Is SVB's collapse a "buy" signal for diamonds?

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If US treasuries are now considered risky—what’s safe?

Diamond prices over the last 5 years.
Data source: (Diamond Prices Index)

What kind of upside-down Alice-in-Wonderland world are we living in? On February 8, CNBC’s financial guru Jim Cramer gives Silicon Valley Bank a strong buy endorsement. On March 6th Forbes includes Silicon Valley Bank on its annual list of America’s Best Banks. It’s already one of the twenty largest banks in America.

Yet when too much of the pandemic-inspired fire-hose of cash from Washington ended up in its coffers, Silicon Valley Bank had to do something with it. So they threw caution to the wind and parked much of it in a high-risk asset class. What was it? Crypto? Medical tech? Solar-power startups? Nope. Way riskier than those. Silicon Valley Bank foolishly went all in on…10 Year T-bills.

Wait, what? U.S. Treasuries are supposed to be the gold standard of conservative investment. U.S. Treasuries come with zero risk, right?

Zero risk as long as you keep them to maturity. But who does that? No, T-bills are bought and sold like any other liquid, dollar-dominated asset. And as interest rates rise, bond prices fall. And vice versa. T-bills are no exception.

So if you bought 10-year T-bills when interest rates were near zero, what’s going to happen to them when the Fed wakes up and realizes it’s in a race to stop inflation—and is losing. T-bill rates have gone from near zero to over 4 percent yield in 12 months. Prices on those earlier Treasuries have necessarily plummeted.

Investors had to spend most of the weekend nervously wondering if SVB’s collapse was going to trigger a replay of 2008, but President Biden took to the cameras on Sunday and promised no depositor would lose a dime.

Wait, but that means taxpayers are on the hook!

Nope. Not with an election year coming up. Our president made clear no taxpayer money would be used for the rescue, it was all coming out of FDIC funds—paid into by banks themselves, as an insurance policy.

Good news, right? Well, if you’re a depositor with more than $250k in your account, yes. FDIC is supposed to ensure only up to that amount. Seems 90% or so of depositors at SVB had more than that.

So it’s the FDIC cavalry riding over the hill to the rescue, right?

Well, are they riding to the rescue or riding into a field of quicksand? The FDIC is an insurance company, and like all insurance companies charges premiums commensurate with actuarial risks. Asking FDIC to now be in the business of covering all SVB deposits, not just those up to $250k, is like asking State Farm to rebuild every home in Florida damaged by a hurricane, even though only 10% of them were insured by State Farm.

State Farm would quickly run out of money. So what’s going to happen to FDIC? Well, probably rescuing one bank, and its well-heeled depositors, won’t kill it. But now that the precedent’s been established, what bank will Biden not rescue? Election year coming up, remember? He can’t let another Great Recession (or worse) happen on his watch. Which means he’ll be asking State Farm (FDIC) to not only cover all these uninsured homes, but also all those uninsured homes that may soon be damaged by the next storm. Clouds are already gathering.

But wait, won’t that wipe out all of FDIC’s funding?

Of course, but they have friends in high places, specifically at the Federal Reserve. Every time the U.S. needs cash, the Fed (always buyer of last resort for US Treasuries, or these days should we say “first resort,”) is there to provide it.

Not this time! The Federal Reserve has its hands full fighting inflation. That’s its prime directive right now. They’re not going to print more money just to rescue the government.

Is that a laugh line? Ever since we got off the gold standard, when the Fed has had to choose between bailing out the U.S. government with printed money, or fighting inflation, which did they choose? That’s right. They’ll abandon their inflation mission in a heart-beat if the alternative is the U.S. government running out of money.

But the inflation mission was never serious in the first place. Mathematically, Jerome Powell can’t raise interest rates enough to stop inflation because doing so would itself bankrupt the U.S. government which is the world’s largest debtor. He knows it. The financial community knows it. And whoever’s currently running the White House knows it.

President Biden is correct. Taxpayers won’t be on the hook for the new round of bank bailouts. But those holding dollars or dollar-backed assets will be.

Let March 12th, the day Biden promised to guarantee all bank deposits whether covered by FDIC insurance or not, go down as the day the Fed formally surrendered in its pretend war against inflation. How bad is the surrender? Well, JPMorgan Chase on March 16th issued a note suggesting the bank bailouts triggered by SVB may end up totaling $2 trillion. And here we were worrying about the student loan bailout.

So if T-bills are no longer considered safe, what is?

Well, let’s not use “safe” in the same sentence as describing a period of economic turmoil which we’re certainly in. But some financial strategies are smarter than others. And diversification into hard assets is always a wise choice when the inflation dragon has broken free of its chains, and has just consumed its first meal. (SVB, with a possibly an FDIC dessert on its way.)

So what do you buy? Gold, check. Silver, check. And now maybe diamonds. We’ve written elsewhere on what diamonds can do that metals can’t. And the government’s inevitable surrender to inflation happens to correspond to a time when an almost-year long slide in diamond prices seems to be ending. (See chart, nearby.) For the last four weeks diamond prices on the wholesale market have held steady and firmed up. In a recent conversation with a De Beers’ sightholder (the elite diamond manufacturers who are able to buy rough directly from De Beers at their periodic “sights”), he told me they’re significantly increasing their buying at the next one. That’s anecdotal but suggests prices in H2 may once again be on the upswing, as they were for most of 2021 and early ’22.

It took a lot of mistakes to ruin Silicon Valley Bank. But it takes only a few smart decisions for investors to avoid what’s now likely to be more out-of-control inflation. Gold and silver look like smart bets right now. And suddenly, so do diamonds.

DISCLAIMER: The author, Jacques Voorhees, is CEO of Icecap.Diamonds, a company that operates a diamond trading platform for hard asset investors. Nothing in this article is meant to provide investment advice. Also, past performance is no guarantee of future results.

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