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

[King Penda]

5 minutes ago, Bobthebuilder said:

Back in 1995 i almost bought a 1/4 acre building plot with a static on site with services in dorset For £64,000, my ex at the time talked me out of it. A million now, stupid girl.

She was on a morgage so was scared I’d rip her off but we were paying 500 a month to rent she had 8k in the bank but 70k was all they would lend a single male aged about 46 on careworkers money and she could not be put on the morgage the best bit being she was due 60k from a divorce

[Alifelessbinary]

This is an interesting interview. Ray has been bearish for a few years now and was Strongly recommending gold last year. It’s worth mentioning that his fund massively underperformed in 2019, so it will be interesting to see how he can perform in the emerging storm.

Topline: Ray Dalio believes we are hitting a depression similar to that of the 1930s, which will take years of financial and economic reconfiguration and human ingenuity to recover from, as he discussed in a Wednesday

 

• “We’re not going to go back the way it was,” said Bridgewater Associates founder Ray Dalio in the virtual TED talk. “We’re going to restructure our economy and restructure our financial system” over the next couple of years in order to recover.
• Ray Dalio’s Bridgewater Associates has $160 billion in assets under management, making Dalio the 46th richest person in the world with an $18 billion net worth. 
• Dalio’s biggest worry is that restructuring will not be done in a civil, bipartisan way to “both increase the size of the pie and divide it well,” warning of partisan politics preventing effective solutions, “damaging”—rather than repairing—the economy.
• The key to success as an individual investor is to “know how to diversify well and in a balanced way,” he said. “The greatest mistake of all investors is to think that what has done well lately is a better investment; cash is almost always the worst investment.”
• He also thanked the Chinese for their work on coronavirus, noting that doing so was political: “The Chinese, in many ways, are helping with things that are needed to manage this crisis.”
• Dalio flagged the opportunity for entrepreneurship as the catalyst for recovery: “The greatest force through time is human inventiveness. The greatest force of that is reinventiveness.”

Crucial quote: “This is not a recession; this is a breakdown. You’re seeing the same thing that happened in the 1930s.” 

 

[sleepwello'nights]

38 minutes ago, Alifelessbinary said:

 

I don’t want to deflect this thread into a north/south house price battle but if you are going to discuss macro trends you also need to thoroughly understand the market and the machinery behind. 

If it’s funded correctly the Northern Hub is essential to balancing the UK economy and I agree with DB’s general statement that affordable northern towns will serve high inflation than heavily indebted Southern home owners. 

 

Some of London house prices are simply ridiculous. For want of something better to do I watched Location, Location, Location yesterday. A fairly non descript 1930s semi was one of the properties shown, £800k. It was in Elstead or Bexley Heath so nowhere central or that close to the centre.

In 1998 I vaguely thought about moving to Fulham or Chelsea. Got as far as looking at some advertised in The Sunday Times, pre-internet, one advert I looked at was a late Victorian terrace at £250k, now a similar house is £1,250K +.

More than enough to retire on and would have saved years of working! What might have been. 

Will the predicted inflation in the nest ten years level out that sort of price disparity between London and the Northern regions of the UK.

[sancho panza]

13 hours ago, Ellandback said:

I'm down 20% on my PM miner allocation, I bought last autumn planning to hold for a 100% gain then exit and await the deflationary bust - serves me right for being cocky! I get the impression that most of FinTwit expects another run up in PM stocks to start soon (@henrikzeberg is a notable PM bear for the short term but is widely ridiculed for his views) so maybe all is not lost. I'm aiming to increase my exposure soon but as a novice I'm a little hesitant as it's been brutal this year and I can't discount the possibly they just drift lower along with the general market.

Prob not by the end of the day

12 hours ago, DurhamBorn said:

There are a few things that go on around debt deflation etc and lags.My friend used to say this is where most/nearly all economists and other market players get it wrong.He said the inflation has already been consumed and the dis-inflation has taken care of it.Its already gone.However a lot of debt has built up on inflation already consumed.Those assets are sat there,ready to produce.In affect the CBs have an open door to print ALL of the dis-inflation over the cycle,because the assets are there to consume the printing.Of course the fuzzy bit is the CBs dont know how much debt is bad,going bad,or in this present situation how much of the asset base will spring back,how much is gone forever.They usually push everything through the capital markets first,but at the end of a cycle they use direct to government as well,they know a fiscal punch is needed.

