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

[Seacrest]

BP results this morning - like the bit for nuggetts like me..

In the second half of the year bp expects to generate surplus cash flow above an oil price of around $45 per barrel with an RMM of around $13 per barrel and Henry Hub of $3 per mmBtu. –   60% of this surplus goes into buybacks,  this information is all updated weekly on the BP website with the uplift value for each $ for oil or in the case of gas every 10 cents the volume is not given and the usual caveats.    

[planit]

5 minutes ago, Seacrest said:

this information is all updated weekly on the BP website with the uplift value for each $ for oil or in the case of gas every 10 cents the volume is not given and the usual caveats  

Not sure I get exactly what you mean here? Do you have a link for the website?

 I didn't know they gave an uplift value per $.

[Seacrest]

Bp investor relations   trading conditions update, weekly update  it updates every Friday for the average for the current quater and documents the previous year as comparison,  by quater  at the bottom it gives the uplift values.

 https://www.bp.com/en/global/corporate/investors/results-and-reporting/trading-conditions-update.html

I use it as indicator if the price falls away for no real reason yet BP are saying weekly things are ok  equally its pretty good a letting you know when its not going well...

 

[wherebee]

18 hours ago, Harley said:

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.

about the only thing I would cheer about the Biden stolen presidency would be if the biggest of all stock market crashes happens on his watch, immolating the 401k's of every american, and sears into the brains of three generations at once that the democrats are poison to your financial wellbeing.

[Castlevania]

18 minutes ago, wherebee said:

about the only thing I would cheer about the Biden stolen presidency would be if the biggest of all stock market crashes happens on his watch, immolating the 401k's of every american, and sears into the brains of three generations at once that the democrats are poison to your financial wellbeing.

They’ll blame the previous administration. For example the Dems are blaming the crisis at the border as being all down to Donald Trump. People are stupid and believe them. Standard politics that. 

[DurhamBorn]

The BP results were of course decent.Debt now at 33b now is good.However i did think the management should be using all spare cashflow to buy back shares,at least until there is a four in front of the share prices.On the surface using the extra 40% of free cash to keep paying down debt seems a bad move.Pay down debt once the share are near £5,not £3.

However i picked up on a few comments from the CEO around investment grade ratings and being in constant talk with the agencies.What this shows is that the narrative is now there that people dont want to lend to oil.So for me BP isnt continuing to pay down debt really to keep a top investment grade,although that is part,it actually fears being able to roll over at decent coupons.That also means small players have no chance.

Another interesting bit was what we already knew on here.Everyone saying they overpaid for the Irish Sea wind farm leases,but they say they didnt at all.Its obvious they see that asset as being able to feed energy to the Teesside hydrogen plant down the road.Teesside is going to be blue hydrogen at first,but the site is huge,and obvious they will go for green there as well once the economics are in.

Very interesting as well that they are going to open a consumer supply in the US.What BP know is renewables need gas ,and a lot of it to balance.Now im a contrarian,but this says to me its the big utility companies that should worry because big oil is about to link up the whole energy chain.They have woken up and have the capital.

I think BP will be at least £8 a share by the end of the cycle counting dividends paid as well.Thats if my oil targets hit mid range.Top of the call BP should see £14 minimum including dividends.Only real question i have is how hard hit in a BK.

[Popuplights]

19 hours ago, DurhamBorn said:

Not only will pensions be slaughtered

Exactly why I am transferring mine out into A Sipp. Don't want to be stuck with below inflation rises for the next 20 years or more. 

[DurhamBorn]

30 minutes ago, Popuplights said:

Exactly why I am transferring mine out into A Sipp. Don't want to be stuck with below inflation rises for the next 20 years or more. 

I had to transfer a final salary and it was a nightmare.Dozens of IFAs who simply kept saying oh no rush,plenty of time etc and seemed to have no idea that CETVs are pretty much based on 15 year gilt yields.

