Just Think What Might Have Happened…
December 24, 09“History is composed not only of what happened but of what didn’t happen. The latter, of course, is impossible to really know.” This remark was made by Time Magazine’s managing editor, Richard Stengel, explaining why U.S. Federal Reserve Chairman Ben Bernanke was chosen as Man of the Year.
“We do know what happened to the U.S. and the world economies during the past year, and it wasn’t pretty,” continued Stengel. “We know the damage caused by the plague of subprime mortgages and the fallout from risky investment vehicles that bankers invented but did not understand… What we don’t know is what the economy and our lives would look like if a few individuals had not acted on our behalf and had simply sat on their hands.”
A theme that both Time Magazine and many other observers are repeating now at year-end is that a worldwide economic catastrophe was averted now because of the lessons learned from the Great Depression of the 1930’s,, mainly that the Federal Reserve at the time constricted the money supply, allowed a third of American banks to go under and told people to tighten their belts.
In contrast, in Europe back in those days, governments slashed budgets, ceased spending and the austerity led to massive unemployment. We all know what followed next.
In a micro-way, all of this applies to our industry – though in a different manner. The industry’s leadership also learned from the Great Depression, namely that what it did back then was right and needed to be repeated this time around: therefore, producers slashed budgets, reduced supplies and closed mines.
In India, when hundreds of thousands of workers were laid off, De Beers faced its stakeholders and simply explained that history has shown that DTC rough diamond selling prices have always sky-rocketed after a recessionary cycle. Both De Beers and Alrosa, and their shareholders, simply reacted as they had in previous recessions.
So what do we have now? We are back complaining that rough prices are rising too fast, that there is no justification for these prices and that the underlying demand fundamentals don’t warrant these prices. We are concerned about the speculators who are willing to buy rough at almost any price.
Yet, somehow, we don’t seem to grasp how fortunate we are. While intuitively knowing that we may not be happy with what is happening now on the rough supply side, we don’t fully appreciate that this is the price we pay not only for “what happened,” but mostly because of what didn’t happen.
In a way, the downstream players did the same thing where our concerns were the greatest – on the financing side. In Belgium, Israel and India the industry went to the governments pleading for assistance to ensure that we wouldn’t lose the confidence of our bankers – that money would still be available once the recession is over. Though the jury may partly still be out, it seems that the verdict is nevertheless clear: the industry has not lost the confidence of its bankers.
In those places where the credit taps are still on tightly, this is not the result of anything that happened within the industry. Rather, it has been triggered by wholly external, unrelated matters. There have been no industry financial calamities, no massive defaults – and hardly any minor ones.
It’s Just Sentiments…
Having spent most of the year stressing the economic logic of the ripple effect in our industry, the word confidence must be repeated over and over again. The forward ripple moves into action as soon as confidence returns on all levels of the pipeline. The diamond jewelry retailers, wholesalers and manufacturers renew their replenishment and increase their stock levels when they see consumers back in the stores and buying again.
Improved trade sentiment, which is just another term connoting restored confidence, is the key. We may or may not like it, but speculation in rough, a widespread willingness to even stupidly overpay for goods, means only one thing: that confidence is back and trade sentiments have improved. The return to normalcy – or to a new normalcy – now appears to be just a matter of time; and it may go much faster than we all expected.
Our small industry is part of the larger economy. The big story now at the end of the year, when we are all celebrating our holidays, is the story of what didn’t happen. It’s the story of the rebound in the world’s economies, and it is celebrating the speculators in diamonds – the harbingers of the better days to come.
It’s also the story of lessons learned from history. The remedies applied during the strict supply-controlled cartel days were the same remedies applied in a less cartelistic environment. In fact, the one, lonely producer that religiously followed a free-market model and was willing to let prices fall precipitously only invoked the antagonism and wrath of the market. The real story is that there was only one such supplier on the market.
As insane as it may sound, any diamantaire would rather overpay rather than underpay for the goods he buys. This is the only way to have comfort that his clients will not find bargains elsewhere… Selling a product that is pure luxury, purely dependent on conspicuous consumption, requires a different set of rules, a different mind-set.
Just as U.S. Federal Reserve Chairman Ben Bernanke remembered the lessons from the Great Depression, in quite a similar way, those players on our pipeline’s upstream and downstream levels displayed a similar resolve – and acted accordingly.
Let me emphasize this again. If there is only one thing we celebrate this week, it is the greatest collective accomplishment of our industry: the miraculously quick return of confidence, one of our industry’s main drivers. Some skeptics may actually dismiss this reasoning and argue that it was never lost to begin with, that neither recession nor economic crisis will ever come between a woman and her love for diamonds.
However, these skeptics overlook a “minor” thing or two. The consumer’s love affair with diamonds is not genetic; one is not born with it; it is not self-evident; it is not axiomatic. Rather, it is a sentiment that needs to be nourished and reinforced every day of the year – in good times and in times of recession. That’s what confidence is all about.
That this will make or break our industry is something that can only be empirically proven when it’s absent – when we have lost it. And we didn’t. And that’s what gets me back to Time Magazine’s managing editor. “History is composed not only of what happened but of what didn’t happen. The latter, of course, is impossible to really know.”
May the day the world lost “confidence” in diamonds never come.