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.
3: Andy Krieger
It was 1987 and Andy Krieger, a 32-year-old currency trader at Bankers Trust, was carefully watching the currencies that were rallying against the dollar following the famous Black Monday crash. As investors and companies rushed to sell the American dollar and buy other currencies that had suffered less damage in the market crash, there were bound to be some currencies that would become overvalued, creating a good opportunity for profit. The currency Krieger targeted was the New Zealand dollar, also known as the kiwi.
Using the relatively new techniques afforded by options, Krieger took up a short position against the kiwi worth hundreds of millions of dollars. In fact, his sell orders were said to exceed the money supply of New Zealand! The selling pressure combined with the lack of currency in circulation caused the kiwi to drop sharply. It yo-yoed between a 3 and 5% loss while Krieger made millions for his employers.
One part of the legend tells of a terrified New Zealand government official calling up Krieger's bosses and threatening Bankers Trust to try to get Krieger out of the kiwi trade. Krieger later left Bankers Trust to go work for George Soros.
2: Stanley Druckenmiller
Stanley Druckenmiller made millions by making two long bets in the same currency while working as a trader for ...you guessed it -George Soros. Druckenmiller's first bet came when the Berlin Wall fell. The perceived difficulties of reunification between East and West Germany had depressed the German mark to a level that Druckenmiller thought extreme. He initially put a multimillion-dollar bet on a future rally until Soros told him to increase his purchase to 2 billion German marks. Things played out according to plan and the long position came to be worth millions of dollars, helping to push the returns of the Quantum Fund to over 60% for the year.
Due to the success of his first bet, Druckenmiller also made the German mark an integral part of the greatest currency trade in history. A few years later, while Soros was busy breaking the Bank of England, Druckenmiller was going long in the mark on the assumption that the fallout from his boss' bet would drop the British pound against the mark. Druckenmiller was confident that he and Soros were right and showed this by buying British stocks. He believed that Britain would have to slash lending rates, thus stimulating business, and that the cheaper pound would actually mean more exports compared to European rivals. Following this same thinking, Druckenmiller bought German bonds on the expectation that investors would move to bonds as German stocks showed less growth than the British. It was a very complete trade that added considerably to the profits of Soros' main bet against the pound.
1: George Soros
The British pound shadowed the German mark leading up to the 1990s even though the two countries were very different economically. Germany was the stronger country despite lingering difficulties from reunification, but Britain wanted to keep the value of the pound above 2.7 marks. Attempts to keep to this standard left Britain with high interest rates and equally high inflation, but it demanded a fixed rate of 2.7 marks to a pound as a condition of entering the European Exchange Rate Mechanism (ERM).
Many speculators, George Soros amongst them, wondered how long fixed exchange rates could fight market forces, and they began to take up short positions against the pound. Soros borrowed heavily to bet more on a further drop in the pound. Britain raised its interest rates to 12% and promised to push them to 15% to tempt investors to buy pounds. All this in one day. The problem was that investors simply didn't believe them.
Paying out interest costs money, however, and the British government realized that it would lose billions trying to artificially prop up the pound. It withdrew from the ERM and the value of the pound plummeted against the mark. Soros made at least $1 billion from this one trade. For the British government's part, the devaluation of the pound actually helped, as it forced the excess interest and inflation out of the economy, making it an ideal environment for businesses.
The US was on a bi-metal or 'gold standard' up until the 'Nixon Shock' of 1971.
What would the value of gold per ounce need to be today to backstop the amount of US currency currently in circulation?
While it is a purely hypothetical exercise at the moment, the answer may surprise you.
As many readers will know, the US monetary system is based on paper money which is backed by the federal government. The US currency is no longer valued in, backed by, nor officially convertible into gold. It is backed by the Government in whom we must trust.
Yet through much of American history, the United States had a currency that was linked to a metallic standard of one variety or another. The first devaluation of the US dollar was a result of the Coinage Act of 1834. This Act changed the 15:1 ratio of silver to gold to a 16:1 ratio by reducing the weight of the nation's gold coinage. The value in gold of the US dollar was thus reduced by 6%.
The Gold Standard
Through the years many developments, including large silver discoveries in the US and the Civil War affected the bi-metal backed US dollar. Yet the US dollar link to both gold and silver persisted until March 14, 1900 and the passage of the Gold Standard Act, which asserted that:
'the dollar consisting of twenty-five and eight-tenths grains (1.67 g) of gold nine-tenths fine, as established by section thirty-five hundred and eleven of the Revised Statutes of the United States, shall be the standard unit of value, and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard'...
At that point, the United States was on a 'gold standard', a standard which guaranteed the dollar as convertible to 1.5 g (23.22 grains) of gold.
The Nixon shock
There were many more twists in US dollar policy until the danger of a run on US gold reserves was deemed too high. As a result, in 1971 President Nixon issued Executive Order 11615, which ended the direct convertibility of US dollars to gold.
He said, 'we must protect the position of the American dollar as the pillar of monetary stability around the world. I am determined that the American dollar must never again be a hostage in the hands of the international speculators'.
This became known as the 'Nixon Shock' and marked the US dollar's transition from the gold standard to a fiat currency.
What price today?
What would the price of gold be today had the US remained on the gold standard as opposed to being backed simply by the 'full faith of the US government?' While this is a hypothetical exercise, it is important for three reasons.