IFAs mostly use tracker funds now but dress it up as financial advice.They base things around Vanguards funds really.60% equity once over 40 and then switch to 40% equity.Fees of around 1.8% when counting in the platform fees.They need 6% returns just to match fees and drawdown of 4% and thats nominal.I dont think people understand the risks especially in drawdown if bonds fall for several years as i expect they will.

[Popuplights]

1 hour ago, DurhamBorn said:

I had to transfer a final salary and it was a nightmare.Dozens of IFAs who simply kept saying oh no rush,plenty of time etc and seemed to have no idea that CETVs are pretty much based on 15 year gilt yields.

IFAs mostly use tracker funds now but dress it up as financial advice.They base things around Vanguards funds really.60% equity once over 40 and then switch to 40% equity.Fees of around 1.8% when counting in the platform fees.They need 6% returns just to match fees and drawdown of 4% and thats nominal.I dont think people understand the risks especially in drawdown if bonds fall for several years as i expect they will.

I have no intention of using them other than to facilitate the transfer, for which they get paid handsomely. 

This board provides me with plenty of investment ideas, and I will be back looking for them as soon as I have got the wad. 

The %age fees for managing the SIPP are as you say, fucking ridiculous. 

[janch]

That graph sums it up and is very scary.  Thanks for posting @sancho panza

[Alifelessbinary]

I tried to purchase some physical silver recently and was shocked at the premium you have to pay above spot. Add VATon top, now that you can’t buy from Europe, and it’s really not a viable option. 

Thankfully I got lucky and stumbled upon ‘stacking’ between 2014 and 2018, so have an alright position. 

I guess I’ll need to focus a bit more time vetting miners for my portfolio. Does anyone have a work around, or is high premium silver here to stay?

[Loki]

13 minutes ago, Alifelessbinary said:

Does anyone have a work around

Germany road trip is about it i think

[CVG]

1 hour ago, Alifelessbinary said:

I tried to purchase some physical silver recently and was shocked at the premium you have to pay above spot. Add VATon top, now that you can’t buy from Europe, and it’s really not a viable option. 

Thankfully I got lucky and stumbled upon ‘stacking’ between 2014 and 2018, so have an alright position. 

I guess I’ll need to focus a bit more time vetting miners for my portfolio. Does anyone have a work around, or is high premium silver here to stay?

It is a bit of a bugger.

I have all of the physical I'm prepared to risk holding (crime / act of god) so now I buy and store extra through Bullionvault.

No VAT payable unless you withdraw it physically from the vault.

https://www.bullionvault.com/help/buying_silver.html

[JMD]

Perhaps this interview is just more confirmation of this thread's own thinking. But if you can ignore the poor sound quality of the podcast (it improves), it is i think very interesting to hear the thought processes/macro outlook of money manager Louise Gave (i subscribe to their free emails, which are good on macro. GaveKal are HQ'd in Honk Kong but interestingly even they see HK now becoming 'just' a replacement financial vehicle for the failed Shanghai experiment, i.e. inward looking and no longer global).   

 

 

 

[JMD]

Many posts recently regarding inflation (@sancho panza?), not a criticism btw.

Anyway, not sure if some of the content from the below link has already been posted on here - but if not, the report does provide a good overview analysis. Plus has lots of good graphs, and its appendix has a list of reflation stocks... so what's to not like? (i note that many of the stocks have been discussed on here.)

Bracing_for_the_Hangover.pdf (mcusercontent.com)

 

 

@DoINeedOne the publishers of the above report, used to show their own portfolio of 'real asset' type stocks, but checking on their site now, i cant locate it, however thought i'd just mention this in case it could be of use for your 'thread inflation list' that you maintain? 

3Fourteen Research | Manage Risk. Exploit Opportunity.

 

[Animal Spirits]

After 13 years of monetary disorder, can QE be called a success? In terms of creating a sustained increase in prices (CPI basket as measured by authorities...) and returning the global economy to pre crisis growth trend then it appears to have not had the desired impact.

