Death by a thousand cuts

This week's spending cuts marked a decisive moment in financial history. And, as the West grows ever poorer, the implications for investors are absolutely crucial. Tom Bulford explains.

I see a remarkable opportunity in the diamond market at the moment. It's been twenty years since a decent find was made - a serious supply crunch is looming.

And I've discovered one London-listed diamond explorer that could be sitting on one of the world's next great diamond fields. I plan to reveal it tomorrow. More details to follow after today's main order of business...

Death by a thousand cuts

This week's spending cuts mark a decisive moment in financial history. The implications for investors are absolutely crucial. Some big, big, trends are about to unfold. If you get on the right side of these you can make plenty of money in the next few years. If you are on the wrong side, then you will end up like the British economy - in trouble.

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The big picture is this. The established economies of the West and Japan are getting poorer while the emerging economies, led by China, are getting richer. This will inevitably continue. The latter take their education seriously, they work hard, they are entrepreneurial and they are hungry to succeed. The UK and other Western economies cannot match this. For the last few years we have been desperately trying to keep up, but only by resorting to reckless borrowing. Now it is payback time.

Over the next few years, these developing countries will outpace our economy by an ever wider margin. But it won't happen in a simple manner. The mature economies will not just write out a large cheque to the developing world and say "Here is our transfer of wealth from us to you." Like death by a thousand cuts, it will happen in a variety of very painful ways.

We are about to get a lot poorer

Take the price of butter. £1.50 for half a pound - unbelievable! But food is in limited supply. The developing economies want butter. They have never had it before but now they can afford it. They are competing for the supplies that we used to take for granted. So we have to pay more for butter, and the same is true for all commodities. We have to pay more for food, for metals, for fuels and that means that we have less to spend on the luxuries of life - and feel poorer.

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We are made poorer too by the inevitable public-sector budget squeeze. Every hike in university fees and passport charges, every cut in pension benefits, every loss of bus passes and child benefit leaves us with less money to spend on the finer things of life. So the cost of living is going up, but we have less money to spend.

How can we counter this? A politically expedient answer is currency devaluation. Make the pound cheaper and our exports will become more competitive. With many other countries pursuing this course, the UK may find it hard to achieve - indeed sterling has been rising of late. But even if sterling is devalued, this only serves to make us poorer global citizens with diminished spending power outside our own country.

So we will get poorer - absolutely perhaps, but relatively for sure. This has serious implications for your investments.

Britain's looming property nightmare

The outlook for the property market in the UK is absolutely dire. With the exception of London, which appeals to big-spending foreigners, everything is militating against the housing market.

With incomes static at best, taxation rising and benefits falling, the amount that a household has left to service a mortgage is reduced. Mortgage rates can go no lower so there can be no relief from this source, and there are other negatives that don't get much of an airing.

Many buyers rely upon inherited money to buy a home. But people are living longer, so when they finally depart this earth they have less to pass on to their offspring. Many pensioners hope to finance their retirement by selling the family home and downsizing. But this simply adds to supply, putting downward pressure on prices.

And now the Government (in an outbreak of common sense) has cut back on housing benefit, most of which ended up in the pocket of landlords. They will see their rental income fall, in turn reducing the value of their properties. Finally, common sense has also spread to the bankers who are not prepared to lend crazy amounts of money to buyers.

I cannot think of a single point in favour of the housing market, or for any other investment that depends upon a robust UK economy. For the next decade the average UK investor will see his investment in UK property lose value, he will suffer from derisory interest rates, he will see the big UK-centric blue chips barely raise a crawl, and he will continue to be ripped off by the over-promising, under-delivering fund management industry.

But the good news for smart investors is that they can gain a huge advantage by doing something different. They could back innovation and the growth of the developing world. And one of the areas where developing world growth is really accelerating is the demand for diamonds.

Tentimes rarer than gold

Diamond stocks got hit heavily in the crash. But since early 2009 diamonds have staged a breathtaking recovery.

This article was first published on 19th October in Tom Bulford's twice-weekly small-cap investment email The Penny Sleuth.

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Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.

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