Credit deflation and the reflation cycle to come (part 2)

[DurhamBorn]

1 minute ago, HousePriceMania said:

Can anyone tell me/anyone reading, which assets you consider dis-inflation assets ?

 

Government bonds none inflation protected,cash,long term company bonds,A- rated at 1% coupon will lose you a lot inflation adjusted etc.Highly valued growth shares are mostly dis-inflation loving and once inflation hits,although some like Amazon can increase prices and still grow their profit growth jumps with the first inflation due to stock timing,then falls away,Amazon should see that,big jump this year then a big slow down next.

If you take a typical 60/40 portfolio most have with IFAs etc around 90% will be in dis-inflation areas,and a maximum of 10% in inflation loving areas.Only a small amount of the portfolio will be throwing off decent inflation loving income.So if bonds revert to price in 3% inflation (still half what i expect) i think those portfolios will lose 2% a year minimum after fees for the cycle before inflation.If in drawdown to maintain a set amount of income those are going to empty over 10 years.

The main take on my roadmap is that this is a distribution cycle.Assets etc will need to be sold to buy and maintain a standard of living.The pot is going through a getting smaller cycle.Critical to own the areas who can at least increase prices with inflation without losing customers,or losing few.

[Nomad]

Historically property has been a good hedge against inflation, however with interest rates and affordability being so low I wonder if that will be the case this time round. I'm still sitting on a large amount of cash hoping for some sort of property correction, but can't see it happening now, so think I need to put my cash somewhere else, or even into property. Very unsure what to do

[Democorruptcy]

15 hours ago, Bobthebuilder said:

I am starting to notice the same in building trades, more people starting to retire / take it a bit easier, etc. The new kids on the block are getting the basics wrong and messing things up from the start, no experience = losing money.

Looked at a kitchen fit for my builder mate today, young kitchen designer had planned it. Doesn't fit, doesn't work, layout all wrong with no allowances for old rooms not being square etc.

Knowledge not shared is lost.

Friend of a friend just had a kitchen done. Wickes came and measured up and did a quote. The friend thought it was a bit steep, so got a young lad in for a quote. He undercut Wickes and has just finished the job using their measurements. The Wickes measurements were wrong and one of the units he'd made up didn't fit. The friend and him are now arguing about who has to pay for it! He could have a great future fitting kitchens without taking his own measurements!

[DurhamBorn]

2 hours ago, wherebee said:

Australian financial review big article on oil and gas sector:

Investors turning their backs on oil and gas stocks risk missing out on an eventual recovery in the sector once the market wakes up to the huge gap that has built between soaring commodity prices, that will boost company profits, and depressed share prices.

Market sources point to a disconnect between share prices and oil and gas commodity prices that has been evident for months but is now becoming “ridiculous” given the buoyant LNG market and continuing robust crude oil prices, which are swelling cash flows for producers.

Big article It's saying basically all the stuff that DB has been saying for a year or more.  Aussie oil and gas stocks up 5% today.

Hinting at the ridiculousness of the 'greeening' of pension funds, but not yet saying it openly - that the climate change lobby is impoverishing millions of future pensioners.

Sometimes things inspire me to work at this and not just lay back and relax.The big one in the opening of this cycle was when i was working.The guy bringing me my parts etc in the factory worked for an agency on £10 an hour.His pension was in NEST.He rented a little flat and was one of the white working class who keep this country going and are fucked over at every turn.That woke bit of dirt in charge of NEST sold his BP shares in his pension at £2 each and was proud of that fact.He doesnt know of course,he just knows his life is shit,will remain shit and his pension will be shit.

The biggest moments in contrarian macro investing are when you face fully into a narrative storm, but you have the knowledge and skills to of done the graft,done the work to focus on the real numbers and the real truth.

As @Harley said the other day,and i think an amazing way to see this.Everyone has become a tracker due to the long dis-inflation.They are all in the same trades,the same path,even the same wrong headed beliefs and lies that they see as truths.

