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

[DurhamBorn]

1 minute ago, Chewing Grass said:

I have noticed the first real signs of inflation in the supermarket economy with everything nudging up, meat is up 10% for starters along with dairy, the signs are everywhere. The biggest one I noticed this week is toothpaste almost doubling in price for some reason.

I just about remember 1970s inflation when I was a kid, crisps going from 2p a bag to 10p a big over the course of junior school and my father once saying that when he sold his 1973 ford escort after 4 years he got what he paid for it four years earlier.

If you live on benefits you will struggle to cope with what is to come.

Its everywhere isnt it,creeping in,creeping up.The dam is breached.Just wait until the energy inputs start to move higher.

 

[Sugarlips]

21 minutes ago, DurhamBorn said:

 

I think a good time to add a few lines from the very first post on this thread,

"Once this does hit the central banks will be slow to react with the right response as they themselves will be shocked at the speed and scale.They will panic and print direct into the economy by passing money/debt to governments at 0.1% or zero coupons.This is what will kick in the first reflation cycle since the 70s"

The UK BOE bank rate is now 0.1% just as i predicted it would be as the BOE prints direct into the economy by passing money to the government.

https://uk.reuters.com/article/uk-britain-boe-sunak-idUKKBN27L0X2

 

By my dis-inflation calculations we are about through printing back now,so future QE will start the inflation ball rolling.No stopping it now.Macro road map is very clear.

All coming along nicely apart from a few bloodied and beaten stocks .

 

Are you adding to positions in the the bloodied and beaten here DB?

Dave H has been reiterating his bullish stance on Twitter today..

[kibuc]

14 minutes ago, DurhamBorn said:

Ha youl have to take it back kibuc on the nasty names you called Great Panther when it was on my rubber band silver list,the stinking pile of turd it was 

Fuck it, they are still shit

That being said, I still made them my biggest holding some time ago, around $0.7 mark. As one would expect, at +8% they are the worst performing stock in my portfolio today.

Shit, as I said  

Meanwhile, Endeavour Silver posted their financials and it's not a record quarter, but it's only because they decided not to sell their production during the downturn in October. Sold just enough to turn profit for the first time in a year and a half, and are planning to sell the rest this quarter, so expect fireworks in 3 months. Still good enough for +18%.

[Bobthebuilder]

23 minutes ago, Chewing Grass said:

father once saying that when he sold his 1973 ford escort after 4 years he got what he paid for it four years earlier.

Something people miss with inflation, i remember my old man doing up minis in the late 70s and making a few quid.

[DoINeedOne]

https://podcasts.apple.com/gb/podcast/the-grant-williams-podcast/id1508585135#episodeGuid=ttmygh.podbean.com%2Fae906c16-cef7-3624-955c-de143fd8e845

[sancho panza]

8 hours ago, Cattle Prod said:

Brent hit 35.67 on Monday before bouncing hard, despite physical oil traders saying at the weekend (in response to lockdown demand fear questions) that there will be no price crash next week as inventories are being drawn down. Inventories are what physical oil is priced off. If traders think it'll be harder to get, they will pay more, and not if not. It's a pretty efficient market. It's up 15% since then, and if that holds till the weekend, I'll take that as my $35 Brent target.

Vitol reckons worldwide stocks are being drawn down by about 2m a day, but as they are in buying mode (not having floating storage to sell), I'd say that is conservative. There are some signals that October stocks drew down by much more golbally, but I'd need to see the same signal in November.

Take a pre-covid oil consumption level of 98 (BP data, oil only), and OPEC currently has 5.6mbpd off the market (they had a 'cut' of 2.1mbpd in 2019, 7.7mbpd now), 2mbpd draws implies a current consumption level of 94.4mbpd. Using a 101mbpd baseline (BP data inc other liquids), current consumption is 97.4mpd, in line with the IEA figures. So in terms of a cap on price, OPEC is really only holding 3.6mpd (7.7 minus 2.1 minus 2) off the market, and shrinking. And as I said, the 2mbpd Vitol mentioned is probably lowballing. This is what is putting a base under price (and oil equities being discounted to it is not rational, I suspect they will just take a while to catch up like all equity markets).

So what happens next? Well, US inventories have just gone below 2016 levels, when price was $51. Given the overhang of OPEC supply, current price is not an unreasonable discount. I think inventories will be drawn down harder than 2016, and as I said there are some signals that this is happening now. Everything I see points to inventories globally going to the 5yr average by the end of the year.

