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

[Noallegiance]

11 hours ago, DurhamBorn said:

As you say the currency would collapse,BOE has little power once the Fed moves.On housing buy one in Redcar now and move up here.Im very worried that we are going to see big house price gains up here while the south is whacked.Loads of southern accents up here now and more every day.Benefit claims of course,but also other people.

Yes quick! Everybody move up north so I can fuckin well buy a house down here!

[Majorpain]

4 hours ago, jamtomorrow said:

Nice chart, more people with more printed money in a limited world with declining resources.  You can't fight simple economics, arguably humanity has been a bit too successful.

[kibuc]

Fortuna More Gold Than Silver buys Roxgold at roughly 42% premium. If this goes through it's an absolute steal for them in this market. Great assets with long LOM and low costs, plus diversification from Argentina? Yes, please. 

[Talking Monkey]

19 minutes ago, Majorpain said:

Nice chart, more people with more printed money in a limited world with declining resources.  You can't fight simple economics, arguably humanity has been a bit too successful.

That's the essence of it really and the world population trajectory is upwards for the next 30 years

[Harley]

3 hours ago, spygirl said:

However, an estimated 250,000 borrowers - such as mother-of-two Vanessa Bampton - have seen their home loans sold by the Treasury to unregulated firms that do not offer new mortgage deals.

As a result, they are trapped by their mortgages, forced when their initial deal ends on to high standard variable interest rates - where their payments can be double or treble what they would pay in a competitive mortgage.

Vanessa and her husband purchased their Bournemouth home in 2006 with a mortgage with Northern Rock. At the time, it was a market-leading loan approved and regulated by the Financial Services Authority.

15 years of having a mortgage and the idiot has not paid nay of he capital back. This is an IO mortgage.

Shes not going to get a 'competitive mortgage' as shes a bad risk. She needs to sell her house.

UK mortgage market is probably pretty safe - bar a hefty slice of IO BTL and IO OO.

Over 13 years of repayments have happened; 11 years of ZIRP.

Reminds me of that action group that was campaigning for taxpayer bailouts on TalkRadio a while back to a very supportive presenter.  Another example why I used to be very dubious of the presenters', etc opinions.

[Harley]

3 hours ago, Siggy said:

@BurntBread

It's great you've put it all in a table like that, really helps to get an overall picture.

My, admittedly novice,  thoughts on this roadmap are this.  From here on in stocks have a 10-15% upside but then a massive bust. For bonds, it's similar say 20% up and then halving. For commodities, precious metals etc a bigger upside but then a big bust and then getting back to the same level as now. 

Now, later on the in the cycle inflation will be running high but for now not so much.  So if I sell everything in May/June 21 and stay in cash till the bust and then buy back isn't that the best strategy? Yes it'll only be worth say 97% but that's less of a haircut than everything else.  

Of course there's money to be made on short term trades in that period but my thoughts are more for those like me who wouldn't have a clue to time it right. 

I trawl the world markets each week for (fundamental) value stocks at a reasonable (technical) price.  Been naff all for a while now. 

Sure stocks can and do go up (plus my criteria are tough) but that's more trading given the lack of fundamentals.  Same with commodities.  So yes, I agree a harder risk/reward atm.  However I'm reducing cash due the risk of bail-ins and regulation. 

IMO, a bit of slackwater atm but I see bonds, PMs (physical and miners), and cryptos possibly bottoming.  I'll forgo much more of the upside for positioning for a BK.  Each to your own, DYOR, etc.

I'll hold my current stocks for the moment but am pruning them back to a core holding.  As usual, knowing when to sell is the hardest. 

I may trade any further upside (crack up boom) with a few focussed options/ETFs but will be ready to bug out PDQ just in case I'm wrong.

PS:  I wrote myself a similar DH summary to form the basis of my strategy, but am using signals rather than specific dates which I'm sure DH, as a macro guy, would prefer, although his dates provide some useful framing.

[Talking Monkey]

27 minutes ago, Harley said:

I trawl the world markets each week for (fundamental) value stocks at a reasonable (technical) price.  Been naff all for a while now. 