 

 

 

[DurhamBorn]

@planit my work says the real supply v demand crunch starts to really hit in gas in 2023.The lags really turn the screw then,so if we get a sharp deflation between now and then the sector should be bought hard again.The key isnt the gas,there is plenty,its that its not where its needed and there is a huge lag between fixing that,even if the green lobby werent around.

Of course its likely the greenies will end up making sure China burns a massive amount of extra coal than it intended to and do massive damage to the planet.

[CVG]

16 minutes ago, Nomad said:

Historically property has been a good hedge against inflation, however with interest rates and affordability being so low I wonder if that will be the case this time round. I'm still sitting on a large amount of cash hoping for some sort of property correction, but can't see it happening now, so think I need to put my cash somewhere else, or even into property. Very unsure what to do

I took a half-way house (sic) approach because I too have no idea how things will pan out.

I have bought the cheapest comfortable home available in a place I would be happy to see out my days whatever happens. But I'm also saving each month in silver in the hope of a 12-fold increase in silver and a 50% crash in housing so that I can benefit from that possible double-whammy in 5 or 10 years time.

[Noallegiance]

41 minutes ago, DurhamBorn said:

As @Harley said the other day,and i think an amazing way to see this.Everyone has become a tracker due to the long dis-inflation.They are all in the same trades,the same path,even the same wrong headed beliefs and lies that they see as truths.

 

 

 

Only yesterday it struck me that anyone under the age of 57 hasn't been an adult in an inflationary environment. 

That takes being an adult as 18. I knew sweet FA about any of this until I was over 30. If I assume most people are similar, then most folk under 70 aren't prepared in the slightest.

That's a lot of people with no idea.

[Popuplights]

15 hours ago, Talking Monkey said:

The whole comfortable benefits lifestyle is going away isn't it over the next decade, it'll go back to being a basic safety net as it should be. Have I got that right DB. I see that as the only way to incentivise people to work. 

 

I fucking hope so. 

[HousePriceMania]

58 minutes ago, Nomad said:

Historically property has been a good hedge against inflation, however with interest rates and affordability being so low I wonder if that will be the case this time round. I'm still sitting on a large amount of cash hoping for some sort of property correction, but can't see it happening now, so think I need to put my cash somewhere else, or even into property. Very unsure what to do

That's one I've been weighing up for sure

Here's the house prices versus wages in the 70-80s...

 

 

Here's now...

 

 

 

Here are the interest rates 

 

it's difficult to see housing as a safe bet in an inflationary environment right now. 

Price inflation could cause peoples ability to service their debts to collapse.

I am still of a mind though that the BoE will introduce -ve rates with inflation at 10%, that's the point a revolution should start

 

[DurhamBorn]

54 minutes ago, Cattle Prod said:

A question, DB. We're finally seeing the high energy prices long predicted on here. Current gas prices are going to affect industrial use, home heating, electricity, ag inputs etc as we know. What do you think the lag time is before these prices show up in official inflation figures? Bearing in mind that they do their best to hide energy inputs. Are current gas prices higher than your roadmap assumptions? This is of course alongside oil which has been in the 60-75 range for a while now.

Id expect the lag on energy prices to lag around 6 months but between 4 months to 8 months for certain.There are a lot of things affect the lags,for instance most factories etc will be hedged and its as those hedges run off things change.There is also a lag between stock on shelf and stock to be made.We should now be entering the stage where inflation feeds itself.Each part of the chain increases prices as its affected.Mosaic and BP get the prices in first ,the guy selling the tin of beans in the corner shop last.He gets everyone in the chains  inflation,where Mosaic and BP mostly just get their own.

On gas its running ahead of where i expected.I expected these prices from 2023 onwards so there is more going on here.It could be we get a classic head fake where it turns down,shakes everyone out,then a long structural bull market.

For anyone reading the thread who is newish,or trying to get their heads around this distribution cycle,the above bean example is a simple way of seeing it.