I've previously said that Art Bermans predictions for US production loss were too extreme, and I thought that 7-8mbpd was more reasonable @sancho panza. He was putting more of this out recently, so I and another geo challenged him on it, and he has since revised his prediction upwards. His assumptions are too vague, and I am now more sceptical about what he is putting out. It's already pretty inconsistent. Anwyay, I'll now say that I think they'll decline to the 8.5-9.5 region, and I have pretty high confidence in that. If the wells they are currrently drilling and completing are of lower quality, that number might undershoot, but I have no way of knowing that. 

The important bit is that that is coming off a pre-Covid production high of c. 13.8mbpd. So there is a fairly solid 5mbpd loss baked in from the US, which is still the largest natural (and very very difficult to reverse) supply drop in history. There will also be losses from Canada and other non-opec suppliers. In summary, the idea that if demand normalises there is a coming supply gap still stands, and is becoming visible in US production as expected, and also visible in Asian demand up at pre Covid levels. If OPEC extends their cuts at the end of the month, it can only be to keep the US quiet, and bake in $80 a barrel to rescue their economies IMO. There is a fair chance of world inventories undershooting significantly to the downside.

Also on demand, I heard on LBC this morning that the roads around and in London are choc a block. I checked the TomTom data, and it's true. If the people England are ignoring lockdown restrictions, there is hope for the country yet! And is also an interesting view on the demand story.

Many thanks for the heads up CP.I've been bsuy with the US election and the kids for the last week.(daughter got sent home from nursery as her bubble had a positive)

Haven't even looked at a share price in that time.I'll have a proper read of this psot later when I've finished the washing ....it's all go here.

 

[Lightscribe]

45 minutes ago, DurhamBorn said:

Ha youl have to take it back kibuc on the nasty names you called Great Panther when it was on my rubber band silver list,the stinking pile of turd it was 

Lucky for me, it’s one of a few PM holdings left that I’ve desperately avoided taking profits to average down further in oil

[DurhamBorn]

The difference with the printing in 08 to 2020.In 08 it was to re-capitalise the banks.This time it also mainly goes in fiscal spending by the governments.People think QE is deflationary,but thats only when its to re-capitalise banks.When its for fiscal spending its inflationary.

 

[Bobthebuilder]

2 minutes ago, Sideysid said:

Lucky for me, it’s one of a few PM holdings left that I’ve desperately avoided taking profits to average down further in oil

I bought Great Panther many moons ago wishing for a profit. Still waiting. (love the name tho).

[DurhamBorn]

31 minutes ago, Cattle Prod said:

Sorry DB, I don't mean to be too direct about a macro road map, but does this mean that the deflation phase is almost past, and we are nudging the reflation cycle to come? I think you'll say there is still a risk of another big crash, especially if governments/CBs disengage, and I'd agree with that, but do you now see that risk reduced?

Lots of risk out there for a quick sharp down leg,but i think in reflation areas it would be over very quickly.Iv just put up the debt figures in relation to M2 in the US and debt is falling hard in relation to liquidity in the pipes.I think the deflation is in the process of ending yes.As you say the key now is that the CBs dont disengage,and also that governments dont.Fiscal spending is crucial.Its the fiscal that lowers private debt that then feeds industry that lowers industrial debt,that forces prices higher and then business chases those higher prices by investing.Dollar is down to 92 now (remember at 100 everyone and their dog and the MSM said it was going much higher,our call was for 88).

[DurhamBorn]

40 minutes ago, kibuc said:

Fuck it, they are still shit

That being said, I still made them my biggest holding some time ago, around $0.7 mark. As one would expect, at +8% they are the worst performing stock in my portfolio today.

Shit, as I said  

Meanwhile, Endeavour Silver posted their financials and it's not a record quarter, but it's only because they decided not to sell their production during the downturn in October. Sold just enough to turn profit for the first time in a year and a half, and are planning to sell the rest this quarter, so expect fireworks in 3 months. Still good enough for +18%.

Endeavour has almost become blue chip  and Harmony,up 12% ,could of bought a house with Sibanye profits if i hadnt sold them 

[Democorruptcy]

1 hour ago, Chewing Grass said:

I have noticed the first real signs of inflation in the supermarket economy with everything nudging up, meat is up 10% for starters along with dairy, the signs are everywhere. The biggest one I noticed this week is toothpaste almost doubling in price for some reason.

