if you are still riding this particular wave.
I believe that analogue cars are seen as part of history now, just as new cars are seen as service providers, little different to washing machines or smart phones. They are valued for their ease of use and little else. The less effort and interaction required, the better.
The classic car boom has been led by cars that were produced in very limited numbers. Very few automatic transmission cars have seen their prices surge like their manual transmission counterparts – why?
Because the cars that make driving ‘easy’, that don’t make you work to extract the best of their performance, are seen as being mere objects, devices that exist to provide comfortable, reliable transport and little else.
In contrast to the rising values of certain old cars, modern cars have never been cheaper. In the same way that mass production normally sees an increase in quality and an erosion of ‘personality’, modern cars are now mere objects. They are not expected to engender emotions, merely to provide a service. For the vast majority of buyers, ultimate reliability is rated far higher than the engine note, handling characteristics and performance on the limit. Most people would argue that is a fair trade off.
Very few young people today aspire to own their own wheels. Ask one today, if you succeed in getting their attention for a few seconds (not easy) and see what response you get. A survey recently reported that young people feel home ownership is no longer a realistic aspiration, and with property values so high, that’s understandable.
I think the lack of enthusiasm for vehicle ownership is deeper than merely financial though.
The advent of firms like Uber has meant that for many, a ride to wherever you wish to go is only a few clicks away. It’s cheap, convenient, mostly safe and reliable. You can sit in silence and arrive at your destination without the hassle of finding a parking space and paying for it (remember I live in London). The only weaknesses are when the human element interferes with the tech. That will change soon.
As your Uber driver glides away, normally using electric power, to collect another traveller and small fare, you are at your destination with the minimum of fuss.
Young people value convenience and value over prestige and engineering now. They value experiences more highly than possessions. They probably have a point.
In the very near future, owning a car will become largely redundant. A driverless vehicle will arrive silently at your home / office/ party / ex Uber driver employment agency office and the doors will whir open like they did on Star Trek. Upon climbing in, your chosen music will play while your favourite websites and social media feeds are displayed on the interior surfaces of the ‘car’. You (and your parents, sorry) will be able to track your journey in real time and there will be no delays or surprises. Journeys can be booked with military precision, as journey times and arrival estimates will be accurate to within a few seconds.
On one hand, this is a huge change in all of our lives.
Dirty, smelly and unreliable internal combustion engines are on their way out, that’s a certainty. The electrical grid (more here) will power our driverless transport very soon, and many of the current frustrations and costs we accept, will simply disappear.
Anyone who has watched the fantastic Netflix documentary ‘The Minimalists’ will admire the ‘own your possessions, don’t let them own you’ mind-set that young people increasingly have now.
The future is quiet, reliable, punctual, predictable and safe. That’s the good news. But it won’t stir your soul.
For that, I can help. Please listen to the Rod Stewart song from 1972, ‘True Blue’. Rod managed to record his Lamborghini Miura at high revs from 2mins 46 seconds onwards. I’ve listened to it hundreds of times and it never fails to deliver. I hope it helps you too.
James Sanders, London.
Over the summer, something truly incredible occurred in Brooklyn, USA.
Over 50 homes stopped using the centralised grid…and created their own micro grid. This enabled each home to generate solar energy…and trade it back and forth with their neighbours using the blockchain (we have discussed blockchains before). This is the same tech that makes bitcoin so powerful.
Anyone heading out for the day, and not needing any energy, could simply sell their energy on to anyone else on the grid. This trade would be very quick, safe and of course, cheap.
No one had to pay a centralised power station to supply them with dirty, ‘old’ energy. This is important. There is a huge decentralised energy revolution happening right now.
There is a similar experiment going on in the UK, in Salford to be precise. Again, hundreds of homes have decided to try going ‘off grid’ and created their own micro grid. It’s happening all over the world in fact. The advantages to a decentralised micro grid are huge. Necker Island, the private island owned by Richard Branson is a great example.
For decades, it has generated most of its energy from diesel generators. But now, it’s built its own dedicated micro grid. It is planning to disconnect from the ‘mains’ and use solar, wind and other renewables to power itself.
This technology is bigger than any single installation or energy source. Whether its solar, wind, geothermal or battery tech. It is really about how they all come on-stream as part of a decentralised system with thousands of smaller energy sources.
