Is the world running out of diamonds?

No, it?s worse.

The world is running out of diamond demand.

That is the only conclusion one can reach when looking at the chart below for polished diamonds for the past four years showing a 25% decline.

The diamond industry now produces 125 million carats a year, well down from 187 million ten years ago.

This is clearly not your father?s diamond market.

In the old days, you could rely on this highly concentrated form of carbon to appreciate an average of 5% a year over the long term.

Just for fun, I recently appraised the diamond I purchased for my late wife which I bought from a Hasidic Jew in an alley off of Manhattan?s West 47^th street. He kept his inventory hidden in an envelope in his sock.

How times have changed!

The two-carat, VVS1, round cut, yellow diamond that I paid $3,000 for in 1977, would fetch $39,800 today. Great trade!

However, now the rock solid investment thesis that underlay diamonds for so long is now turning to sand.

The problem is the millennial generation which fails to see the value in the sparkly rocks seen by previous generations. Their discretionary spending instead goes into the latest electronic device, game, or Tesla.

Indeed, there is far more competition for the luxury dollar than in the past.

A luxury ?glamping? safari in an African game reserve can easily set you back $30,000, the cost of an investment grade two carat diamond ring today. So will the private jet to get you there.

Kids this age are still about ten years away from when income, family formation, and spending patterns start to favor diamonds.

That leaves the current Gen Xers to support the market. However, there are only 65 million of them, compared to 85 million Millennials. Hence the softness in prices.

In 2015, global sales of diamond jewelry fell by 2% to $79 billion, the first decline in six years. Sales of rough diamonds plunged by 30% as dealers cut inventories in a soft market.

Structural changes in the industry are also having an impact.

DeBeers had a 90% world market share during the 1980s, and spent massively on advertising its product, some $200 million a year.

Now they account for only 31%, and the advertising spend has similarly withered.

Another problem is that the buyers of the very large diamonds in the Middle East have seen oil income shrink beyond imagination.

Industry analysts were shocked when the Lucara Diamond, at 1,109 carats, the largest discovered in 100 years, failed to sell at auction in June.

Government anti-corruption efforts in China have had a similar drag.

And let's face it. The diamond industry has not exactly been at the cutting edge of technology.

Stodgy marketing strategies enabled Internet start-ups like Blue Nile (NILE) to come out of nowhere and seize an important part of the retail trade. (NILE) recently announced blockbuster sales that took its stock up an eye popping 35% in a single day.

In 2011, Anglo American took control of the Oppenheimer family owned DeBeers for $5.1 billion.

Another problem can be found in the middle tier of the diamond market, the so called ?sightholders.? These are the dealers, cutters, and retailers largely based in Antwerp, Belgium (great moules mariniere there by the way).

Since the 2008 financial crisis, banks have withdrawn loans from the industry, citing secrecy and the lack of transparency. This has lead to a wave of bankruptcies of small firms and the consolidation of the rest.

Industry veterans are still optimistic about the future.

The US accounts for about half the world market, so the new frugality will be a challenge. Perhaps Trump inspired inflation will jolt this market back to life.

As standards of living steadily rise in China and India, and more western social practices are adopted, so should diamond consumption.

This could also be the greatest Millennial play of all time. If the past is any guide, Millennials DO eventually adopt their parents' spending patterns.

They just do it much later than we did, another possible outcome of the financial crisis.

To avoid a week on the sofa, you might even think about buying next year?s Valentine?s surprise early, like NOW.

The 1,109 Carat Lucara Diamond

I have recently reread the best financial book ever and I have read most of them. It is The Ascent of Money: a Financial History of the World by Harvard professor Niall Ferguson. It gives you a great explanation of how the broad sweep of history delivered us to where we are today.

Ferguson starts with an ancient accounting system written on clay tablets in Mesopotamia 5,000 years ago, and then takes us through the economic dominance of Greece and Rome.

We learn about a medieval Italian diplomat named Fibonacci, who imported advanced mathematical concepts from the Middle East, which we still trade around today. He plots the rise of the great banking dynasties, such as the Medicis and the Rothschilds (Jacob was my neighbor in London).

It is also a pot boiling narrative of the great financial scandals, starting with the Mississippi bubble which wrecked the government of France, the South Sea bubble, where Sir Isaac Newton lost his shirt, to the Ponzi schemes of the 20^th century.

The story tells us how the financial center of the world has migrated from Babylon to Cairo, Rome, Venice, Amsterdam, London, and eventually ending up in a hedge fund dominated New York.