So all the dis-inflation since 1982 is available to be printed,in theory.Iv road mapped this,and i come up with a figure of 50% of the disinflation and that says $18 trillion balance sheet for the Fed and another $10 trillion to be printed,BOE (who say no printing ) probably $1 trillion.

Of course if they printed nothing,the assets would go back to being worth what they were in 1982 (and overshoot on the downside).The reason the CBs wont let that happen is because its their job not to.The financial dislocation would be on a scale never seen,and society would collapse.Its a bit like having a fire brigade who dont respond to a huge fire.

At the end of a reflation though things change.The inflation has built up in the system,instead of being consumed,it has added onto costs.If the CBs print then you get hyper inflation.They are at the exact opposite of where they are now.So governments cant turn to them,they have to actually live within their means.In simple terms during and at the end of a deflation/disinflation governments cant run out of money.At the end of a reflation/inflation,they do run out.

Given to get back to growth we need to print all of the dis-inflation,it then means the situation comes up where rates end up where they were then as well,however adjusted down for a much more efficient modern economy.

So why buy inflation stocks like oil,potash etc?.Because the market priced them back towards those early 80s prices (they didnt get right back,but well over halfway),rational,but ignoring the CBs would put all that dis-inflation back into the markets.

 

Thanks for that DB.I hadnt really thought much about this angle .I've always thought debt deflation follows credit bubble and that was about it.After repeated efforts to educate me on here,I've realsied they can print thsi time around,but I never made the hsitorical cconnection with GD1 which is crucial(for me) ie it was preceded by an era of infation.AS you say that handily restrcits CB scope.

I also hadnt thought of it like the bit 'He said the inflation has already been consumed and the dis-inflation has taken care of it.Its already gone.However a lot of debt has built up on inflation already consumed'

 

850 pages in and still learning shedloads.

[sancho panza]

6 hours ago, Bricks & Mortar said:

Yeah, I see the derision that meets Henriks predictions, especially from the PM bull community.
But he was one of the few who called the recent collapse (in general, although he was also calling $800 gold, that didn't happen).
He's revised his timing, and is now predicting a bigger collapse, (including $800 gold), in the 2nd half of the year.  Which puts him in the same camp as anyone here who thinks we may not have seen the 'big Kahuna' yet, and also that guy, David Hunter that sometimes gets a mention on here.

Disclaimer - I'm in that camp.  Not sure who else might be, but at least my view wasn't laughed out of the room.

I'm with the 3 of you.

[RickyBacker]

4 hours ago, Vendetta said:

The 70 year MACRO Oil cycle ..... Peaks and troughs.... 

Are we at 1970 again?

Price per barrel inflation adjusted...$

US Crude oil production. Producing a huge amount...since 2012...... correlates with the price collapse since 2012...

How does this fit in with your $200-300 price forecast DB? 

As far as I'm aware, for the last ten years the increasing global demand for oil has been met, more or less, by that increase from the US. The problem being though that that increase from the US is purely down to shale oil. As Cattle Prod has previously discusses, shale fields have a very steep decline curve which is why these companies have to keep drilling more and more just to keep production flat. Take shale out of the picture at these low oil prices and it's quite easy to see how oil could rocket in price thereafter. 

[BadAlchemy]

33 minutes ago, Vendetta said:

Hope you don’t mind placing this here  for easy access:

Platinum price (inflation adjusted)

Gold price (inflation adjusted)

The 40 year long cup/handle in silver is quite something too...

[Ellandback]

9 hours ago, sancho panza said:

Prob not by the end of the day

 

That's encouraging! Now do I chase or wait for the pullback... Decisions, decisions.

[Loki]

10 hours ago, sancho panza said:

David Hunter

Here is his Twitter account

https://twitter.com/davehcontrarian?lang=en

[MrXxxx]

22 hours ago, DurhamBorn said:

wrong.He said the inflation has already been consumed and the dis-inflation has taken care of it.Its already gone.However a lot of debt has built up on inflation already consumed.Those assets are sat there,ready to produce.In affect the CBs have an open door to print ALL of the dis-inflation over the cycle,because the assets are there to consume the printing.Of course the fuzzy bit is the CBs dont know how much debt is bad,going bad,or in this present situation how much of the asset base will spring back,how much is gone forever.They usually push everything through the capital markets first,but at the end of a cycle they use direct to government as well,they know a fiscal punch is needed.