Sure stocks can and do go up (plus my criteria are tough) but that's more trading given the lack of fundamentals.  Same with commodities.  So yes, I agree a harder risk/reward atm.  However I'm reducing cash due the risk of bail-ins and regulation. 

IMO, a bit of slackwater atm but I see bonds, PMs (physical and miners), and cryptos possibly bottoming.  I'll forgo much more of the upside for positioning for a BK.  Each to your own, DYOR, etc.

I'll hold my current stocks for the moment but am pruning them back to a core holding.  As usual, knowing when to sell is the hardest. 

I may trade any further upside (crack up boom) with a few focussed options/ETFs but will be ready to bug out PDQ just in case I'm wrong.

PS:  I wrote myself a similar DH summary to form the basis of my strategy, but am using signals rather than specific dates which I'm sure DH, as a macro guy, would prefer, although his dates provide some useful framing.

My own strategy from here onwards ahead of any BK is to systematically reduce positions, I've taken a little off already. I put on some options trades a few weeks back to make it easier to reduce cash equity positions in a meltup and limit hesitating due to fomo. I reckon that fomo is going to burn a lot of folks, we're at the stage where discipline is key. 

I think I won't reduce much past 50% ahead of a BK so would still hold a decent chunk spread across things like oil, tobacco, telcos, mining. 

Within that the only trading I might do is if we see a fall in oil in the coming weeks and a corresponding fall in the big oilies, I would load in big for a short term trade, as I go with the view developed by CP and SP that oil should run to at least 75 to 80 ahead of a BK. Out of the areas we discuss oil is the one I'm most comfortable holding, so if for whatever reason a black Swan triggers the BK ahead of the signals where we anticipate it to hit, then I'm fine holding an oversized oilies position through the BK. 

[ste]

 

 

[Green Devil]

18 minutes ago, ste said:

 

 

I N F L A T I O N

[Castlevania]

Harmony dividend should be arriving today

[janch]

2 hours ago, Talking Monkey said:

That's the essence of it really and the world population trajectory is upwards for the next 30 years

Maybe not with the plandemic.  Who knows?

[King Penda]

16 hours ago, DurhamBorn said:

As you say the currency would collapse,BOE has little power once the Fed moves.On housing buy one in Redcar now and move up here.Im very worried that we are going to see big house price gains up here while the south is whacked.Loads of southern accents up here now and more every day.Benefit claims of course,but also other people.

Yep got lots of black Londoners around me now 

[sancho panza]

intersting to see the only red on my oilies today being the underlying.Both Brent and WTI down,yet sector up.Short term bottom?
i'm tempted.

 

https://seekingalpha.com/news/3685526-bp-applies-to-set-up-us-retail-power-business-reuters?utm_source=investing.com&utm_medium=referral

On 25/04/2021 at 07:05, BurntBread said:

David Hunter rough transcript:

DH: Last March S&P was 2200 and I called for new highs: now 4200+. Length of time taking gold to re-emerge from consolidation has been longer than expected, but markets don't always do what we want.

Expect a spectacular melt-up into Q2. This is due to liquidity injection, and fiscal stimulus. Investors have remained relatively restrained, with a wall of worry. Now see more signs that people are believers, but still some healthy scepticism, with people calling for bigger corrections than we have had. Market has been self-correcting on the way up. At true top, we will have many more true believers, saying "this is the start".

I'm looking for equity & commodity markets to make new highs. Oil correction is not yet done, but will come out of that and reach $75 by this summer. Gold & silver will reach new highs (all time high in gold). Bonds can rally. In a global bust, treasuries will make new highs. I'm expecting a bear market in stocks: 60-75% bear market, possibility of 80%, that will be the worst in post-war history.

Inflation will get a lot higher in next 6 months, and fed will have trouble ignoring it. Last July, fed felt comfortable pulling several hundred billion out of the system. That was with no inflation. They could now pull 0.5 to 1 trillion out of the system. System is fragile: needs new liquidity to keep it coming.