It’s an idea that is catching on across the world, including right here in the UK. Imperial College London are exploring the possibility of moving the UK train network off the national grid…and building a micro grid to power our trains. The project rolls out in early 2018. I will be watching their conclusions and suggestions with interest. In San Diego, the US military is investing heavily in its ‘Miramar Microgrid’, a joint project between energy giants Schneider Electric and Black and Veatch. Google, Walmart, Siemens, Microsoft, Facebook and the US Government have stumped up billions to fund new micro grids.
Apple has just registered itself as an energy supplier, ready to sell and trade solar energy. They have the cash after all.
By James Sanders
Opec, the oil exporters cartel has never been very good at sticking to deals which are designed to rein in output. They recently agreed to cut production to mop up a glut and boost prices, but it turns out they are not doing a very impressive job this time around either.
According to the International Energy Agency, some producers are showing signs of ‘weakening their resolve’. In July, the compliance rate amongst Opec members was just over 75%, overall production rose however. You should expect the cheating to continue, and don’t be surprised if some withdraw from the deal altogether.
Opec states have become more dependent on oil revenue this decade. As The Wall street Journal pointed out recently.
They have used a $100 oil price to boost spending in order to ‘pacify restive populations during the Arab Spring’ in 2011, and now they don’t dare to cut state spending too harshly. Of course, they are tempted to cheat and go for ‘jam today’, over ‘jam tomorrow’, but the situation is not sustainable in the long term.
They need the oil price to be higher to balance their budgets, and this shift has coincided with the advent of US shale oil, which has become increasingly cost efficient on the exploration front. Opec’s market share has declined to 40% from 55% in the 1970’s.
US shale is coping with lower and lower prices, producing more oil and thus capping any oil price rallies, just as Opec has begun to need the highest oil price of anyone in the market. The US government estimates that American production will hit an all-time high in 2018. No wonder the oil price is doomed.
Any price rises are likely to be short lived and I would recommend short selling into any strength for active traders.
By James Sanders
When I was at school, they had a multiple choice assessment for all the kids when they reached the age of 13. It tested various skills and it’s aim was to give the students and their parents an idea of suitable careers they may wish to consider. At the time it was considered cutting edge and the ‘tests’ were viewed with trepidation for fear of being pigeon holed as a future chimney sweep, cobbler or window cleaner – no offence to any cobblers, cleaners or ‘sweeps that may be reading this.
One job above all others was seen as ‘the job’, it was as if getting this profession selected as a potential career was in itself a huge boost and step up the slippery ladder amongst ones peer group. Ridiculous but true.
When the results were published, there seemed to be a year group full of mostly lawyers, marine biologists (not sure how that one was triggered), teachers, explorers and a select few that hit the jackpot - ‘commodities traders’. Of course, at the time, being a trader was all red Porsches, cocktails and braces. Open outcry trading was still in existence and it wasn’t necessary to have a degree to become one of this new breed of confident, arrogant alpha males. Fortunes were made and lost and it seemed that all you needed was confidence and ‘chutzpah’. In the early 1990’s, it felt as though being a trader was the quickest and most exciting way to become very wealthy, very quickly. It helped that traders appeared to flaunt their wealth more than equally wealthy lawyers, consultants and bankers. In many ways, not a huge amount has changed, as successful traders can still earn huge amounts of money and compared to other professions, it can be done quite quickly.
There are many different types of trader. Some risk their own money and work from home, others risk their firm’s money and are rewarded with a split of any profit. Others work for banks or funds and receive a salary and bonus dependent on how well they have performed. Of course there are a myriad of products that can be traded and most traders tend to stick to one product until they have developed a mastery, or as close to a mastery as possible, of that particular product. It is rare that you find a trader that can trade several products equally well, even though the rules and skills are pretty similar.
Other traders are not traders at all. They are ‘account managers’. They are not really ‘account managers’ either. They are salesmen. I used to employ many of these type of ‘traders’ and their job was to build relationships with their clients and give advice on the markets when required. They never traded their own funds and the trade ideas mostly came from analysts. Of course, if you give advice on the stock market, you can legitimately claim to be a trader I guess, but it’s worth noting all the different types as some have lots of brains and others just have lots of chat.
