Rapaport Magazine
Op-ed

Bubble Trouble

By Martin Rapaport
RAPAPORT... Diamond prices reflect market sentiment — the emotional mood and feeling of the market as to future price movements. Simply put, if dealers think that prices are going to go up, they buy at higher prices. If they think prices are going to go down, they sell at lower prices or hold. Sometimes, as in inventory purchases, the entire decision is based on market sentiment. Other times, as in an engagement ring sale, the transaction is ensured but the price level is based on the market sentiment of the seller.

Economic bubbles are periods of time when market sentiment and expectations drive transaction prices to unsustainable levels. Consider the situation one year ago. Surging stock and commodity markets created extreme inflationary expectations and an unprecedented wealth effect. Diamond market sentiment was extremely positive, resulting in booming prices for large stones that traded at huge premiums to the Rapaport Price List. Today, we have the reverse. Market sentiment has crashed, along with prices.

An obvious question is whether diamond prices are the result or cause of market sentiment. Do lower prices destroy market sentiment, thereby causing prices to fall even further? Is there some point at which dealers say — “Wow, those are really low prices, let’s buy”? Or is everyone so afraid of catching a falling knife that no one buys until some powerful external force changes market conditions? Do our markets suffer from a “dealers are sheep” effect, whereby everybody is afraid to buy because everybody else is afraid to buy? Is our trade having psychological mood problems? How can we escape a negative bubble?

Many industry leaders believe that if they could somehow lift the mood of the market by creating positive feelings, confidence would be restored and all would be well. While I agree that market confidence is a vital factor, I do not believe that confidence can be artificially created.

The thing about bubbles and market sentiment is that they are real. While greed and fear create swings of irrational exuberance and depression, the fundamental factors that move market sentiment are based on the hard reality of the marketplace. Over the past few months, millions of people have lost their jobs and $30 trillion of global wealth has been destroyed. The problems in our diamond markets are not psychological.

The idea that all would be well if our industry could somehow be made to feel good as we head over the financial cliff is absurd. Industry leaders who believe it is their mission to create an artificial sense of false confidence may be well intentioned, but their actions may do great damage to those they are trying to help. There are times and market conditions when industry survival requires dealers to be afraid. Industry leaders must not sacrifice the financial survival of the diamond industry on the altar of artificially high diamond prices.

Are bubbles and negative sentiment bad for the diamond industry? We must recognize that successful diamond dealers are among the smartest and most savvy traders in the world. They are not sheep — they are wolves. Negative market sentiment is a welcome, powerful, positive force that protects and corrects our diamond markets from abusive artificial pricing by rough suppliers and the speculative greed of manipulative dealers. If manipulators and speculators are punished for their greed — so be it. Next time, if they are still around, they will practice greater restraint

The bottom line is that the fundamental basis of fair, honest and competitive markets is survival of the fittest. Those who make good decisions are rewarded and those who make bad decisions go out of business. Attempts to alter or misrepresent reality should not be tolerated.

Bubbles represent an opportunity for smart dealers to make windfall profits by trading off the excesses of less intelligent traders. Essentially, wolves eat sheep. I, for one, believe in the great power of free markets and in the great intelligence and capability of diamond dealers

Market sentiment and confidence are based on real market conditions. When people pay real cash for real diamonds, market confidence improves. When people don’t get paid, market confidence deteriorates. When people sell diamonds on memo and long-term credit at unrealistic, unsustainable prices, bubbles are created. The further our markets move away from cash prices, the greater the bubbles we create. The more we fool ourselves into believing that we can sell diamonds without getting paid, the greater fools we are.

It has been said that the greatest fear is fear of the unknown. It has also been said that fear is the greatest motivator of all. As our diamond industry confronts the great uncertainties, challenges and opportunities brought about by the global economic crisis, let us not be afraid to be afraid. Let us use our fear to create the necessary changes that will build the strong foundations necessary for our future growth.

