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

[Loki]

Quote

 

  OIL MAJORS: WALKING AWAY

Almost every week, we hear of Shell, BP, or other Western oil and gas majors exiting a project or dumping assets to "reduce carbon footprint" or whatever bullshit they would have us believe.

But has anyone stopped to think what actually happens to those assets? This Bloomberg article provides some interesting insights:

The chief executive officer of BP Plc had ­something ­exciting to tell investors in September 2019. The fifth-­largest multinational oil producer in the West had just inked a deal to sell everything it owned in Alaska, marking a sudden exit from a region the company had prized since the birth of the state 60 years earlier. The $5.6 billion sale would help reduce corporate debt, but that wasn’t the only boon. BP would be proudly shedding unwanted greenhouse gases, paving the way toward what would soon become its signature goal: zeroing out emissions by midcentury.

For a fossil fuel behemoth such as BP to undergo a sustainable transformation, smaller entities like Hilcorp must sit on the other side of the transaction. Owned by Houston billionaire Jeff Hildebrand, the privately held company has made a name buying oil and gas assets no one else wants.

BP’s sale to Hilcorp is a harbinger of what’s coming to the wider world of divested fossil fuel assets. By the end of this decade, Royal Dutch Shell, Total, Chevron, Exxon Mobil, and the rest of the top eight oil and gas companies will sell a combined $111 billion worth of assets “to adjust to the energy transition,” Oslo-based consultant Rystad Energy predicted last year. BP alone plans to cut oil and gas output by 40% in the next 10 years.

Oil and gas is probably the most toxic, unloved sector in the world, probably even more hated than coal (if that is possible). You would probably be more popular if you’d been friends with Jeffrey Epstein than investing in oil and gas. But we’re quite content to do so.

 

 

Extract from Capitalist Exploits newsletter 

[DurhamBorn]

1 hour ago, sancho panza said:

Interesting to see that a third of physicians are over 60.

It's one thing I've ntoiced with this 'no jab,no jab' policy they were looking at trying.They tired it with care home workers first to see how they got on before taking on the moneyed,close to retirement doctors.I don't think it's going to happen.In London 50% of care home workers haven't bothered-good luck replacing them in ahurry.

It's a sign,as it were of how tight the labour market is in some areas.I suspect care home workers wages might be about to get above minimum wage-and not before time too.

All wages are.Its not just money/demand.During a cycle change attitudes change as well.People have tasted more freedom,had death shoved in their face,even if just a small blip.Then they look at the wages and say no thanks.Its incredible the amount of jobs im being offered,its every day,sometimes a few a day.I tell them all the same thing,not enough money for the loss of time.

What i have done this week though is sign on JSA,its the new tax year and so i might as well have the 6 months free money.Its also really interesting.They offered me to sign up with these guys

https://www.aptem.co.uk/

Another Serco outfit to syphon taxpayers money.Its so woke its unreal.Of course its all online.First up you get a telephone interview,nice girl,seems interested in helping.Then your onto the portal.Suddenly im signed up for a couple of useless online group sessions.So iv messaged her and told her i wont be attending as i dont use Zoom or any other work from home Teams type thing,but to message and let me know when there is a face to face session local and il attend  

At the end of the 6 months il phone my quack and tell him im really down and feel really angry all the time,like i want to hurt people for locking me down and stealing my freedom,il then get a sick note and get on ESA,you can get that for a year none means tested as well.Might as well.

 

[geordie_lurch]

I know a few people have mentioned the direction the car trade is headed but not seen this model pushed before in the UK i.e not PCP or leasing

The following is from Volvo:

No long-term commitments. Change car or cancel with 3 months’ notice.

 

All-inclusive. With an option to add insurance or use your own.

 

No hidden costs. No deposit. Just a clear monthly fee.

https://www.volvocars.com/uk/care-by-volvo/

[Harley]

Watch out for a dividend yield trap?

I'm performing my weekly market screens and seeing some new companies pop up because they have hit my dividend yield target.  But not due to a fall in market capitalisation (share price times shares outstanding) as one would normally expect but because of material increases in their dividend payouts. 