Most people become traders because they wish to back their judgement against others and be rewarded handsomely when and if correct. The best paid traders will be those that deliver the biggest profits and those will be the traders with the biggest credit lines and best information, research and lowest fees. It will also be the luckiest ones, as all traders need lady luck smiling on them occasionally, I assure you.
I have met a handful of traders that claim they enjoyed the mental challenge of trading against others in the market, but most of all, I think they enjoyed the way they were able to keep score of how they were performing during the challenge and you keep score by counting your money. It all comes down to money in the end. You live or die by your decisions and results, there are no excuses or explanations required – the result is binary. You win or you lose. That is very appealing to people with personalities that don’t have a high tolerance for BS.
I see many training courses being marketed online and in print offering to ‘train people to trade and earn a fortune’ from the comfort of their own home. These courses claim they will reveal the ‘secrets’ of all successful traders and the courses tend to cost thousands rather than hundreds to attend once you have been lured into attending the first (free) session which is a series of hints and vague talk of these ‘secrets’.
Of course, there are no secrets and these courses and their marketing are cynical ways to take advantage of those most desperate to earn a good living. In fact, there are a handful of rules that every successful trader needs to stick to just to be in with a chance of making that fortune. I will share the most important ones now and they are simpler than you may expect.
Of course, in 2017, it’s less to do with personalities and chutzpah and chat have taken a back seat to technology and trading programs that execute thousands of trades in the blink of any eye. These trading algorithms are the present and the future, but if you can win more than you lose and keep your cool when others are losing theirs – you may still be able to make a fortune. But it won’t be easy.
What makes some traders consistent winners?
It is the million dollar question. Some claim to have a secret 'system' that consistently beats the odds, some have particular stocks or currencies they track religiously and know inside out. Some pay huge amounts for fancy trading software and tipping services and other trust the trading decisions to robots, in short, there are many, many firms and products that claim to have the secret to consistent profits.
99% of the products and services in the market will end up costing you money. The mistakes I see most frequently are very simple and it may be worth noting them here so you know what to avoid.
1. Money Management
It is the most important issue every trader faces. It overrules every other consideration and that is why it is top of this list. If your trades are too large for the size of your account, you face making a lot of money but the real possibility of a few bad trades wiping you out. I suggest that you use around 5 to 10% of your total account balance for each trade, this gives you the chance to get it wrong and be able to 'fight another day'.
2. Let the trend be your friend
A very wealthy man once said that 'trying to call the bottom of the market is like trying to pinch pennies from in front of a steamroller'. If the market is flying up, it's because there are more buyers than sellers and it makes sense to be one of the buyers at this point, the key is to leave the party before it ends!
3. Decide what suits you best
If you like the adrenaline rush short term trading, focus on these markets. If they are too racy for you, perhaps you would prefer a longer term market. It's worth noting that many successful traders have a handful of longer term positions but often dip in and out of short term markets when opportunity presents itself.
4. Know your limits
Some people can lose £250,000 and take it in their stride, others are miserable when they lose £25.You should have an amount of money in your mind that you can afford to lose should things go against you, and stick to it. If you start making a profit, consider taking some of it back to cover your initial deposit perhaps? If you can afford to risk £2500, trade with £2500. If you can risk £100,000, use £100,000.
ick here to edit.
There is rich and there is, er, rich. One is the 'I bought a house in London 15 years ago and now it earns more than I do' rich, but the other is the 'I own more homes than I can list' type of rich. Walk down any street in London and you can bump into several of the first group, but the second group is a more rare breed. I have two friends who probably qualify for membership of this latter group, and annoyingly, both are self-made, charming and super kind. Both are worried at the moment. What's worrying them you ask? I'll tell you, it's debt.
They say that the seriously rich always carry a healthy slug of debt. It's efficient to use other peoples money (borrowed at low rates) to earn higher rates of return and very few people have no debt to speak of. However, the normally clueless Bank of America Merrill Lynch has come out and said that Britain could face an 'explosive debt trajectory' in the long term if it does not deal with its problems now. Of course, banks are useless at predicting this type of thing and their views generally only useful as contrarian indicators as they are nearly always behind the information curve and always have a bias and a backside to cover. But sometimes, it's OK to agree with them. And this time, I agree with Merrill Lynch and the poor wage slaves they flogged to produce their latest piece of 'research'. Don't worry loyal traders and analysts, your bonuses may be paid in deferred non voting B shares, but who really wants cash anymore?