The Fed and other CB's have failed to meet inflation targets despite increasing base money creation because most of this was swapping treasuries for bank reserves on the commercial bank balance sheets. Banks are not limited by reserves with respect to lending and these only move between bank balance sheets so do not tell anyone anything about banks willingness to take risks and lend as they had done so pre 2008.

BNP Parisbas press release statement, August 7th 2007:

“The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating.”

Larry Elliot, Guardian Economics editor:

On the face of it, there was nothing especially memorable about August 9 2007. With the holiday season in full swing, Britain was in relaxed, even soporific mood. House prices were rising, unemployment was falling, the economy was growing at an annual pace in excess of 3%. Gordon Brown, prime minister for six weeks, was enjoying a honeymoon with the voters and Labour had a 10-point lead over the Conservatives. The sports pages were full of cricket and the build-up to the new football season.

It was, however, the day the world changed. As far as the financial markets are concerned, August 9 2007 has all the resonance of August 4 1914. It marks the cut-off point between "an Edwardian summer" of prosperity and tranquillity and the trench warfare of the credit crunch - the failed banks, the petrified markets, the property markets blown to pieces by a shortage of credit.

Post 2008 banking appears to have been largely stuck in an environment of risk aversion or the perception of some risk and the hoarding of the most liquid and sought after assets; US bills/bonds after many banks became insolvent. If we take a look at the most recent auction results for a 20 year bond:

•           Bid to cover of 2.42.
•         Primary dealers tendered for over $33 billion but only $5 billion accepted.
•         Someone bid as low as 0.080% for 20 year paper?

13 week bill auction result for 26th April 2021 for comparison at the short end:

If banks and bidders thought inflationary pressures would be more than transient, the auction results don't currently reflect this? The short end actually shows massive demand, such that bidders will take no yield to secure at auction.

Initially, one would suspect the enormous buying pressure of the CB's is responsible for high price and yield but according to the Royal Bank Of New Zealand:

Studies found the government bond purchases worth 10 percent of GDP have, on average, lowered 10-year government bond yields by around 50 basis points.

https://www.rbnz.govt.nz/monetary-policy/monetary-policy-tools/large-scale-asset-purchases

50 bps is a small impact in the context of bond purchases worth 10% of GDP. Furthermore, Jeff Snider of Alhambra Investment Partners believes that the Fed is actually making the situation worse by removing collateral from the banking system thereby exacerbating the shortage. In September 2019 during the repo spike the Fed actually started purchasing T-bills which was the very collateral market participants wanted.

What Drives U.S. Treasury Re-use?

"We study what drives the re-use of U.S. Treasury securities in the financial system. Using confidential supervisory data, we estimate the degree of collateral re-use at the dealer level through their collateral multiplier : the ratio between a dealer's secured funding and their outright holdings. We find that Treasury re-use increases as the supply of available securities decreases, especially when supply declines due to Federal Reserve asset purchases. We also find that non-U.S. dealers' re-use increases when profits from intermediating cash are high, U.S. dealers' re-use increases when demand to source on-the-run Treasuries is high, and both types of dealers' re-use can alleviate safe asset scarcity. Finally, we document a sharp drop in Treasury re-use at the onset of the COVID-19 pandemic, with a subsequent reversal after the Federal Reserve's intervention to support market functioning".

https://www.federalreserve.gov/econres/feds/what-drives-us-treasury-re-use.htm

Re-pledging of collateral increases systemic risk within the banking system:

Put differently, a $33billion dollar increase in weekly Fed purchases leads to a 0.5 increase in the collateral chain. From this perspective, if policymakers are concerned about the level of leverage and interconnectedness in the financial system, shrinking the Fed’s balance sheet is an effective tool to decrease the average length of collateral chains. However, a smaller Fed balance sheet increases dealers’ exposure to sharp changes in external demand and supply of Treasuries, and thus, can result in disruptions similar to those triggered by the COVID-19 outbreak.