For example, one close to our heart:  Yara International (YARO:Sweden).  Currently yields 4.60%.  Why the change?  Has the share price fallen on the monthly?  No, remains overbought.  The reason may be more because the total cash dividend paid (per the cash flow statement) has gone from 1.89B in 2019 to 8.35B in 2020 and 8.89B TTM.  Is this justified?  Maybe.  Operating cash flow jumped in 2019 to 17.88B from 6.30B and has risen steadily since, although allowing for changes in working capital the increase is not so large.  Regardless, note the increase in dividends is (proportionally) far larger than the increase in cash flow.  I also note a large increase in share buy backs in 2020 and TTM. 

So maybe these increased dividend payments are justified if this is a longer term trend, but of concern if this is just the distribution of shorter term super profits.  I'm looking for valuations that justify a steady income stream, not ones at risk by volatility in that stream.  That said, you could argue for some companies these streams will continue for a while.  It'll be interesting to watch to see if this becomes a more pronounced trend.         

[DurhamBorn]

29 minutes ago, Loki said:

 

Extract from Capitalist Exploits newsletter 

Its incredible the hate for the sector,that is until you go cold or starve.

At the moment all those massive wind farms with huge subs are producing 1% of the UKs electricity,not energy,just electricity.1%.49% from gas,and even around 8% from biomass,mostly DRAX.See why i said buy DRAX and we have trebled our money.

https://gridwatch.co.uk/

Now imagine if all cars were electric now.

Now solar is producing 16% so its not all bad for renewables,but tonight they wont be.

As a macro strategist the best moments are when the macro meets sentiment.Iv only seen it as extreme once before,and that was tobacco.BAT made me more money for a quite small investment than i got working for 10 years with GSK.

Big oil wont do that as they are already huge companies,but i think trebling money including divis over the cycle is likely.

 

[Harley]

2 hours ago, sancho panza said:

Thats the key thing with current infaltion measures is that they've completely missed the huge rise in cost of buying a home or a dollar of pension income.

shocking in many ways,scale/act of omission etc.

.......

IMO it's more than that.  As he says, inflation measures are becoming meaningless as they are based on the same common UOM of value.  They are all in the burning building together where true devaluation is not noticed as it is by stealth against the rest of the world outside of that building.  It's a bit like feeling good about house prices because they have gone up.  Sure, but only against a devalued UOM.  And being houses, which you have to live in, makes them a great poignant example.  Outside the building (the burning one or the one you have to live in!), they've gone nowhere.   They feel more expensive because they are, but that's relative to your declining income (using that same UOM).  Real capital preservation involves thinking more about value and opening the door and looking out.  Raoul is right - the building will burn down; it cannot be saved and their current excesses show they know they're in the end game and they have no intention of trying to save it.

[Harley]

1 hour ago, Loki said:

"For a fossil fuel behemoth such as BP to undergo a sustainable transformation, smaller entities like Hilcorp must sit on the other side of the transaction. Owned by Houston billionaire Jeff Hildebrand, the privately held company has made a name buying oil and gas assets no one else wants".

Bang, right there.  Privatisation of value and income streams under the guise of wokedom.  "No one else wants" or should that be "no one else allowed to have"?

[Harley]

27 minutes ago, DurhamBorn said:

Its incredible the hate for the sector,that is until you go cold or starve.

At the moment all those massive wind farms with huge subs are producing 1% of the UKs electricity,not energy,just electricity.1%.49% from gas,and even around 8% from biomass,mostly DRAX.See why i said buy DRAX and we have trebled our money.

https://gridwatch.co.uk/

Now imagine if all cars were electric now.

Now solar is producing 16% so its not all bad for renewables,but tonight they wont be.

As a macro strategist the best moments are when the macro meets sentiment.Iv only seen it as extreme once before,and that was tobacco.BAT made me more money for a quite small investment than i got working for 10 years with GSK.

Big oil wont do that as they are already huge companies,but i think trebling money including divis over the cycle is likely.

 

Maybe they will regulate cars like tobacco, so fewer of them (mostly short term rentals) at a higher price.  You will own nothing an be happy and the climate will be saved without having to build all that generating capacity (which BTW we're not so QED!).  We can say what we like but the vast majority have almost willingly done things they probably would have previously said "no" to these last few months.  And TPTB now know that.

[DurhamBorn]

1 hour ago, Harley said:

Bang, right there.  Privatisation of value and income streams under the guise of wokedom.  "No one else wants" or should that be "no one else allowed to have"?