I just about remember 1970s inflation when I was a kid, crisps going from 2p a bag to 10p a big over the course of junior school and my father once saying that when he sold his 1973 ford escort after 4 years he got what he paid for it four years earlier.

If you live on benefits you will struggle to cope with what is to come.

I suppose you didn't have much interest in the +50% annual HPI? Noticeable how HPI front runs RPI?

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/1995/the-housing-market-and-the-economy.pdf?

 

[MrXxxx]

5 hours ago, Yellow_Reduced_Sticker said:

Cor blimey gold ROCKETING...UP ...$50 as i post!

meanwhile Rolls-Royce DOWN 11% today ...well i never!

I'm saying nothing...but I am regretting welcoming you back now! :-)))

[Errol]

30 minute presentation from Ronnie Stoeferle on Gold (and silver). Well worth watching.

 

 

[Talking Monkey]

3 hours ago, DurhamBorn said:

Lots of risk out there for a quick sharp down leg,but i think in reflation areas it would be over very quickly.Iv just put up the debt figures in relation to M2 in the US and debt is falling hard in relation to liquidity in the pipes.I think the deflation is in the process of ending yes.As you say the key now is that the CBs dont disengage,and also that governments dont.Fiscal spending is crucial.Its the fiscal that lowers private debt that then feeds industry that lowers industrial debt,that forces prices higher and then business chases those higher prices by investing.Dollar is down to 92 now (remember at 100 everyone and their dog and the MSM said it was going much higher,our call was for 88).

 DB the mega PE glamour stocks at some point have to come back down to earth, I reckon a huge correction in the Nasdaq at some point. Defo agree any pullback in the reflation stocks shouldn't be too brutal

[DurhamBorn]

5 hours ago, Talking Monkey said:

 DB the mega PE glamour stocks at some point have to come back down to earth, I reckon a huge correction in the Nasdaq at some point. Defo agree any pullback in the reflation stocks shouldn't be too brutal

Key to inflation stocks is inflation rising and running above trend and above interest rate lag.I think thats certain now and will last the whole cycle.

[Heart's Ease]

Looked for a better thread to put this on but none jumped out. So tis here.

[Noallegiance]

58 minutes ago, Cattle Prod said:

Those graphs are astonishing. I've been staring at them for about 15 minutes trying to take it in and consider the implicatons (as well as your second response, thanks for that). One thing is clear - the tapering of QE by the Fed and the raising of rates was exceedingly stupid, they really didn't have a clue where they were. 500 PhDs couldn't comprehend this graph.

So though government debt has been rising, M2 has been rising faster, since 2008. I get that the latest downleg in that ratio is due to recent printing, which your second graph shows to be both QE and fiscal spending. But prior to this year, it was almost all QE. Where is that money now, just sitting in commercial banks because they don't want to lend it out? It's a strange standoff, because they are about to be put in the dustbin of history by the CBs, are they not more afraid of that?!

I've had to look up what 'government current transfer payments' are (here, for my fellow financially challenged: https://www.investopedia.com/terms/t/transferpayment.asp#:~:text=Transfer payments commonly refer to,common types of transfer payments. ). I can see how these are inflationary, it's intuitive. People get money for nothing, it's out in the real economy chasing goods and services. So most of that green spike on the second graph are the virus paychecks and other unemployment supports, right? Thinking back the chain, they are not getting wages, because their employers are not getting business because people are not spending money. But that unspent money is not dissapeared, it'll all flood out once this thing is (allowed to be) over. On top of all the printed money handed out to keep people going. If my line of thinking is right, those floodgates will be open soon in the US, once the election is settled, I think the coronavirus will go away pretty quickly (the data will show it to be not a significant threat, and the media will allow this narrative out).

Then we have the UK. I wonder what a similar graph in the UK looks like, because we are printing direct to government here who is handing it out in furlough (and to BCG at the rate of £7000 a day per consultant etc etc). And savings are rising, rising, rising. Our idiotic goverment will simply copy what other governments are doing re covid, so once they have cover to say it's over, they will.

My kind of take away from this is that the deflation, sharp shock risk is a curtailment of fiscal spending as you say. And at the first sign of this, they will do a deal in the US. It's not necessary here, they have already printed enough to the real economy to bake it in. So the main risk I see is the US election result getting dragged through court, and no covid relief deal being possible till the new administration sits. This is a real risk, but would be to me a very low risk buying opportunity, as there is no way out of this other than more fiscal spending. And once the election outcome is settled, the post covid opening up (and massive pent up demand by our consumer mad culture and governments on infrastructure) will kick off the reflation cycle in full.