Each stage in a reflation/distribution cycle ADDs their own inflation through energy use,wages,tax,inputs etc and along the line it gets harder and harder to pass those increases on.The easiest place is at the start,the de-complex,the boring wrote off stuff.The other areas to be positioned in are ones who can increase price direct to the consumer without losing too many sale,and where their main costs arent inflating.The classic example is telcos.A lot of their costs are debt payments that are fixed etc.Baccy is the same,very low input costs,but wage inflation means they can increase prices in tandem.

[DurhamBorn]

Who outside of macro strategy would of predicted this?.A 100% bullseye for the thread.Everyone always looks at whats happening,not at what happens due to whats happening and what that reaction creates.Lots more to come yet,25% increase in wages at the bottom,or a mix of that and cuts to welfare,or systemic collapse.

https://www.bbc.co.uk/news/business-58543554

 

[Harley]

1 hour ago, DurhamBorn said:

The biggest moments in contrarian macro investing are when you face fully into a narrative storm....

Another one.  Turning into poets here!

Yin-yang.

[Harley]

44 minutes ago, HousePriceMania said:

Price inflation could cause peoples ability to service their debts to collapse.

This and more.  Tail ends and "J" curves!  

[HousePriceMania]

7 minutes ago, Harley said:

This and more.  Tail ends and "J" curves!  

I've been a believer for some time in the....low prices + high IRs = crash and high prices + low IRs = crash.

It just needs a tipping point now and if IRs are forced up then you cannot tell me UK house prices are a good store of value.

Best they can hope for is wage inflation to meet the price falls somewhere in the middle, 20-30% down, but with an over shoot you could be looking at 30-40% down.

All depends on what the bankers do and right now, that is nowt.

[DurhamBorn]

This video is a key part for Telcos,they are going to work together more and more,meaning massive barriers to entry and slowly increasing prices.Continental AG are also a very good buy.Iv worked with them and their products and they are key to most of the new tech in cars etc.Most think of the tyres etc,but they are in fact an amazing tech company and will gain from the cycle hugely.Id like pullbacks to add more,but happy to open positions here if i didnt have any.

 

 

[Hancock]

Deflationary for the price of industrial metals.

https://www.telegraph.co.uk/business/2021/09/14/chinas-property-market-runs-steam-millions-investors-demand/

Lets see if China lets their epic property bubble crash.

A line of 60 uniformed security guards stretched across the entrance to ailing Chinese property giant Evergrande’s gleaming Shenzhen tower on Monday as dozens of angry investors demanded answers – and their money – from the company.

The protesters, who claimed they had been “swindled”, represent just a fraction of an estimated 1.5m people who pumped cash into Evergrande to buy apartments which have yet to be built – and may never be.

Evergrande, founded in 1996 by the well-connected billionaire Xu Jiayin, rode an urban property boom now running out of steam and is teetering under a $300bn debt burden. The firm was forced to deny an imminent bankruptcy but ratings agencies predict a default, while domestic banks and foreign creditors are on the hook, prompting fears of a "Lehman moment" for the world’s second-biggest economy.

“Right now, there are an awful lot of people in China paying for a property from a company that looks like it's going down the plughole,” says Mark Williams, chief Asia economist at Capital Economics.

While Evergrande’s crisis has grabbed the headlines, the ingredients of a Chinese property bust have been long in the making. As far back as 2016, Chinese president Xi Jinping warned of a potential crackdown with the phrase that “property is for living in, not for speculation”.

That message belies the wall-to-wall billboards, television and even elevator advertising luring buyers to put their cash into property, a portrayed sure option in an under-developed financial market offering relatively few alternatives for investment. Amid higher savings rates and a population that has lived through an economic boom, cash-buying real estate years in advance is common and owning properties – the more the better – is a status symbol. 

Iris Pang, ING’s chief economist for China, says: “It is a culture deep in the mind of the Chinese, if not all Asians. Look at Hong Kong, look at Macau. Singapore is a little bit different because they have a very generous public housing policy. But across Asia home ownership is a kind of self recognition, a safety net for people's life or retirement.”