If we look at Eurodollar futures (all slides courtesy of Macro Voices Episode chart deck 267), the market isn't currently pricing in the probability of sustained inflation:

A series of lower and lower reflationary peaks that have historically rolled over:

A look at US treasury yields:

These are slightly out of date since the interview but the Eurodollar Futures contract prices can be viewed here:

https://uk.investing.com/rates-bonds/eurodollar-futures-contracts

The dollars no longer flow like they did in the post 2008 banking era. Does this show that actually a lot of the CB's actions to date have been through the expectations channel (jawboning markets) rather than long term growth?

These require market participants to price these in which are then reflected in bond yields and the prices of other assets. We are now on QE5 which intuitively tells you that this flood of liquidity has not made its way into the real economy.

Remarks by Chairman Alan Greenspan
At the Annual Dinner and Francis Boyer Lecture of The American Enterprise Institute for Public Policy Research, Washington, D.C.
December 5, 1996

At different times in our history a varying set of simple indicators seemed successfully to summarize the state of monetary policy and its relationship to the economy. Thus, during the decades of the 1970s and 1980s, trends in money supply, first M1, then M2, were useful guides. We could convey the thrust of our policy with money supply targets, though we felt free to deviate from those targets for good reason. This presumably helped the Congress, after the fact, to monitor our contribution to the performance of the economy. I should add that during this period we maintained a fully detailed analysis of the economy, in part, to make sure that money supply was still emitting reliable signals about the state of the economy. Unfortunately, money supply trends veered off path several years ago as a useful summary of the overall economy. Thus, to keep the Congress informed on what we are doing, we have been required to explain the full complexity of the substance of our deliberations, and how we see economic relationships and evolving trends

You can see at different times the disconnect between Fed policy and the market as outlined it was known as Greenspans conundrum, a series of rate hikes but longer term yields not reflecting this:

This is a good example of showing who dictates longer term bond yields.

Ben S Bernanke: The influence of Milton Friedman’s monetary framework on contemporary monetary theory and practice, October 2003:

The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it.

FT: Why economists kept getting the policies wrong
Monetarism decreed that as long as the authorities kept control of the money supply, and thus inflation, everything would be fine. The snag was that every time the Treasury alighted on a particular measure of the money supply to target — sterling M3, PSL2, and M0 come in mind — it ceased to be a reliable guide to price changes. Goodhart’s law, this was called, after the eponymous economist Charles. By the end of the 1980s, monetarism had been ditched, and targeting the exchange rate had become the holy grail. If sterling’s rate was fixed against the Deutschmark, the UK would import stability from Germany. It was about this time that a senior aide to the chancellor took me to one side to explain that one of the great skills of the Treasury was to perform perfect U-turns while persuading the world it had deviated not a jot from previous policy. This proved its worth again when the exchange rate policy was blown up by sterling’s ejection from the European exchange rate mechanism in 1992. The currency was quickly replaced by an inflation target as an infallible lodestar of policy.

Based on the statements above, the Fed appears to know that it can't properly measure what money is and therefore the quantity or what it is doing outside of domestic borders which will have an impact on the accuracy of modelling. The Eurodollar system of offshore interbank liabilities grew out of a post second world war need to supply US dollar liquidity to a growing global economy outside of the regulatory boundaries of The Federal Reserve. 

It's going to be interesting watching this unfold whichever direction its heads beyond the summer and the work Jeff Snider has released definitely leaves you with plenty to consider even if fundamentally it comes back to debt and leverage.

What is different this time is the scale of the fiscal packages already passed and being proposed as monetary policy has been exhausted, you can see these blowback loans turning into grants as well. The CB and Treasury are working in unison @DurhamBorn mentioned that CB directly financing the treasury would happen and the banking system would be bypassed to an extent, which is different to the previous QE programs.

If it goes wrong, is there any space for a Southerner in your bunker @DurhamBorn or are you already swamped ? Will dig for coal. I believe @Sasquatch claimed the shed some way back on the thread.

This picture below was released with a paper in 2012 by Artemis Capital Management, (who you may have come across with the 100 year Dragon Portfolio) a picture paints a 1000 words. The channel between the waterfall and the inferno has narrowed and no government has chosen the deflationary waterfall willingly.