Ferguson is particularly astute in explaining in layman?s terms the borrowing binge and the exotic, super leveraged derivatives that lead to the crash of 2008.

The author finishes with an explanation of how American overconsumption is financed by Chinese saving and why this can?t last.? If you are looking for a single tome which ties it all together, this is it.

To purchase? this book on Amazon, please click here.

A campaign to recount the electoral votes is underway in three states, Pennsylvania (20), Wisconsin (10), and Michigan (16).

If successful, it could overturn the presidential election in favor of Hillary Clinton.

If that occurs, the consequences for financial markets would be extreme.

Volatility across all asset classes would explode. The Dow Average ($INDU) would open down 1,000 points.

Domestic US ?New World Order? stocks would instantly give up their recent 20%-25% gains. US Treasury bonds (TLT) would rocket by ten points.

The US dollar would utterly collapse against the Euro (FXE) and the Japanese yen (FXY). Gold (GLD) would soar by hundreds of dollars.

Have I got you interested now?

Personally, I give this less than a 1% chance of taking place.

But, after a year when Britain voted itself out of the European Community, Donald Trump won the presidential election, and the Chicago Cubs took the World?s Series, I have learned to never say never the hard way.

Russia has been interfering with the US presidential election since it started a year ago. A steady drip, drip, drip of hacked Democratic emails appeared in the media daily.

Some 225 million pro Trump fake news posts sent by Eastern European sources were opened by American voters.

This and other inconsistencies has prompted the Green Party to petition for recount votes in Wisconsin.

Trump won by a wafer thin 73,703 vote margin out of 2,700,822 votes cast in the Badger State. A hack of a single county could change the results. The Green Party is paying the $5 million cost of a physical recount.

Similar efforts are underway in Michigan, where Trump won by a miniscule 11,612 votes out of 4,547,998 cast, and Pennsylvania, were he was ahead by a scant 57,588 votes from 5,745,002 cast.

State officials will be working double time to assure that accurate results are available by the time the Electoral College votes on December 19.

If there IS a correction in these three states of only 142,903 votes, Clinton would win the Electoral college by 278 votes to 262.

And that is 142,903 votes out of a total of 126,394,468 cast nationally.

This is not that unlikely, given the thin margin.

There is still another path open to a Clinton presidential win.

The founding fathers, largely members of an elite landed aristocracy, feared the possibility of an uneducated rabble using democracy to take over the government in a future election.

So they created the Electoral College, which requires electors to only vote for ?reasonable? men. Electors may view the popular votes as advisory only, and may vote for anyone they want. This was further reaffirmed by a 1952 Supreme Court Ruling.

These are known as ?faithless? electors.

In 22 elections in American history, some 179 faithless electors voted for candidates against their party?s wishes.

During the 1836 election, all 23 of Virginia?s electors refused to vote because their party?s candidate, Richard M. Johnson, was romantically involved with one of his black slaves.

During modern times, one faithless elector turns up in every election, usually as a protest vote.

In the 2004 election, a Minnesota elector pledged to John Kerry voted for the wrong candidate.

In 2000, a Washington DC Al Gore elector refused to vote at all.

In 1968, a North Carolina elector pledged to Richard Nixon voted for American Independent Party segregationist George Wallace.

Electors are career party loyalists chosen for their reliability. Going against voters? wishes results in a lifetime party ban. So it?s rare that we see more than one per election. Electors very rarely give up power and influence over principals.

However, this year is different.

With virtually the entire Republican Party establishment opposed to Donald Trump, and with the president elect already turning over century long Republican policies, we may see more than the usual number of faithless electors.

And it would not be a stretch for some Republican electors in all 50 states to view Trump as not a ?reasonable? man, especially women and minorities.

They already have their excuse. Hillary Clinton is now winning the popular vote by over 2 million votes.

If Clinton wins two out of three of the states above, and picks up a handful of faithless electors, she could still win, by 271 votes to 269. A 270-270 tie goes straight to the new Republican House of Representatives, which would certainly elect Trump.

This is a highly unlikely outcome, but not impossible. If Trump needed an inside straight to win the election, Hillary needs two inside straights back to back to pull this off.

But it is one reason I plan to run a long volatility position going into the Electoral College vote, and expect to be 100% in cash before the actual date.

It could also be why the Volatility Index (VIX) was modestly ticking up last week when the recount story started gaining traction, even though stocks were still rising.

It's been one of the crazy years. Why change now?

Just ask the Cleveland Indians.

Still Up In the Air