Q: Why is the leverage able to speed things up? DH: leverage is both debt and derivatives (people often just think about debt). From late 80s, derivatives really started growing, and is much bigger now than 2008/9 collapse. Tail wagging the dog. Derivatives can really speed up things. This can push the markets.

View on inflation/deflation cycle: Have not had a widespread deflationary downturn since 1930s.

We are very late in the cycle that started 2009 (global bust will be the end of it). A year ago, inflation close to zero could be 3-4% this year. Still relatively low this late in the cycle. If they have to tighten because of overheating, they could tip into negative if policy mistake leading to downturn. We are not starting this downturn with high inflation of 7-8%. A lot of current inflation is commodity inflation, which can fall in a hurry as demand drops. So many people worried about inflation this year (including DH), but we are close, in a longer perspective, to a deflation ... so having fed deal with a breakout of inflation on the eve of what could be a deflation, makes it a very complex situation of a central bank to handle, and they may not be up to it: could slip quickly into deflation if policy mistakes are made. Things could happen quickly. No precedent post WWII, and central bankers rely on precedent.

Downturn before year end, and could slip into deflation. Will be contained within a year, as will the deflation. Call it bust, not depression, because will be short-lived, but will have some of the characteristics and damage of depression, because of involuntary debt liquidation. Europe more precarious than US. Could be largest financial crisis (not largest downturn) in history, because of mass of leverage. Between Q4 2021 and middle 2022 worse than DH has seen in 48 years.

Don't expect to see inflation and deflation in different parts of the economy, because the bust will be quick. Hard to know if everything will deflate. Not like the 30's: it will be fast. Look at second quarter swoon 2020: it was scary. Things can go from seemingly good to bad in a hurry. Primary forecast is most assets will deflate. Even if they were quick to turn the money spigots on, it would be 9 months before it impacts the economy, and maybe another 18 months before it impacts inflation in a big way. A few months of missteps could feel like an eternity.

Will we see yield curve control? DH doesn't think so: YCC on a longer-term basis is a myth because inflation will force their hand. On a short term, they may try. Rates are going to be dropping because of the bust, and after, rates won't be an issue. Lets suppose the bust starts end of this year and carries on at least first part of next year, maybe all of 2022. You are looking at 2024 before you have another inflation concern like now where it's pushing above 4%. It will take several months to a year coming out of deflation before it goes positive, then you will be low single digits for a while. Real inflation story is mid-decade: starting 2024, by 2025-2026, that's when you start to push high single digit to double digit inflation. Having lived though Volker era, the only way to control inflation is to pour more fuel on the fire by pouring in money. That leads to more inflation.

Large parts of the economy are interest-rate sensitive: financing and home-buying, so the fed worries about that, rather than amount of money.

Dollar: Last time talked had an 85 DXY target. It got down to 89 then spent most of the year going back to 93-94. We have rolled over again. I have lower target to maybe 82. Thinks we have finished the upward consolidation. Euro looks like it will get to $1.30. CAD will get $0.90. AUS may get to $0.95. That will help fuel inflation. That move on dollar will be between now and early Sept (maybe sooner). Move to 85 and maybe 82 happens in matter of months.

Q: Do you have end of Q2 time-line for the bust to start? Not the bust: the bust is a H2 event, probably end of year. The bear market refers to the market. The bust refers to the economy. Stock market leads by several months. Stock market may top this quarter. That top may have a secondary rally. Could be mid Q3 before you see market unwinding, but could unwind quickly. Window for top is end May to early July. Top then stretches out into much of Q3. Bust may not start till late 2021. If the market unwinds more quickly, bust would be late Q3, early Q4 event. The bear market will be earlier.