A Beijing-fuelled property boom

Strong demand has left average Chinese house prices at an eye-watering 18 times average incomes in a private property market which did not even exist until the eve of the millennium. But this has also been fuelled by Beijing regularly turning to property investment, a sector accounting directly for around 15pc of China’s economy, as a short-term fillip to growth during periods of economic turbulence. Companies have leveraged up with the blessing of the government. 

Despite vacancy rates of over 20pc, the tendency to overbuild in a country of party officials eager to show rapid regional growth – and gain their next promotion – is also behind the phenomenon of “ghost cities”: urban areas filled with half-finished concrete shells. 

The deleveraging drive was slowed down by trade war, and then by the pandemic. Last year it gathered pace with Beijing’s publication of the “three red lines” for developers, imposing strict new limits on liabilities as a share of assets, gearing of less than 100pc and enough cash to cover short-term debts. 

Only a fraction of domestic developers, or just 6pc, complied with the rules at the beginning of 2021, according to ratings agency Standard & Poor’s. Meanwhile this year authorities have stepped up efforts to rein in housing prices with measures such as restrictions on home purchases and higher mortgage rates.

Looming demographic crisis

The move to rein in Evergrande and its peers will only add to downward pressure, all while the Communist leadership keeps an eye on social cohesion and a worsening demographic crisis. 

China’s population grew at the slowest rate since the Fifties in the decade to 2020, according to the latest official census published earlier this year. Meanwhile, the legacy of a rapid economic development and a one-child policy that was abandoned in 2016, means that by 2050 the country is likely to have one retiree for every two workers, compared with a one-in-ten dependency ratio in 2000. 

Jonathan Ashworth, a China economist at Fathom Consulting, says property investment has been a “great tool” for growth in the past but adds: “You've come to a point where prices are just so expensive in the Chinese cities, so that's this big issue about inequality. They’ve felt they’ve had to do something. The fears have really increased among the authorities on the demographic side. It is generally thought that with house prices being so expensive it reduces people's willingness to have children, or more than one child.”

The movement of China’s population to the cities is also expected to slow, catching out the developers who have geared up for further expansion.

Ashworth adds: “The outlook for sales is a lot weaker than [developers] had thought. So they've got all these debts that they've built up on the expectation that they’re going to be able to expand and expand.” 

As the price of new build property slows to its weakest for five months, bad debts from the sector among China’s banks have also grown. That has fuelled concerns over financial contagion as well as the knock-on impact on the world economy from a slowdown in the country’s property sector which consumes around a quarter of the world’s iron ore.

But Williams says a Lehman Brothers style moment isn’t likely, citing the rescue of the failed Baoshang Bank in 2019 by the People’s Bank of China as the “playbook” for a bank intervention: “They've had a chance to look at 2007 and they wouldn’t make the same mistakes. They've sort of had a dry run for how to deal with banking sector stresses.”

A Government restructuring looks most likely for Evergrande, which Pang puts into the “too big to fail” bracket. “It has to be survival,” she says. 

That, however, may be of little consolation to the Chinese buyers who have poured billions into Evergrande, as well as the foreign investors holding more than $7bn of the company’s US-denominated debt. Weaning the Chinese economy off its appetite for property is likely to be a painful experience.

[planit]

2 hours ago, DurhamBorn said:

@planit my work says the real supply v demand crunch starts to really hit in gas in 2023.The lags really turn the screw then,so if we get a sharp deflation between now and then the sector should be bought hard again.The key isnt the gas,there is plenty,its that its not where its needed and there is a huge lag between fixing that,even if the green lobby werent around.

Of course its likely the greenies will end up making sure China burns a massive amount of extra coal than it intended to and do massive damage to the planet.