What a thread this is.

[23rdian]

3 hours ago, CVG said:

It is a bit of a bugger.

I have all of the physical I'm prepared to risk holding (crime / act of god) so now I buy and store extra through Bullionvault.

No VAT payable unless you withdraw it physically from the vault.

https://www.bullionvault.com/help/buying_silver.html

Had bullionvault back in the day. Can honestly say I hated it. Sorry but worse investment I have ever made. The holding fees just eat into your investment so much and if prices don't appreciate fast enough it feels like you are watching inflation eat away at it. Just buy more physical and find a good hiding place.

[23rdian]

4 hours ago, Loki said:

Germany road trip is about it i think

I can think of worse things to do if you can get it back through customs okay. Or would you post it?

[Loki]

18 minutes ago, 23rdian said:

I can think of worse things to do if you can get it back through customs okay. Or would you post it?

I'd try my luck with customs

[MrXxxx]

20 minutes ago, 23rdian said:

Had bullionvault back in the day. Can honestly say I hated it. Sorry but worse investment I have ever made. The holding fees just eat into your investment so much and if prices don't appreciate fast enough it feels like you are watching inflation eat away at it. Just buy more physical and find a good hiding place.

Agree, especially for silver where they are higher than gold, and also have a higher monthly minimum fee that for smaller amounts doesn't reflect the headline % they show. In addition, realistically unless you have £millions in silver you cannot `go and collect`, so your solid investment is no different to allocated ETF/ETC`s, with a far lower yearly running cost.

[Harley]

5 hours ago, Alifelessbinary said:

I tried to purchase some physical silver recently and was shocked at the premium you have to pay above spot. Add VATon top, now that you can’t buy from Europe, and it’s really not a viable option. 

Thankfully I got lucky and stumbled upon ‘stacking’ between 2014 and 2018, so have an alright position. 

I guess I’ll need to focus a bit more time vetting miners for my portfolio. Does anyone have a work around, or is high premium silver here to stay?

You could console yourself with the idea the premium actually represents the true value over paper silver, silver which may not exist and would be cash settled at whatever the Comex decides! 

 

[Yellow_Reduced_Sticker]

5 hours ago, Loki said:

Germany road trip is about it i think

 

GREAT idea!

 

Why don't we hire a mini-bus with @sancho panza driving (as he seems sensible reading his posts :-) @Harley can give directions AND then give BOLLOCKINGS if he gets LOST!!!

 

Meanwhile I will supply the YRS BEER...in the back we shall be listening to @DurhamBorn 's repertoire of stories, ranging from when he throws someone through a window, to scavenging cigarettes from the local tip to GOURMET pizza making etc, etc...!

 

@MrXxxx will take Kenneth Williams Role AND keep everyone in order, however will probably end up in a altercation with BIG FUN @nirvana as he will be OUT OF CONTROL!

 

NICE!

 

This event is STRICTLY on a first-come, first-served basis SO...

 

ALL that are INTERESTED let me know by up-ticking!

 

 

 

 

[Loki]

@Yellow_Reduced_Sticker I can't help but think you're onto something. 

 

[Harley]

Been on the table saw all day cutting lists for multiple projects.  A good chance to catch up on podcasts with my Bluetooth ear defenders. 

Fascinating perspectives but particularly liked the discussion we are transitioning to a new monetary order (lot more than just BTC), that the Fed/UST would be the last wanting to go crypto, that we need to redefine value (sounds familiar), and the general overvaluation, lack of diversification, and most importantly how we're heading back to a 2007 style crash.

Now need to stock up on screws!

[Harley]

17 minutes ago, Yellow_Reduced_Sticker said:

@Harley can give directions

Best not, my map reading ability once gave an incredibly polite instructor a melt down like the memorable "it's a church, it's an effing church, right there, in front of you, you effing cretin"!  But I do have good local knowledge and perfect beerkeller german!  Is Ireland any good VAT wise?!