Q: What happens to metals and miners? DH: Definitely correct in the bear market, but probably much less than the equity markets do. The fed will be coming back in with both feet, easing aggressively. Timing and gold and silver going back up will come before the stock market comes back up. Could have 30% pullback in metals, more in silver. Forecast for gold is $2500 for next several months. Probably a Q3 top. If you get a 30% move down from there, you're basically back here. Silver 45-50. Let's say 35% to 40% move back, again you're back here. There's not a lot of downside from here. You may re-test this during the bust. A couple of years ago, I thought gold could see $500 or $800 in the bust, but I'm not there now. It's possible it could get to $1000, but I doubt it. The many months spent in $1700 to $1800 area may serve at the floor.

Q: Why have real rates become disconnected from gold? Using CPI, real rates are rising, but looking at actual inflation, CPI is not measuring that accurately. Realistic inflation is not 1.5% to 2% - it's a lot higher than that over last few months. Nominal rates have risen: that didn't surprise me, but real rates haven't. I'm calling for 1.20% 10Y, in which case real rates are dropping. Then calling 2.5% 10Y as inflation begins to take off, but even then, inflation will be higher. Hard to see a scenario between now and early Sept where real rates rise: they will be falling even as nominal rates are going up.

Q: What are the biggest bubbles which will suffer in the bust? Certainly the equity market. We are coming to a secular peak for a run starting in 1982 (or 1974). We are in the parabolic phase, which is rare. Equities are the prime asset that will be hit hard. Also junk bonds, and toa lesser extent, real estate. RE is funny: we may be making a secular top, but don't know how fatst & hard thy will fall. We were hit hard in 2008/9, and we don't have the same subprime issues (but have others). Canada (and Aus?) are the markets which will fall hardest: they are where the US was in 2008/9. US housing will be hit hard, but I doubt it will be 2008/9 hard.

Commodities: We are in a super-cycle between 2 depressions. 1930's was the last depression. 2030s will be the next, so we have one more recovery to get us to the end of the super-cycle. By the end of the super-cycle, commodities are in for a huge run in post-bust era. It's not a straight line. The run this year has been great, and a lot of analysts are calling for a huge run from here. But, remember: that bust will interrupt the commodities cycle (i.e. the run to the end of the decade): it's like looking from the south rim of the grand canyon to the north. Sure it looks like a straight line, but there is a huge canyon in between. Thinking you can buy commodities today and they will go right on through... But beginning latter part of 2022 to the end of the decade, commodities will have a run like they have never had in history. Oil could get to $200, gold to $10000+, silver to $300+, and the pluses may make the number look silly low. Copper could go up 7-, 8-, 10-fold. The big moves coming in the next cycle are because of the money being put out.

Equities will make a secular top, meaning recovery in equities after the bust won't come close. Maybe it's 4700 for S&P at the top (or 5000 if it goes parabolic). Next cycle, if you have 80% drop and get to 1000, you could triple or quadruple from that, and still not get close to the top we have coming soon. That secular top might not be tested for decades. (2 or maybe many more). Gold and silver, next cycle, go on to much much much higher highers. Social media stocks and FAANGS and growth stocks in general will be dealing with headwind of inflation and rates. Looking at rates for 10 year, maybe 0% at top of the bond market in the bust to 15% by the end of the decade. For index funds, that rise from 0% to 15% will have a big impact on P/E multiples, so will be very hard for indexes to do well next cycle.

Q: How important is the oil price in the economy, and do you use it as a tool to analyse other markets? DH: I look at it, but it's not a primary driver. We have had O&G prices under control. Longer term, it's going to be a big factor, though. We are going to have an industrially-led cycle. Consumers will be digging themselves out from a horrendous bust (and are not strong going into it), then add on what happens if prices are $300+, gasoline will be easily double-digit. Consumer will have a problem even if wages break out. They will be following, nor leading.