So all the dis-inflation since 1982 is available to be printed,in theory.Iv road mapped this,and i come up with a figure of 50% of the disinflation and that says $18 trillion balance sheet for the Fed and another $10 trillion to be printed,BOE (who say no printing ) probably $1 trillion

OK, I understand the second bit of this post (reflation bit), but despite reading again and again, I can't get my head around what this bit means/how it works...anyone care to explain again?

My understanding of disinflation is a slowing down of the inflation rate...its a process, how can it be consumed?...I can understand how inflation can be used to erode a debt but disinflation is acting in the opposite way.confused!?

[Red Debt Redemption]

20 hours ago, DurhamBorn said:

https://www.wsj.com/articles/fed-announces-new-facilities-to-support-2-3-trillion-in-lending-11586435450?emailToken=541e2dedd6bede9b4d6ae9d44a2a062c7HuWo9MeoBNqhzmd09hf0IEjJVhb1HTeGJkTRwnEgr2wW1szbCZ9iSqB5eAUfJ5MrTaa7qUHJRxPktf+vdJ7dWh4tMok+E1cIneDsYK4DiTVjOvzKtS2+Vbq7iqpfucG&reflink=article_copyURL_share

Ok, Powell is right-sizing now,injecting direct into the economy.I make this around $6 trillion ,so another $2 trillion to come from somewhere.This one is stage two backstopping the credit markets,last injection will be the consumer,probably by buying up treasuries as the government borrow.

All happening as expected,this stops the bond market locking up to corporate's trying to roll over.

Debt deflation will still happen but Powell has now removed the systemic risk.ECB need to follow though,so far they have been way behind the curve.Powell caught up at last.

https://www.bbc.co.uk/news/business-52238932

[NogintheNog]

 

Posted 1 hour ago

11 hours ago, sancho panza said:

Prob not by the end of the day

 

I think a few of these are essential ingredients of a balanced portfolio. In the good times they'll under-perform compared to everything else, but in times like this they out-perform.

I only have a few of them, and Franco-Nevada are missing from that list!

 

[sleepwello'nights]

The theory is all very well, could a major geo-political dispute render our attempts to protect ourselves ineffective.

I'm wondering whether the potential backlash against China would involve confiscation of their assets in Western economies to recoup some of the financial losses and result in a global war against the Chinese?

[DurhamBorn]

1 hour ago, MrXxxx said:

OK, I understand the second bit of this post (reflation bit), but despite reading again and again, I can't get my head around what this bit means/how it works...anyone care to explain again?

My understanding of disinflation is a slowing down of the inflation rate...its a process, how can it be consumed?...I can understand how inflation can be used to erode a debt but disinflation is acting in the opposite way.confused!?

By the expansion of productive capacity over the cycle making things cheaper.Those factories and supply chains are now sat there doing nothing,they have already consumed all the liquidity since 1982 .A lot has found its way into housing as well.The only real thing costing more and why it will suffer most.

Where a lot of people go wrong,they think inflation comes when everything expands,it doesnt,it comes when everything shuts.

The reason we get inflation in this new cycle is because the money will be forced down a small area of the economy.Instead of billions of consumers making small choices on products etc we will have governments making  a few choices.

 

[Don Coglione]

6 minutes ago, sleepwello'nights said:

The theory is all very well, could a major geo-political dispute render our attempts to protect ourselves ineffective.

I'm wondering whether the potential backlash against China would involve confiscation of their assets in Western economies to recoup some of the financial losses and result in a global war against the Chinese?

Reparations are already being discussed...

The Coronavirus is, in itself, geopolitical. 

The fall-out is likely to see some highly unusual geopolitical plays.

If anything, I reckon the above merely reinforces the thrust of this thread.

[DurhamBorn]

7 minutes ago, Ponty Mython said:

Reparations are already being discussed...

The Coronavirus is, in itself, geopolitical. 

The fall-out is likely to see some highly unusual geopolitical plays.

If anything, I reckon the above merely reinforces the thrust of this thread.

It does,more supply chains coming back,re-tooling etc and China will have to invest as well to counter the loss.Industrial cycle ahead.

[DurhamBorn]

@Cattle Prod what sort of reserve profile does Repsol have?.I really like their  structure and i know they have really good gas reserves and some good recent finds,just wondered on oil.Iv have them 3rd biggest energy holding and might increase it a bit.