I look at it like a flight of stairs, there will be a whole series of energy hits over the next 8 years. They will all look different but the seeds are sown by ESG and the political knee jerk reactions to previous issues. They are like bottlenecks each getting exposed as we try to do 100 years of energy transition in 10 years. (for example it is pretty obvious that we should already have started a huge national grid investment to be able to cope with it being the country's sole main source of energy).

 

55 minutes ago, DurhamBorn said:

On gas its running ahead of where i expected.I expected these prices from 2023 onwards so there is more going on here.It could be we get a classic head fake where it turns down,shakes everyone out,then a long structural bull market.

 

Putin's play has also been more successful than he himself wanted so he will want to dial it back a bit. There are already protests in Spain regarding the energy prices and Putin will not want to be blamed for creating this crisis. He will want to be out of the way by the time politicians are looking for someone to blame.

I expect Putin to:

Tell EU he is doing them a favour (which he will want payback for in the future)

Sign up to give EU enough gas to cover a coldish winter

Then we can 'expect' an average winter where gas prices are high but nothing like they are at the moment. So the problem will go away for a while, as @DurhamBorn says, the main problem with gas is where it is. There may be gas spikes (LPG) in Feb but they won't be in the EU.

 

Oil is where it is at over the next 2 months, declining inventories meet the shortness of supply. Just depends on how low different countries allow stores to go before they start buying. Like all these things, as soon as one country starts building rather than running down, this will kick all the others off like dominoes. The 1-2mmbpd demand gap suddenly looks like a problem if you expect it to last into the future.

 

[Majorpain]

38 minutes ago, Cattle Prod said:

 

That's great news, now they can rebuild them and add that into the GDP figures, Baijiu's all round! 

[kibuc]

20 hours ago, Loki said:

Hopefully in the future INFA does a McShare 

I could be wrong but I believe the gas storage project is dead and burried. They're fully committed to building and servicing ships at a loss now.

[planit]

13 minutes ago, Majorpain said:

That's great news, now they can rebuild them and add that into the GDP figures, Baijiu's all round! 

Oh yes, the good old broken windows fallacy. I learnt a lot on TOS.

 

On a connected note, I think Xi Jinping might be ill. I was wondering why there is a sudden urgency with the Communist  push, surely it would have been better to spread out the announcements over the last 2 months.

I came to the conclusion Xi is time limited in his legacy plans.

 

Nothing much comes up on Google search.

 

[Loki]

Something just happened the NASDAQ really likes...

[DurhamBorn]

Well iv actually been to sign on JSA today for the first time face to face.Iv got 5 weeks worth left before it stops then il claim none means tested ESA until they boot me off,or for the year you get none means tested.The guy gave me a sheet for a jobs fair with almost every big employer on.He said "we are getting big employers phoning every day asking where all these unemployed people are because we cant get anyone to apply" .Of course i was laughing inside,but i replied that i knew lots of people who would never work because welfare was that generous for anyone with kids,and that unless wages went up 25% minimum,taxes stopped increasing and welfare fell a lot then they wouldnt be getting anyone.

So its obvious this is slamming government in the face now,loads of jobs,those out of work dont want them.Each factory and supply chain pulling back production is walking into a wall.The people arent there to replace the Chinks on those wages.Business will be screaming this at government,we want more EU migrants etc or welfare cutting.

@King Penda would of been pleased though.I was getting the eye off the cleaner, quite tidy and would of only taken a quick "fancy a coffee sometime" comment to bag her number, but given the cost of care im bahaving and sticking with my nurse 

 

 

[Noallegiance]

8 minutes ago, Loki said:

Something just happened the NASDAQ really likes...

US inflation data up but not as much up as expected.

How that's positive, I don't know!

[DurhamBorn]

2 minutes ago, Noallegiance said:

US inflation data up but not as much up as expected.

How that's positive, I don't know!

They think inflation is levelling off.It will be,the first spurt will fall back,then turn up again as lagging inputs like wages take affect.

[Loki]

11 minutes ago, DurhamBorn said:

quite tidy and would of only taken a quick "fancy a coffee sometime" comment to bag her

Inflationary