I think thats a huge part of what is going on.Removing access to un-earned income from capital for ordinary people.The very very first thing i was taught in this game was that the rich need to stop the poor taking back the land.To do that they tax the middle and give to the poor.Then they own the assets that all those people use,so all the money goes to the top.Thats it.Amazing system,for them.

Like you say oil.Industries that have reached the end of their growth,or are in slow decline are cash cows.They are actually the best companies to own for income,and indeed protection of capital.Nobody wants to enter the sector,nobody will sanction the billions needed to build up a new company etc.So the last ones merge together until there are a few.Then they tick over their assets,cut capital spending right down,and slowly increase prices above falling use.

 

It seems the markets are losing investments going private that actually create cash,and are being left with all the growth stuff.Most 40/60 type funds now pretty much fund big tech to grow but never pay much of an income,and government debt to never pay an income.

So the publics assets are ending up only in areas that dont and wont create an income,and the elite slowly own all the assets that actually do produce free cash in the 10% to 13% range of turnover.

The result?,less people can retire early,or until they are knackered,and to escape state control is getting out of reach of almost everyone.

[Talking Monkey]

1 hour ago, DurhamBorn said:

I think thats a huge part of what is going on.Removing access to un-earned income from capital for ordinary people.The very very first thing i was taught in this game was that the rich need to stop the poor taking back the land.To do that they tax the middle and give to the poor.Then they own the assets that all those people use,so all the money goes to the top.Thats it.Amazing system,for them.

Like you say oil.Industries that have reached the end of their growth,or are in slow decline are cash cows.They are actually the best companies to own for income,and indeed protection of capital.Nobody wants to enter the sector,nobody will sanction the billions needed to build up a new company etc.So the last ones merge together until there are a few.Then they tick over their assets,cut capital spending right down,and slowly increase prices above falling use.

 

It seems the markets are losing investments going private that actually create cash,and are being left with all the growth stuff.Most 40/60 type funds now pretty much fund big tech to grow but never pay much of an income,and government debt to never pay an income.

So the publics assets are ending up only in areas that dont and wont create an income,and the elite slowly own all the assets that actually do produce free cash in the 10% to 13% range of turnover.

The result?,less people can retire early,or until they are knackered,and to escape state control is getting out of reach of almost everyone.

How do you think BTL fits into this. There's many in the middle with smallish portfolios. Do you think in the coming decade regulation and tax policies will try to take this wealth in order to keep the plates spinning, in order to keep the poor subdued. 

[Chewing Grass]

^^^ The Biden Bounce....

[DurhamBorn]

5 hours ago, Talking Monkey said:

How do you think BTL fits into this. There's many in the middle with smallish portfolios. Do you think in the coming decade regulation and tax policies will try to take this wealth in order to keep the plates spinning, in order to keep the poor subdued. 

Leveraged BTL will likely be a poor investment given the amount of regs and tax they keep adding.Obvious they will keep adding to those.There will also be huge investment from big insurance firms etc in rentals.Student rentals from big new shiny blocks are already killing the BTL market in student towns.To be fair the people in early enough should of done well and nice capital gains.More and more will look to get out i think.I know several people with small portfolios,3 or 4 houses looking to slowly sell each one.

 

[Green Devil]

4 hours ago, PrincessDrac said:

Link Link.

 

US household incomes rose by the most in recorded history in March as the country’s economic expansion accelerated, lifted by government stimulus and a healing labour market. That has sent reverberations throughout financial markets, with investors’ inflation expectations over the next decade rising to an eight-year high.

“It just won’t stop,” Mr Buffett added. “People have money in their pocket and they’ll pay the higher prices.”

 

Sounds like a great time to be loaded with property, equity shares and crypto.

[Harley]

I think all the bases have been covered.  Good luck everyone making of it what you can.

[Loki]

4 minutes ago, Harley said:

I think all the bases have been covered.  Good luck everyone making of it what you can.

This thread was my only real hope.

 

At least I'll be happy!

[goldbug9999]

16 hours ago, planit said:

I feel all low paid jobs are going to see a shortage,

Low paid jobs with shortages become high paid jobs, thats a good thing.

[wherebee]

3 minutes ago, goldbug9999 said:

Low paid jobs with shortages become high paid jobs, thats a good thing.

and if the human car washes stay around, that confirms they are laundering/tax fiddles, not real businesses.

[wherebee]

I've posted on here about BPT before.  Just filled my boots again on it, brought average price down to 1.3AUD.
 