That's the problem really. Cash isn't important until its very, very important and you absolutely, desperately must have it. By then - its too late.
I actually think that Britain's debt problem/explosion could come to a head much sooner than people think. I can see failing banks, seized assets and property prices collapsing. And if this happens, I see instability leading to anarchy. You simply can't have an economy built on debt.
I believe that the figures emerging from government and press releases from firms claiming 'growth and recovery' and talk of things 'getting better' is largely an illusion. If you are struggling now, it won't be any easier with interest rates at 3% or where they were a decade ago, say 5%. My friends both tell me that the cash flow of their businesses has been stretched in recent months (both run very different businesses in totally different sectors - if one had said as much, it would not warrant a blog, but both...). Customers are taking longer to pay and negotiating extended time to pay their bills. Revenue in their businesses is steady but only when inducements or offers are made to lure new customers on board.
Both men fear that when rates climb, and they surely must, businesses and families will be overwhelmed. Those that have not insulated themselves will find themselves exposed and sunk. Both have paid down substantial debt within their empires during the last 12 months in anticipation rates climbing.
I will write more about this subject in the future, but I believe that gold, diamonds and a little cash may not be a bad 'fall back' position if it gets ugly. If you are rich, add a few million in sterling/dollars/euros, a fully fuelled Citation jet filled with 5 years worth of food and a small armoury, along with those gold bars and flawless stones just to be safe.
It's just a question of when and how long the music can continue playing for. I am shorting equities - the explanations from those that remain long are not convincing and sound lazy to me.
Investing in diamonds can be a tricky business.
Are diamonds truly a good investment?
On paper, they would appear to be one of the very best. Remember, 90% of managed funds don’t manage to beat the underlying market, so it’s questionable why anyone would pay for such market ‘expertise’. If interest rates were 5% or 8%, perhaps the investment outlook for diamonds and other assets like classic cars and fine wines would look very different, after all, why take on any risk if you can grow your worth by 8% per year without lifting a finger?
Sadly, we live in exceptional times and central bankers appear to be happy to print paper money and take on record levels of debt – in these circumstances, diamonds make more sense than ever.
Diamonds have a high intrinsic value, they’re always in demand and they last forever - plus, they’re small, portable and easy to store (unlike gold, cars or fine wine). And, like most gems and precious metals, past performance shows that they will increase in value over time.
However, there are issues that need to be faced when making a case for investing in diamonds. One is the pricing. Unlike gold which is valued by weight because one block of gold is pretty much the same as every other block of gold, diamonds don’t have a universal price per gram. No two stones are exactly the same and every diamond has to be valued on its individual merits and most of the time that valuation is going to be somewhat subjective. Which means choosing which diamond to buy in the first place can be the hardest part. Despite this, many people are investing in diamonds - more than ever now that traditional investment opportunities are failing.
But how do you go about buying a diamond for investment, and how can you be sure of making a good return?
I would never encourage anyone to buy a diamond as an investment without a full awareness of the risks and potential pitfalls. With that in mind, I've identified three of the most common mistakes people make when they invest in diamonds.
1. Paying too much
It sounds obvious, but never has the mantra ‘buy low, sell high’ been more appropriate than when buying diamonds. However, when it comes to diamonds, ‘buying low’ is much harder than it looks.
First, there’s the tax. Unless you are storing your diamonds in a secure vault and not taking delivery of them, you will have to pay VAT. So, if you are serious, you need to store them and make sure this is done properly. If you take delivery and pay VAT, it means your diamond needs to grow by 20% for you to merely break even. Some firms offer secure vault storage in Antwerp or Geneva to avoid this issue for their customers. This immediately puts you at a huge advantage. I should add that should you decide to remove the stones from storage and bring them back to the UK, VAT must be paid (just in case lawyers are reading this - unlikely but you never know).