There was a good question upthread about 'is this not the wrong kind of QE'. Do you expect the BOE and the Fed to hand another tranche of cash to spend on infrastructure once the Covid panic is declared over, or do you see a risk they will retrench? I suspect they won't see what they've already created given inflation lags. 500 PhDs couldn't see the obvious before all this. I can see that governments will ask for it "build back better" and all that, but will the CBs comply if the crisis has passed?

Edit:

The other main takeaway is: how big is a trillion. We have become desensitised to it, but a trillion is an absolutely enormous number. People kind of think 'yeah, billion, trillion, whatever, boooring" But you take one look at those graphs and you can see the impact of the 2 or 3 Tn deal they are trying to agree on in the US will have. And how big the $1Tn or so (£850bn) the BOE has handed out is relative to it. Pound is toast. We need dollar/forex earning companies/gold&silver in our portfolios more than ever.

 

59 minutes ago, Cattle Prod said:

One thing is clear - the tapering of QE by the Fed and the raising of rates was exceedingly stupid, they really didn't have a clue where they were.

The really fascinating thing for me is that ceasing of creating money from nothing to support asset bubbles and attempting to raise rates to get back to a more normal range is deemed stupid. 

I say it's fascinating because given the amount of and reliance upon debt, it was stupid. But the alternative is to continue on with more debt and lower rates.

So we appear to have a choice between stupid that used to be sensible and more stupid because the stupid has got so stupid that the only thing that can be done is more stupid because sensible has been forced to disappear. Which is stupid.

[Loki]

11 minutes ago, Noallegiance said:

a choice between stupid that used to be sensible and more stupid because the stupid has got so stupid that the only thing that can be done is more stupid because sensible has been forced to disappear. Which is stupid.

You are Thomas Sowell and I claim my 5 trillion Zimbabwe bing bongs 

[Noallegiance]

6 minutes ago, Loki said:

You are Thomas Sowell and I claim my 5 trillion Zimbabwe bing bongs 

I wish I were that smart

[HolyCow]

On 31/10/2020 at 22:14, DurhamBorn said:

Here is the next bunch of liquidity.Just another years welfare printed here.More inflation down the lines.£845billion balance sheet now for the BOE.Roughly printed back the deflation now so its all inflationary from here on in.Im shocked how bad this government is though.

https://www.telegraph.co.uk/business/2020/10/31/bank-england-inject-100bn-fight-second-wave/

Sorry for asking a completely layperson question but is it better to be almost completely out of cash/NS&I premium bonds for the coming inflation/wealth tax targetting cash in your opinion?

[Bricormortis]

18 hours ago, Barnsey said:

We had two offers rejected as I greatly underestimated the pent up demand frenzy which is now most certainly coming to an end here in the West Midlands. One of the offers made was 8% below asking and the agent refused to put it forward as it was "too embarrassing". I sh*t you not. It was for the best looking back now as would have been the wrong choice. The months since have given us time to consider so many other areas I hadn't thought of.

Thankfully I'm seeing quite a bit of inventory sticking recently and very little going sold STC, VERY area specific, some new build prices even coming down a little (very surprised given how they're reluctant to do so for land reg reasons), been the case for about a month now I'd say and worsening.

The lending market really needs to ease up as it's incredibly restrictive at the high LTV/FTB end which is a killer for chains.

 

Feel for you mate, when the stimulus ends, the bubbles pop, while to go yet though.

For what its worth  I used to live in Kings Norton south Brum and quite liked it, safe area.

[Boon]

I'm looking in London or the surrounding areas.

Was hoping for a 15-20% correction, it's not there at the moment but you can sense the downward pressure on the prices. But I guess furlough will keep the show on the road for a lot of people. You can sense the hope from the government is that in 6 months everything will be OK again and they can remove the supports. 

The narrative of the news kind of hides the fact that for many places in London prices have been pretty stagnant since 2016 and in some cases have fallen. 

I know of people who have bought around 2016 time and the property is worth c.10% less - that's pretty much the entire deposit if they wanted to sell.

HTB in particular I think has been disastrous for anyone that used it after the initial sweet spot (c.2 years), where prices climbed massively. We're getting to the point now where the equity repayments now kick in, and potentially remortgaging as well, which could be at higher rates.