Q: Lots of analysts are talking about currency resets. What is your view on crypto, digital currencies? DH: I'm not big on currency reset. If we are going to have a reset, I think it will be late in the decade. I don't see anything poised to take over in next 5 years. Dollar will be in trouble on that horizon. We have talked about dollar going to low 80s (DXY), then it will go to 120 in the depths of the bust, as everyone runs to it. Then, starting from that dollar high, I expect a long-term erosion to the end of the decade: it could be less than 50 cents. But, it won't be replaced as a reserve currency until much later in teh decade. We talked about high inflation at 15 - 20%, interest rates at 15%, and short rates at 20%. That takes all the central banks out of the game. That's why I was bullish last March: the fed was not out of bullets. The opposite end with high rates and inflation, they can't pour fuel on the fire, because it just exacerbates what they're trying to fix. End of the decade the fed cannot intervene, and that's when you can get the collapse of the system (the "Ponzi scheme" that has built up over 50 years). What comes out of that is probably a totalitarian response. That will be the resent, and you can't plan for it, you can design any currency you want.

Q: tell us about contrarianism. DH: In the 70's it was a very rare thing. Everyone today wants to be a contrarian, but it's just a psychological truth that the vast majority of people are not comfortable being outside the crowd, with conviction (actions not words). Computers have made it worse, as everyone is a "relative strength technician".

Q about sentiment for miners. DH: People become too myopic. You need to step back and broaden out the time horizon, even just a small amount sometimes. I love the gold chart and the silver chart. They are in flag formation, and when they break out they are going to do that vertically.

Q on how to decide when to sell? DH: Sentiment drives me more than anything, particularly if it is at an extreme in either direction. Fundamentals and macro also matter to me. It's a mix of all of them.

Q: can you give us some price targets towards the end of Q2 2020? DH: S&P 4700 (but won't be surprised if that's too conservative). DOW 38000. NASDAQ 17000. 10 Year 1.20% this quarter, then start pushing back up to 2.5%. 30 year 1.95% then pushing back to 3%. Gold $2500 at top (but might push beyond that). Silver $45 to $50. Longer term, gold & silver have a lot of upside, but it's not going to be a straight line. Oil probably down to low $50's, but the jury's out. It's possible we have had our consolidation in oil and it starts running again, but more likely it gets to $50-$54, before it makes another run at $75, and then down to sub $20 in the bust, maybe $10 again, before it starts the big move up coming out of the bust. GDX I have raised my target from $55 to $60. GDXJ $100. SIL probably $75. SILJ I have said $30, but now $35, and that may be low, if silver goes to $45 or $50. I think we are very close: we are starting to see the downtrend being broken, and I think gold and silver will start acting better as we move through this quarter.

Q: anything else you would like to mention? DH: Junk bond area is very frothy, because of these low yields we have had, that really reached out on the risk curve to get income, and I would cation people that equities are probably number one to be hit in the bust, but junk bonds are probably right behind them. They are the exact definition of what leverage means. Also, if we get oil back from $75 to $10, then as you know there is a lot of leverage in the shale oil area that got bailed out in March, but I think that is going to have real problems in the bust, and won't be bailed out.

Thank you so much for that BB.Much appreciated.I haven't had time to do this myself yet.Watched it a coiuple of times while doing otehrs things,but this needs concetration.

 

Also my thanks to @The Idiocrat and @Harley for posting the David Hunter vid.Glad I caught that one.

[sancho panza]

On 25/04/2021 at 13:20, DoINeedOne said:

Interesting

That chart is a bit misleading as it's yoy %age.

Doug Short's are informative.Obviously deflator warnings apply to second graph.

One thing is for sure,this will be an epic bust.

https://www.advisorperspectives.com/dshort/updates/2021/04/19/margin-debt-and-the-market-up-another-1-1-in-march-continues-record-trend

[Harley]

A fair volume of talk out there about the proposed Biden CGT tax increases causing a sell off by the end of this year.  Or could accentuate any falls before then.

[sancho panza]

On 25/04/2021 at 13:29, DurhamBorn said:

I think the interesting thing here in the UK is how many people have nearly all their wealth in housing and worse high leverage when higher rates are coming.Of course the media and pundits say it cant happen as it will crash the housing market and bankrupt a lot of householders.My answer to them is the US bond doesnt care,and yes,it will.

I couldn't agree more.

The longer I look at this postion the more I see a credit/debt deflation running initally that's then compounded with price inflation.