Secondly, there’s the retailer mark-up. This can vary from store to store so it’s crucial to shop around and make sure that you’re buying at the most competitive price available. I often hear about people trying to sell their ‘investment’ diamonds back to the trade - only to realise they were completely stung on the original purchase. A £50,000 diamond may only attract offers of £15,000 to £20,000 from the trade. Of course, the internet has transformed the market so if you buy from a reputable firm working with sensible margins, you can get a stunning diamond for close to wholesale prices but don't assume that all internet retailers will be offering the sharpest prices, some are charging more than the boutiques with their coffee and comfy sofas.
Thirdly, if you decide to take delivery of your stones and wear them, bear in mind that the setting will be virtually worthless when the time comes to sell. And what about insurance? If your diamonds are valuable enough to be an investment, they should probably be insured - that’s another expense you’ll need to recoup when you sell. Make sure your stones are insured if they are vaulted and remember that security boxes are not insured.
2. Expecting too much
Investing in diamonds is not a short term 'get-rich-quick' scheme. I have seen them marketed as such and this is both irresponsible and unfair. Diamonds take time to increase in value and should only be bought with a view to medium to long term growth only. If you are fortunate enough to buy stones that can quickly be sold on at a profit, see it as an unexpected bonus, but don’t expect it. Diamonds are a commodity and like any commodity, their value can go down as well as up. On the whole, based on past performance, they go up - just slowly and they are not volatile either. In a recent survey, only antique furniture was less volatile than diamonds! This means that when you invest in diamonds, your money is going to be locked up for a while (albeit in a very beautiful asset) so it’s important to be absolutely sure that you:
a) want to invest in this way and b) can afford to.
If you need to sell early to get your money back you may get less than you spent in the first place
Remember, diamonds are rare but not that rare. There are hundreds of thousands to choose from, but, and it’s a big ‘but’ – diamonds with genuine investment potential are rare. I think that only 3-4%% of all diamonds have any investment potential (to give some context).
3. Buying the wrong sort of diamond
The final hurdle when buying a diamond as an investment - and the one where most buyers fall - is knowing which diamonds are worth investing in. Some diamonds are easier to resell than others so investing in one of these will obviously make your life easier in the future. Trends change and what may be popular to Russian buyers may not be in demand from, say, Indian buyers.
The most important thing is to buy a certified stone, I would recommend a GIA certificate. This is true whenever you buy a diamond, whether it’s as an investment or as an engagement ring, for so many reasons. A certified diamond is far easier to resell than one that hasn't been certified and will be more desirable - especially if it’s certified by one of the most highly respected labs (GIA and AGS are best). Keep the certificate in a safe place but separate to the diamond itself, just in case. I would go as far as to say that you should not buy a diamond without a certificate under any circumstances.
The shape of the diamond can also be a factor. Round brilliant is the most popular diamond shape (about three quarters of all diamonds sold are round) so investing in a round brilliant diamond will give you access to a bigger resale market. If you’d rather not buy round, opt for one of the other popular shapes, such as the princess cut perhaps.
Always buy the best quality - that means a diamond with an Excellent or Very Good cut grade as well as above average colour and clarity. However, don’t be fooled into thinking you have to buy the biggest, best quality diamond in the world. The opposite is actually true. An extremely high-spec diamond will only be of interest to a few wealthy buyers and will be harder to sell on. You should instead aim to buy a high quality diamond of wide appeal - again, this will be more desirable to both trade buyers and private individuals.
I wrote this a few months back. I was very wrong..
In some parts of London, you see Tesla cars on every street, they are literally everywhere. BMW, Audi and Mercedes dealers may claim to be relaxed about the new upstart, but they must know that when it comes to styling, practicality, cleverness and panache, the Tesla has the upper-hand right now.
Buyers range from celebrities to politicians and you can even order a Tesla minicab if you require silent, pollution free travel. At the Eurotunnel in Folkestone, owners now have their own charging points outside the terminal entrance. Whilst we queue for petrol, Tesla owners top up their batteries, giving a range of around 350 miles, or close to half way across France. Owners even have dedicated charging points outside Harrods and inside Westfield shopping malls. .