 

 

[AWW]

I've got quite a few mates in London properties. One had to be bailed out by BoMaD when selling their flat in Muswell Hill as they were in negative equity, another in Winchmore Hill has lost 20% as they had to sell to relocate, the other has doubled their money in 5 years on a terraced house I wouldn't board a dog in  (Walthamstow).

 

[sancho panza]

On 29/10/2020 at 16:50, Cattle Prod said:

Too many moving parts I think, Sancho. Just need to keep watching. I don't think US production will get that low, but 6 or 7 is realistic. The Mexican export drop just means they'll have to play nice with Canada and get the pipelines built, but it just subtracts more from the global supply picture. My current estimate, and dyodd of course, is $80 Brent by end 2021 (as in sometime during 2021 - I think ~$80 Brent will tip us into another crisis, maybe BK).

I had some fun today looking at the ration of XLE, XOP and OIH to the oil price, there will be plenty of time to see it coming. One thing I'm currently watching is if contango starts to come out of WTI.

Here is how discounted OIH is to the oil price (brent is easier because of the WTI spike low), you'll see that trend changing a mile away. They have to start making money again before it does!

that discount to OIH,XLE and XOP really is a compelling chart showing how cheap the big players are to the underlying.

Ref US shale,even a drop to 6 or 7 would surely cause a significant dislocation to the treadmill? as per your previous comments/art bermans that ti will take ayear to get it going again.

I've got my head out of my election trading book and am back looking at oil prices and the more we talk,the more this looks like the opportunity of a lifetime.I'm playing catch up with this thread but DINO has another comment further on about chinese coal demand which goes to show that if you;re looking west for the future demand picture you're looking the worng way

On 02/11/2020 at 05:56, DurhamBorn said:

At Fidelity David would of provided a macro road map and the stock pickers would decide what to do with it.He is a cycles guy based on liquidity and is probably one of the best in the world in understanding Fed action and the leads/lags.Short term calls arent his thing,so im surprised he is making them more and more,though its end of cycle stuff so probably trusts the calls more.Iv always found for the ordinary investor its far better to focus on building out a portfolio over time at what you think are cheap or very cheap entry points guided by the likely cycle ahead.

For instance,i think Shell will return £21 minimum up to £30 over the cycle,share increase and dividends.So £9.40 + £21 

BT i think will return £2.40 (so £3.41 a share total price) minimum increase and dividends.

Thats based on an inflation road map.I have a lot of confidence across my portfolio most will hit by 2028/30,i have zero confidence,nor care if they go up or down in the short/short medium term.

 

I use David for his analysis of long term trends.If you're using him for anything else then it's a bit like playing a striker at centre back at football and then moaning when a few people go past him.He's a macro strategist who's retired and having some fun with his twitter account.

With any calls,you have to get to grips with the underlying logic of the call.His long term calls are well reasoned and he articualtes his case extremely well across all interviews.Short term calls are hard to get right and are inherently more prone to error.

WHat we need to be watching here is liquidity and David's record on calling long term moves and expaining them is super.AS individual investors it's easy to rely on other people's calls but long term it'll harm your returns and maybe put you in a posution where your risk/reward is skewed.

I read everything posted on here by some knowledgeable psoters but at the end of the day we all need to make our own minds up particualry if you're trading short term.

On 02/11/2020 at 18:58, Cattle Prod said:

India oil consumption now at 2020 highs, I think people forget that cheap oil is a stimulus direct to the economy, and that it's a disproportionatly large stimulus im emerging markets as a % of GDP. It's no wonder they are buying it and burning it hand over fist, while stupid governments in Europe subject us to more enforced stagnation. Its f'ing maddening.

There we go......looking West instead of East...

On 04/11/2020 at 19:19, DurhamBorn said:

Its starting 

https://www.ispreview.co.uk/index.php/2020/11/three-uk-and-vodafone-adopt-inflation-busting-price-hikes.html

CPI+3.9%

The industry will all follow suit and likely none will break ranks.

 

I've bored on beofre about what good value BT is at the moment and I haven't beena fan of them for years,but canning the divi and then raising prices is a prelude to a good deal from the regulator and future divi's.BT and Vod FCF yield is eye watering at these levels.

Ref CP's oil supply drop,it won't be long before we're seeing significant input price hikes.....

Decl:long BT/Vod and other telecoms.