Article from the Rapaport Magazine - March 2009. To subscribe click here.

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Comments: (20)  Add comment Add Comment
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Aah, OOh & Ouch !
Mar 7, 2009 1:45AM    By dharmesh
There is saying, in our country - that .."if you are not abused and vilified, you have not reached a position of eminence!" So Martin, the comments heaped on you - signifies the envy you have created in people's mind. I wonder whether the reluctance of my fellow diamantaires to accept the truth is not an attempt to disguise or find a scape goat for their own greed and its after effects ? The excesses shall find their own retribution, like it or lump it - one will not be able to deny it. As Tennyson wrote... "The Old order changeth, yielding place to new...." so shall the history of the diamond market evolve, with todays leaders yielding the podium to others. To abscribe the Nazi theory to the TRUTH or call it NON- humanitarian is both funny and devilish, to say the least. Much as some would like to live in denial, the TRUTH is that the diamond business has changed for ever..... and those who live in denial will be consigned to the dustbin of history! Martin, continue to walk the talk - and forgive the nay sayers!
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Why blamed on Martin for the crash?
Mar 6, 2009 10:24AM    By Dumbo
Comment #18 r your NUTS...? Martin is the main cause of the problem. People would have been running to invest in diamonds if he did not do what he did to the prices charts over the last 2 years. By the way Diamonds prices have not crashed by the rap sheet. Martin Raised prices then lowered prices and crashed the confidence in diamonds. His raising and lowering prices instead of reporting just the new discounts going on is what is hurting the prices. His small prices lowering sent people wanting to pay -60% off rap. because he lowered the prices -5% to -10%. Get a clue to what he did and how he can fix it. Being nice to martin will not help fix the problems he caused.
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Why blamed on Martin for the crash?
Mar 2, 2009 4:12PM    By Ansary
Put on your seat belt and ride the roller coaster on the biggest drop in stock prices. This is nothing yet. We are hardly at the bottom. The bottom for Dow will be 4000 and Nasd of 1100 at the end of 2010
Until then cut your expense to the minimum and pray hard.
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Mar 2, 2009 1:56PM    By shreyans sheth
The Article is so true and eye opening,
that if believe can even follow 50 percent of it,
it will create a huge huge difference for the good... Keep it up! cheers..
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what is the reality
Mar 2, 2009 4:54AM    By mahesh
hi to all f my friends all over the world i think very few among us are really aware of what is the reality i m just thinking on one part that the list prices kept on going up and up and up all the time when every body and even mr rapaport was aware that the market was not strong enough to absorb it and the us economy which being the largest consumer was already under recession it didnt go under recession in a single day and it was already under a bad shape despite of knowing the facts they kept on increasing the prices and the goods kept moving majority between the traders internally than going to the real end consumer was the trade analyst being so smart not aware that already the biggest supplier of the trade was in huge debt and the prices were increased to support them and clear of there major part of inventory of there very good friends and instead of making people aware of the reality of the trade before it went bad a long time before they kept a dead body decorated like a newly wedded bride till it stratred stinking whose responsibility was that. when they take the responsibility now by reducing the list now and saying that we do what the market says or the realty is it was manipulated and lots of millions of people in the trade were trapped and killed because of it everybody in the trade a lost their lifes savings and earnings please i request the people who take the responsibility of the trade and prices and need an answer not to analyse manipulate and put false things in front of people and misguide them we need a reply please do send me your feed back on this article at mmkdiamonds@rediffmail.com thank u
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Diamond are NOT a Commodity
Mar 1, 2009 9:33AM    By Dia Trade
Dear Mr. Rapaport:

I have tremendous respect for what you have accomplished in the Diamond business. However, your fatal flaw has always been trying to create a commodity market with diamonds. Unlike most other commodities, diamonds contain too many variables, for example, you can look at a thousand 1ct Round G-VS2's and it is likely that none of them will look the same, however, 24k Gold will always look like 24k Gold.