They seat up to 7 people in comfort and have a fantastic 13'' iPad like screen which replaces the old fashioned buttons and switches of other cars. Updates and servicing information is relayed straight to the 'brain' of the car via the internet. That 'brain' means they can drive themselves (when allowed) and some models, when equipped with the largest battery, will accelerate faster than any Maserati, Ferrari or Lamborghini, even the ones that costs £1m. If you only have half an hour to spare between meetings, you can travel 150 miles or so on a quick charge. All very convenient. All very 2017.
Pretty impressive from an understated, sober looking family car, albeit, a very well off family as the cars start at around £75,000.
What about the shares you ask?
All this means that Tesla stock is expensive. Really, really expensive. It trades at $220 a share today, up from $20 in 2010. The banks and brokers covering Tesla are mostly very enthusiastic and positive, but no surprises there.
The stock was upgraded a few days ago and given a $300 target price, but some of the reputation covering that came with the recommendation was rather desperate, even by the standards of investment banks. Try this one, 'interim swings could take it from point A, down to point B, but ultimately we predict a much higher point C'. They also point out that the stock is 'controversial, expensive and risky'. Reading some of these reports, you could be forgiven for questioning why the author bothered in the first place.
Anyone who has sat in, driven, or been driven in a Tesla product will almost certainly be hugely impressed. The way the car silently surges past other traffic will know that this product is a definite glimpse of the future. The branding, build quality and showrooms are all beautifully executed and styled. However, the market is rating the shares so highly, I can't help but wonder if it has ignored all sense of risk.
Tesla racked up $4.2bn in sales over the past year, and lost $1bn during the same period. It has not made a profit as yet. Remember, this is a $30bn company. Tesla recently announced a new model, the $35,000 family hatchback, the Model 3. It took around 400,000 pre-orders and a third of these were taken before the car was actually revealed. At $1,000 per car, those deposits add up to $4bn which will help sales hit over $9bn this year. According to Tesla, it is aiming for $32bn of annual revenue by 2019. Most investment banks have Tesla making around $10 per share in 2018 and $17 per share by 2019.
Let's say that the investment banks are correct, yes we know that is a huge assumption and one we would not normally recommend, but let's go with it for now. It means that at today's share price of $220, Tesla stock costs 22 times what it will earn two years from now. Let's assume the analyst is also right about earnings in 2019 climbing from $10 to $17 a share, most traders would agree that 70% annual growth is worth paying 22 times earnings for. If you think the banks are correct, you would buy Tesla stock, no questions. Of course, you are banking on correctly predicting that this stock will turn from a loss maker to a huge profit maker within a couple of years and it's the speed of this turnaround that gives us cause for concern. 2 years is not long to go from perennial loss maker to huge generator of profits, and the world may not be buying shiny new cars in 2019 if the doom-mongers are correct and we slip into heavy recession.
Bear in mind that Ford is selling at just 6 times earnings and General Motors is selling at 5 times earnings - those are actual earnings and have already been generated. Of course, neither of these traditional carmakers are as trendy or plain exciting as Tesla, and neither are projected to grow as fast as the electric-auto pioneer. But, both Ford and GM boast double digit projected growth rates and are earning profits right now. Those profits are being channelled into electric vehicle development.
Some of those 400,000 depositors will choose not to complete their purchases, some won't be able to due to 'changes in circumstance'. A deposit should not be considered booked revenue as it takes a much larger leap of faith to commit to $35,000 (plus options) for a new car than it does to put $1,000 on your credit card to reserve one. Tesla stock is priced as if there is nothing that can go wrong in the next 24 months, so whilst the cars and company are certainly inspirational, the shares may be a touch too high, too soon.
Then I drove one..
Last night, a very generous and kind friend let me drive his new Tesla P100D. It was like no other car I've ever been in. I have owned all the traditional supercars and none of them could get close to this thing. It was truly epic, and beautifully built. It's the fastest car you can buy, so maybe the price of entry is not so greedy after all. If you own a £2m LaFerrari, any Lamborghini, McLaren or Bugatti - the P100D packs a bigger punch. Under full acceleration, you feel your organs being compressed and frankly, a bit sick.
Drive one and try not to be smitten. The shares are trading at $300 today, but I can see why. The car is monumental.
James Sanders is a London based trader and investor. He founded the UK’s largest independent derivatives broker in 2001 and left the City in 2009.