The issue you previously spelled out re penions blowing up is highly deflationary,as is a banking crisis.The worst of both worlds then arrives if the CB's can't put liquidity into the system at that time.

Your bang on the with that statement in bold.We're all pricing of dollars now whether we know it or not,as the situation approaches it's climactic moments.

[Hancock]

4 hours ago, kibuc said:

Fortuna More Gold Than Silver buys Roxgold at roughly 42% premium. If this goes through it's an absolute steal for them in this market. Great assets with long LOM and low costs, plus diversification from Argentina? Yes, please. 

Just out of curiosity how do you know so much about gold/silver mining industry? 

[DurhamBorn]

5 minutes ago, sancho panza said:

I couldn't agree more.

The longer I look at this postion the more I see a credit/debt deflation running initally that's then compounded with price inflation.

The issue you previously spelled out re penions blowing up is highly deflationary,as is a banking crisis.The worst of both worlds then arrives if the CB's can't put liquidity into the system at that time.

Your bang on the with that statement in bold.We're all pricing of dollars now whether we know it or not,as the situation approaches it's climactic moments.

Something that im starting to understand more as i see the cross market stuff on the roadmap is the massive political risk ahead.Seeing the public sector suck more and more and seeing higher and higher benefits,pensions and salaries for bennie claims and state workers wont wash once the private sector seeing its pensions go up in smoke.

Higher rates will turn everything on its head.Not only will pensions be slaughtered equity release will go up in smoke as well.Seems to me lots of assets are pricing from inflation of around 7% over the whole cycle when i think 65% is likely.

Council tax alone is going to be a massive issue.My partners department  has several staff who are off 5 months every year on full pay on the sick,and nobody is every finished.Incredible waste and yet council tax is now at eye watering levels.

[kibuc]

6 minutes ago, Hancock said:

Just out of curiosity how do you know so much about gold/silver mining industry? 

I reckon it must've been ironic because frankly, I don't know shit. But I often parrot what I find on the Interwebz, and it sometimes helps me look clever.

Clearly not too clever today with FSM getting smashed. But markets are dumb and I'm patient

[Chewing Grass]

6 minutes ago, DurhamBorn said:

Something that im starting to understand more as i see the cross market stuff on the roadmap is the massive political risk ahead.Seeing the public sector suck more and more and seeing higher and higher benefits,pensions and salaries for bennie claims and state workers wont wash once the private sector seeing its pensions go up in smoke.

Higher rates will turn everything on its head.Not only will pensions be slaughtered equity release will go up in smoke as well.Seems to me lots of assets are pricing from inflation of around 7% over the whole cycle when i think 65% is likely.

Council tax alone is going to be a massive issue.My partners department  has several staff who are off 5 months every year on full pay on the sick,and nobody is every finished.Incredible waste and yet council tax is now at eye watering levels.

The only thing keeping me paying into my private pension is the tax-relief and the fact that I will be up 20% at the point of drawing it (in theory) even at 0% growth with 5 years to go.

I have 15/80ths in a government superannuation scheme from the 80s/90s and it is still worth more than all my private pensions to date and I have being paying 20% average in for the last 10 years.

This is the last chance saloon.

[Hancock]

3 minutes ago, kibuc said:

I reckon it must've been ironic because frankly, I don't know shit. But I often parrot what I find on the Interwebz, and it sometimes helps me look clever.

Clearly not too clever today with FSM getting smashed. But markets are dumb and I'm patient

I do that with this thread when meeting the occasional person who has an interest, if only they knew all i contribute is my whining about the property bubble and calling covid a load of bollocks.

[leonardratso]

im a compulsive liar still.

[Option5]

7 minutes ago, leonardratso said:

im a compulsive liar still.

I don't believe you 

[leonardratso]

9 minutes ago, Option5 said:

I don't believe you 

you do right, i might be lying.

[Animal Spirits]

Update on US 30 year treasury inflation adjusted yield and Gold price (inverted) 1 year trend:

• 0 real yield since 22/04/21.
• 2021 highest yield to date was 0.22 25/02.