Your constant fear mongering has caused great instability in the market. While we fully understand that publishing the list is a very profitable business for you, you run the risk of becoming irrelevant due to your highly erratic price changes (both increases and decreases).
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leave every thing alone
Feb 27, 2009 6:46PM    By michael Indelicato
business has been fine for jan the same as last jan, feb is about 10% higher then last feb and i actually believe it would have been better if the rap didn't keep going down and or the belief that each friday it would, it prevented me to buy some weeks when i should have bought and missed sales cause of it, stop talking and stop lowering and by the way we memo 98% of our sales and get paid MICHAEL FROM RDI DIAMONDS
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Sell diamonds, not numbers
Feb 27, 2009 11:07AM    By Supermario
Martin should go back to trading diamonds. He can sell all his stones for full list. Then he'll either go out of business or correct list prices to real market value. What do you say Martin? I’ll sell you 700 stones for a package deal at -22 and you can sell for 0 back.
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to mr. martin
Feb 27, 2009 3:26AM    By ashish
Lets say i understood and believed in what you say, but tell me when this is going to end. the fall and the rise of our business
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MARTIN'S LITTLE PLAN
Feb 26, 2009 2:44AM    By NAVID RABBANIAN
--MR. RAPAPORT WANTS TO DISPEL DEALERS/MIDDLEMEN FROM THE DIAMOND BUSINESS. HE WANTS YOU TO DUMP GOODS AND BE OUT. WHEN YOU GO OUT HE WANTS TO REPLACE YOU. AS LONG AS WE OWN THE GOOD WE SET THE PRICES. DONT BE WEAK--BE STRONG. THE MARKET IS MUCH HEALTHIER THAN OCT. NOV. DEC. FOR BIG STONES. ME AND MANY OF MY FELLOW DEALER FRIENDS HAVE SEEN SALES AT HEALTHY PRICES FOR LARGE STONES IN JAN. & FEB. WE SOLD ON MEMO, WE GOT OUR PRICES, & WE GOT PAID!!!

--DONT INSTILL FEAR IN THE MARKET MR. RAPAPORT, IT MIGHT JUST BACKFIRE, YOUR MESSAGE MIGHT JUST GET REDUNDANT, OLD AND LOSE ITS FORCE, THEN NOBODY WILL LISTEN TO ANYTHING YOU HAVE TO SAY AND YOU MIGHT BE OUT OF A JOB.