[MrXxxx]

2 hours ago, DurhamBorn said:

By the expansion of productive capacity over the cycle making things cheaper.Those factories and supply chains are now sat there doing nothing,they have already consumed all the liquidity since 1982 .A lot has found its way into housing as well.The only real thing costing more and why it will suffer most.

Where a lot of people go wrong,they think inflation comes when everything expands,it doesnt,it comes when everything shuts.

The reason we get inflation in this new cycle is because the money will be forced down a small area of the economy.Instead of billions of consumers making small choices on products etc we will have governments making  a few choices.

 

Thanks DB, now I have `got it`...you'll have to excuse me, bit `slow` with some of the theory unless you make it bloody obvious.

[DurhamBorn]

As we now look forward into the cycle its time to look at cross market work more.We know the de-complex trade will do fantastic over the cycle.Energy,potash,other inputs.However no portfolio could ever just hold these things as it would be far too risky.There are other areas that the cycle will put rocket fuel under,mainly as they are the backbone,the tool to unlock productivity gains .That sector is the telecoms.

The market hates them right now.Although telcos have seen explosive growth they havent been able to monetize a lot of it.Mainly because other tech companies have used their assets to create the profit and they havent had their share.On top of that they have had to invest massive amounts of capital,some building networks,some consolidating the industry more.They also have had legacy issues like pension deficits,spectrum fees etc.Being unable to force up prices has meant its been hard for free cash flow to increase fast due to depreciating the assets without the growth in income.

The market thinks this is for good,after all everyone has a phone who wants one.Competition will keep prices down.However they miss the massive change coming.Soon it wont be people who have a Sim,it will be everything having one.Inflation will force companies to keep their costs down.Each truck will be monitored,every door in a shop,window,fridge,car,even pairs of shoes.Costs will be shaved everywhere.The beauty for the telcos is its all going over their networks.Even better big tech cant take all the profit this time,because a lot will rely on clouds on the edge of the network,not distant data centres.

This explosion in use will come at the same time as investment slows,and also as prices can start to rise slowly,pulling away from those depreciation charges.It also means as the inflation grows,building anything to compete with the big guys now will simply not happen.

Now telcos have too much debt.Vodafone and Telefonica especially,and they might/will take a hit as economies are whacked after this virus/end of cycle hit.Dividends might have to be cut for a while to de-leverage quicker.They also will be facing much higher rates later in the cycle,so its crucial they have a good debt structure so that they can de-leverage and not have to roll over too much.They should be one of the few sectors able to do that though.

Where a lot of sectors will see huge growth simply because they are inflation loving,the telcos might be an area that are structurally undervalued,and as a sector including dividends might deliver 400% returns against around 100% for inflation.

If Shell holds its divi's those 15% returns from the buys at £9.20 might be well worth putting into the telco sector.

 

[Loki]

I like your staged updates as you see the cycle move on 

Can't say I'm enthusiastic about the "internet of things" as they call it, but that's for another thread. 

[DurhamBorn]

30 minutes ago, Loki said:

I like your staged updates as you see the cycle move on 

Can't say I'm enthusiastic about the "internet of things" as they call it, but that's for another thread. 

Companies will all be looking to cut costs during an inflation and it will be a key driver for many areas.Even if it only adds 10% to the amount of sims,that will nearly all flow to free cash.The cycle will help high fixed cost companies.Not all,but most.I think that will be the main story of the cycle.

[Loki]

What are your thoughts on airlines?

I'm torn between them being consumer-focused (easyjet) and also part of the globalism which may start to unwind as manufacturing returns, but also an ingrained part the travel infrastructure now.  Apologies if you've already covered, I try to make sure I read all your posts but sometimes miss one 

[Errol]

Lots of good webinars here - https://ttmygh.com/hmmminars/ . From Grant Williams of 'Things that make you go Hmmm'.

Gold webinar filmed on 9/4/20.

[Loki]

2 minutes ago, Errol said:

Lots of good webinars here - https://ttmygh.com/hmmminars/ . From Grant Williams of 'Things that make you go Hmmm'.

Gold webinar filmed on 9/4/20.

I will watch that now, that's the one benefit of now being off work and on 'lockdown'

[Don Coglione]

1 hour ago, Loki said:

What are your thoughts on airlines?

I'm torn between them being consumer-focused (easyjet) and also part of the globalism which may start to unwind as manufacturing returns, but also an ingrained part the travel infrastructure now.  Apologies if you've already covered, I try to make sure I read all your posts but sometimes miss one 

Run far, far away.

And when you get there, keep running.