1. The US dollar is currently recognised as the world's 'reserve currency' of choice and dominates payments in global trade transactions.
2. Gold is globally priced with the US dollar as the reference. The 'full faith' of the US government has arguably been compromised with the election of Donald Trump as President. With statements such as, 'the US dollar is too strong', 'I love debt', and the suggestion to renegotiate US sovereign debt. This, combined with Trump's opposition to commonly accepted 'big systems' like the Euro-zone, NATO, and trade pacts like NAFTA, as well as a relationship with Putin that at best is odd and at its worst quite disturbing. Do we still have 'full faith'?
3. To accurately answer the question of the price gold needs to trade at in order to back-stop the US currency, we need to know how much gold the US government really holds, as well as how much currency it has issued.
US Gold Reserves
According to the US Treasury, the federal government currently holds a total of 261,498,926.23 troy ounces of gold. However, some analysts and politicians question whether or not the US government truthfully reports its gold holdings considering the holdings have not been independently audited. In 2011, US Representative Ron Paul introduced a bill to audit the Fed's gold holdings. Paul, who was running for President at the time and pushing for the US to return to the gold standard, said, 'this is one of the few legitimate functions of government. To check our ownership and be fiscally responsible and find out just what we own and whether it's really there'.
The bill failed. It failed a Senate vote in early 2016 when Ron Paul's son once again pushed to audit the Fed's gold supply. As a result, we'll have to take the US Treasury's word for it, and use the figure of 261,498,926.23 troy ounces.
US Outstanding Currency
According to the Federal Reserve, as of January 11, 2017 there was approximately $1.5 trillion in circulation - $1.46 trillion of which was in Federal Reserve notes.
With $1.5 trillion in circulation it means that each ounce of gold held by the US government would need to be valued at $5228/ounce. Gold is currently trading at only $1230/ounce.
Market madness (again)
You could be forgiven for wondering what was going on currently. We have a reality TV star as the US President, a man who dictates policy through Twitter like a tipsy teenager.
Equity markets have surged to new highs and more people are trading them than ever before. Wages are stagnant, asset prices are bloated, debt is everywhere and people have never been more miserable. Perhaps I should try to be more upbeat about things.
I firmly believe that recent highs for US share markets are nothing more than the US being seen as the lesser of two evils. US markets are not cheap on a historic basis (average trailing price/earnings ratio of 25 times) and only look 'safe' compared to the mess that is Europe. In fact, the kindest thing you can say about the markets is that they are not as expensive as they were in 1929 and 2000.
Should France, Italy or The Netherlands decide to leave the European experiment, it would clearly put Germany in a very awkward position. US markets are assuming all Trump promises on tax and the removal of red tape will come to fruition. They won't, but that's a story for another day.
Many recent advances and changes in the way we live our lives in 2017 are of course fantastic. We are able to communicate more efficiently than ever before, (if we could just remember to actually speak to each other now and again). Having said that, we are unlikely to return to boxy black and white TV's anytime soon and phones won't ever have tightly wound cords linking them to a wall socket again. Booking a flight no longer takes a drive to the travel agent, booking a table for dinner can be done in seconds and transferring money is simple and fast. Wonderful.
Some things won't change however. Overpriced, over hyped and desperately 'fashionable' stocks will come to market. They will make their founders hugely rich. The shares will rise and then fall. It will make lots of people look very silly.
The only problem with fashion is that it changes so quickly, and never more so than today. What looks like a great buy in rosy times can quickly look like a moment of madness once storm clouds start to gather for the economy. Let’s take a look at Snap Inc, the largest and most anticipated (by who, we are not sure) IPO since 2014.
The young founders of Snap turned down an offer of $3bn from Facebook a few years back and at the time, many could barely believe their chutzpah and arrogance. At the market close last week, the company was worth just under $23bn. Smart move boys! They even kept their voting rights to the company, the shares they floated (sold) did not have the same rights as the ones they retained - it's brilliant really. Each is worth $5bn today. Impressive stuff indeed.
The IPO prospectus describes the business as 'a camera company'. This is not really true. Snap is a messaging application for smartphones - you send someone a picture or video, and it deletes itself shortly after the recipient has read it. They also allow users to manipulate pictures with various graphics. That's it in a nutshell. The shares floated at $17 and rose to $27 a few days later.
Facebook has 4bn users and a worth of $400bn. Snap has 158m users and a current worth of $23bn. Facebook users spend 50 minutes a day using the site, Snap users spend half that amount. Facebook made $8.6bn in advertising revenue last quarter, Snap made $165m. However, and this is the most important number, Facebook made $20 advertising revenue per user, Snap pulled in just $2.15 per user.
Could Snap grow and attract a mainstream middle-aged audience? Possibly, but it would be costly and risky and the prospectus suggests it won't even try.
Growth in China will be difficult as it is doubtful whether China would be happy with Snap's delete function because it would be so hard to police. Instagram recently launched a rival to Snap, called Stories. It signed up 100m users within 4 months, Snap has 158m in total remember.
Facebook and Google are both bigger and less risky, and both trade on far cheaper valuations. The founders, Evan Spiegel and Bobby Murphy, were very brave to turn down that $3bn offer in 2012, but even smart, brave billionaires have been known to push their luck.
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.