Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Diamond Market
Transcript
- Lucas: Let me start with a number that stopped me this morning. The CPI reading for May came in at 334, up from 332.4. That's a 1.6 percent increase in just one month, and core inflation is even stickier. Meanwhile, real GDP growth is barely above 2 percent annualized. That's the stagflation playbook — prices rising while the economy sputters. Luna: And when that happens, one of the first things consumers pull back on is big discretionary purchases. I've been looking at the diamond market, and the data is pretty striking. Lucas: Yeah, diamonds are a fascinating case because they sit at the intersection of luxury, tradition, and financial asset. For decades, the industry was buoyed by a simple story: diamonds are rare, they hold value, and a two-month salary rule for engagement rings was non-negotiable. That story is cracking. Luna: Lab-grown diamonds are the obvious disruptor. But I think the stagflation angle is that consumers are now making a rational trade-off — why spend $10,000 on a mined stone when a lab-grown one with identical chemical composition costs $2,000 and you can use the savings on higher grocery bills? Lucas: Exactly. And it's not just about upfront cost. The resale market for natural diamonds has collapsed. A diamond you bought for $10,000 five years ago might fetch $3,000 today. That's a terrible store of value when inflation is eating away at purchasing power. People are realizing that the much-hyped 'diamonds are forever' liquidity is a myth. Luna: So the industry giants are scrambling. De Beers — which once controlled 90 percent of the rough diamond supply — has cut prices on its natural stones by more than 40 percent over the past year. They're also pushing a new marketing campaign trying to differentiate natural diamonds as 'real' and lab-grown as 'synthetic.' But does that resonate with a cost-conscious consumer? Lucas: It might work at the very high end, where status signaling matters most. But for the mass market — the $5,000 to $15,000 engagement ring segment — lab-grown has already captured about 35 percent of new purchases. And that share is growing fast. The price gap is just too wide to ignore. Luna: And it's not just engagement rings. Diamond jewelry overall is seeing a shift. I read that in China, which was supposed to be the next big growth market, diamond imports dropped 25 percent last year. Consumers there are also favoring gold — which has a better track record as a store of value. Lucas: Gold is interesting to compare. Spot gold is around $3,994 an ounce, down a bit this week but still near all-time highs. Gold has a deep, liquid market. You can sell it instantly. Diamonds? Not so much. The spread between wholesale and retail can be 50 to 100 percent. So when people talk about diversifying into hard assets during stagflation, diamonds are a much worse bet than gold. Luna: Though I wonder — if inflation keeps running hot and the economy stays sluggish, could natural diamonds benefit from a scarcity premium? Mines are closing, new discoveries are rare, and production is falling. Supply constraints could eventually support prices. Lucas: They could, but the demand side is the wild card. We're seeing a behavioral shift that may be permanent. Younger buyers are less attached to the tradition of mined diamonds. They're more pragmatic, more value-conscious, and more likely to see a lab-grown diamond as a smart purchase rather than a compromise. That's a structural change, not just cyclical belt-tightening. Luna: So the diamond industry is facing a kind of perfect storm: a demand shock from stagflation, a supply shock from lab-grown competition, and a crisis of narrative. The 'diamond is forever' pitch doesn't work when the resale value evaporates. Lucas: And if this topic is making you think about your own spending choices — whether on diamonds, gold, or just navigating these weird economic times — I'll say this: the reason we can explore these angles without ads or sponsors is listener support. If today helped you see something a little more clearly, you can keep this going at buy me a coffee dot com slash fexingo. Luna: Yeah, no pressure. It's just a way for people who find value here to chip in. And we really appreciate it. Lucas: So back to diamonds. Let me give you another data point from the latest JOLTS report: job openings ticked up to 7.59 million in May. That's still above pre-pandemic levels, but the labor market is cooling. When people feel less secure in their jobs, they don't drop $8,000 on a ring. They wait. They shop around. Luna: And that waiting game feeds the lab-grown market even more. If you're postponing a purchase, by the time you're ready, lab-grown options will be even more advanced and even cheaper. The technology improves every year. Lucas: Right. So the traditional diamond industry is stuck in a downward spiral of price cuts trying to compete with a product that keeps getting cheaper to produce. De Beers and Rio Tinto have tried to create a premium segment through certification and branding — like the 'Forevermark' stamp — but that's hard to maintain when consumers are skeptical. Luna: And there's another angle: the 'wealth effect' from the stock market. The S&P 500 is at 7,499, up almost 2 percent in the last five days. The NASDAQ is up nearly 3 percent. So equity investors are feeling richer. But that wealth is concentrated among higher-income households. The middle and lower tiers are still squeezed by inflation, which is where most diamond buyers sit. Lucas: Exactly. The top 10 percent might still buy natural diamonds, but the mass market is down-trading. So you get a bifurcated market: high-end natural diamonds holding some value, and everything else getting commoditized. That's rough for an industry built on the idea that all diamonds are special. Luna: I think what's interesting is how this parallels other luxury goods during stagflation. We saw it with watches during the 1970s — the quartz crisis decimated the Swiss watch industry. Is diamonds' quartz moment now? Lucas: That's a great parallel. The quartz watch was technically superior — more accurate, cheaper, more reliable. Lab-grown diamonds are chemically identical, more affordable, and conflict-free. The incumbents are trying to defend on emotion and tradition, but the technology is winning. And in a stagflation environment, consumers make rational choices. Luna: So where does that leave someone who has a natural diamond? If they're hoping to sell it for cash to cover rising expenses, they'll be disappointed. Lucas: Yeah, the secondary market is brutal. A one-carat natural diamond that retailed for $8,000 might get you $2,000 from a dealer. That's a 75 percent loss. Compare that to gold, which typically retains 90 to 95 percent of its spot price when sold to a refiner. The liquidity difference is night and day. Luna: So for our listeners thinking about hard assets in their portfolio, diamonds are not the answer — at least not natural ones. Lab-grown might be better for jewelry, but as an investment? Neither works. Lucas: Right. Unless you're buying extremely rare, investment-grade stones — like a D-Flawless, Type IIa diamond over five carats with a GIA certificate — the vast majority of diamonds are poor stores of value. And even those high-end stones have a thin market. You might wait months for a buyer. Luna: One more thing: the environmental and ethical dimensions. Lab-grown diamonds have a smaller carbon footprint and no association with conflict zones. That matters more to younger buyers. And during stagflation, ethical consumption often takes a backseat to price — but here, the cheaper option is also the more ethical one. That's a win-win. Lucas: It is. And the industry knows it. That's why De Beers actually started selling its own lab-grown brand, Lightbox, in 2018. They're hedging. But it's hard to compete with yourself when your core business is natural diamonds. Luna: So the question is: can the natural diamond industry survive this? Or is it a slow decline like the music industry after Napster? Lucas: I think it survives, but as a much smaller, more niche market. Think of it like vinyl records — still around, still beloved by enthusiasts, but no longer the mainstream format. Natural diamonds will become a luxury product for the wealthy, while lab-grown becomes the default for everyone else. Luna: And in a stagflation environment, that transition accelerates. Because when you're choosing between a $5,000 lab-grown ring and a $10,000 natural one, and your real wages aren't keeping up with inflation, the choice is clear. Lucas: Yeah. It's not just about economics — it's about a cultural shift. And that's what makes this episode's angle so fascinating. Diamonds were once a symbol of enduring value. Now they're a case study in how inflation and technology can upend an entire industry. Luna: Definitely. And as we head into the second half of 2026, it'll be interesting to see if the trend continues or if the market finds a new equilibrium. Lucas: We'll keep watching. Thanks for listening.