--THE FACT OF THE MATTER IS THAT THE USA HAS AND WILL BE MEMO BASED. A CASH MARKET WILL ONLY BENEFIT THE PERSON WHO GETS A COMMISSION FOR PUTTING BUYER AND SELLER TOGETHER. GUESS WHO THAT IS? YES MR. RAPAPORT! WHY? BECAUSE RAPAPORT USED TO BE A REPORTER BUT PLANS TO BECOME A DIAMOND-DEALER. HOW? HE WILL SOON START AUCTIONING OFF DISTRESSED DIAMONDS FOR CASH ONLINE FOR A COMMISSION, SOURCED FROM EITHER DISTRESSED SELLERS OR BANKS IN ISRAEL, INDIA AND BELGIUM. GETTING PEOPLE USED TO HIS CASH THEORY IS ACTUALLY MARKETING FOR HIS FUTURE ENTERPRISE. THE ONLY WAY HE CAN JUSTIFY THESE UNDESERVING PROFITS AT THE EXPENSE OF PEOPLES LIVELIHOOD IS WITH A LOUSY THEORY OF "SURVIVAL OF THE FITTEST." A THEORY BASED STRICTLY ON LOGIC AND ABSENT ANY NOTION OF HUMANITY JUST LIKE THE THEORY OF EUGENICS USED BY THE NAZI REGIME TO CONVINCE THE WORLD OF A MASTER RACE.
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Asinine Evocations
Feb 26, 2009 12:59AM    By sushil
This superfluous and absolutely ambiguous and irrelevant piece needs to be called out. Mr. Rapaport one would expect a little more insight and restraint from you. This is utter bombast and a disservice to the trade from where you make a living from. Your analogies and name calling are amateurish, childish and churlish. Instead of stressing the inherent strength and positive aspect of our product and its resonance and place with the consumer you talk of crashes and corrections. These are already in play. But when you recklessly advocate this …you should be ashamed of this. There are thousands of manufacturers, dealers and retailers who have owned inventory who try to make a living. Moreover there are countless thousands in different parts of the world employed in the trade be it manufacturing, trading , retail or fabrication of jewelry who also depend on this trade in the largest market (USA) are already reeling from the downturn and can do without your scorched earth views. Can you not spew your utterances at the mining companies? Or in a more constructive way … suggest how the industry can overcome the challenges that face the trade in more concrete terms then asinine evocations from your soapbox.
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Feb 25, 2009 2:11PM    By DIB
I think what Martin is saying again and again and again, is that in his mind the the industry should become a cash business , traded like a precious metal commodity through a central market place and if it was trusted would attract new money into the industry ie diamond investors . Is this possible sounds great, very skeptical even though it sounds like it would help my business.
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bubble trouble babble
Feb 25, 2009 8:02AM    By ashish garg
Today everything in this industry is transparent, prices, raw material in jewellery ie gold, diamond and labour. So Margins are wafer thin compared to investments being made in stocks, as to sell in retail we need variety. No financing still available on inventory basis. So whats the solution. Other segments of luxury industry has huge margins which allows biggger inventories and sustains investments even in downfall. So are we paying price for being too transparent or not being branded. ( compare ourselves with watches!!!!)
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Discounts
Feb 24, 2009 4:39PM    By What the DIFF.
Martin start reporting just discounts in the Market and leave the prices the same. This will at least be more truthfully than your price sheets.
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Survival of the fittest
Feb 24, 2009 4:38PM    By It does not matter
Martin SAYS "The bottom line is that the fundamental basis of fair, honest and competitive markets is survival of the fittest". FACE It MARTIN, if diamond dealers followed this anti-Torah practice of survival of the fittest,you Martin, would have already met your maker. Wake up! Your articles have no basis in what's really happening in the market, just like your Rap sheet. You keep causing problems for the market and you just don't get it.G-d help you. BH
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Martin's views
Feb 24, 2009 1:50PM    By concerned diamantaire
Sorry, but this article is just totally irrelevant and shows, as I have said before, the total lack of knowledge of Martin about the polished markets.
First, it is not the surging stock or commodity prices that have created a bubble in diamond prices but Martin's own irrelevant price list with its constant increases based on wind.
Secondly, the shmooz about cash or credit or memo is again a sign of ignorance of conditions outside the USA.
Thirdly I am surprised to read a reference about Darwinian survival of the fittest from the pen of a religious man who doesn't believe in evolution.
Please, no more perfunctory analysis . Siyag le khokma chtika.
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PRICES
Feb 24, 2009 12:46PM    By MJL
MR RAPAPORT DONT WORRY ABOUT FLYING AIRPLANES OR THE BUBBLE, JUST THE PRICES ARE STILL TO HIGH ESPECIALLY IN THE LARGER STONES 7 CT AND ABOVE, DEALERS STILL ASKING WAY OVER LIST. KEEP LOWERING THE PRICE LIST.
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bubble
Feb 24, 2009 12:42PM    By rabbi daniel
the fear is that u are moving the list people are buying with a reserve for a falling listprice
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real trade
Feb 24, 2009 9:46AM    By moishe yukel
Diamonds has been and will always be a memorandum way of trade, the only ones who sold for cash were the ones who need the money to pay back debts or to replace stock for lack of credit. The way you describe the trade is like saying that the cart pushes the horse.
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prices
Feb 24, 2009 9:34AM    By aron k
another greenspan speech so does that mean the list will go up or down?
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