The price collapsed as the CEO did a presentation saying flow from fields was down 5% or more.  Interestingly, about half the commentators on the small boards in Australia are saying 'dead duck, sell everything' and half are saying 'no debt, strong company, oil is going to rise, fill yer boots'.  

Me, I think the fact the CEO went public was a clever play to drive the price down legally.  I would not be surprised if execs and insiders buy more stock at this price.  Legally.

[Ash4781b]

Vacant commercial unit upon vacant unit in my local town centre (Kent). It’s significantly deteriorated since the last lockdown. Loads more units have been mothballed. Have the commercial property losses started showing up yet ? Surely the scale of the losses will be jaw dropping. I have no idea what other towns are like but this is the worst I have ever seen it. 

[M S E Refugee]

5 minutes ago, Ash4781b said:

Vacant commercial unit upon vacant unit in my local town centre (Kent). It’s significantly deteriorated since the last lockdown. Loads more units have been mothballed. Have the commercial property losses started showing up yet ? Surely the scale of the losses will be jaw dropping. I have no idea what other towns are like but this is the worst I have ever seen it. 

I have noticed most vacant units in my local Town Centre are up for Sale as well as To Let, I can't recall ever seeing Freeholds being sold in the Town Centre.

[AWW]

1 hour ago, Ash4781b said:

Vacant commercial unit upon vacant unit in my local town centre (Kent). It’s significantly deteriorated since the last lockdown. Loads more units have been mothballed. Have the commercial property losses started showing up yet ?

The effects are going to be very localised. The parade of shops and cafes near me has never been busier. The road outside them has been closed and filled with seating, which is packed out throughout the day.

Commercial property in residential areas will do very well. Commercial property in towns and city centres won't.

[jamtomorrow]

1 hour ago, Ash4781b said:

Vacant commercial unit upon vacant unit in my local town centre (Kent). It’s significantly deteriorated since the last lockdown. Loads more units have been mothballed. Have the commercial property losses started showing up yet ? Surely the scale of the losses will be jaw dropping. I have no idea what other towns are like but this is the worst I have ever seen it. 

Question is when.

Owners have no need to mark to market, so losses only crystallize when they sell.  And that only becomes a forcing function if it's somebody else's money *and* that someone has the right to demand it back.

Always seems to me like US CRE "clears" fairly well in that sense, whereas UK CRE seems structured specifically so that landlords can put their fingers in their ears and yell "did you say something?" at the market, over and over again.

The extension of pretension in UK CRE is just getting started.

[sancho panza]

2 hours ago, Ash4781b said:

Vacant commercial unit upon vacant unit in my local town centre (Kent). It’s significantly deteriorated since the last lockdown. Loads more units have been mothballed. Have the commercial property losses started showing up yet ? Surely the scale of the losses will be jaw dropping. I have no idea what other towns are like but this is the worst I have ever seen it. 

I think CRE will be this crises sub prime from 2006/7.

Kevin Dowd/Dean Buckner wrote a great paper last year on how the UK banks are more levered than 2006 and I suspect a lot of loans will go sour in the CRE world.A lot fo those businesses will be cashflow negative already after the lockdowns and I suspect they won't be able to charge more than 40%-60% max of previous rents given how the High ST has haemorraged footfall over the last 12 months.Once people go online for purcahses theyrarely come back.

Obviously,a lot of CRE has been sold to local councils eg Spelthorne,Leicester,who will have deeper aka taxpayer funded pockets for losses,but the profits are gone,if they were ever there.

[sancho panza]

1 hour ago, jamtomorrow said:

Question is when.

Owners have no need to mark to market, so losses only crystallize when they sell.  And that only becomes a forcing function if it's somebody else's money *and* that someone has the right to demand it back.

Always seems to me like US CRE "clears" fairly well in that sense, whereas UK CRE seems structured specifically so that landlords can put their fingers in their ears and yell "did you say something?" at the market, over and over again.

The extension of pretension in UK CRE is just getting started.

This is really about which bank will head for the exit first.In the past extend and pretend was an option because there were generally cashflows from other parts of their portfolios that could pay the bills.I think this time,they will be cashflow impaired to the point of exhaustion.

[Ash4781b]

8 minutes ago, sancho panza said:

I think CRE will be this crises sub prime from 2006/7.

Kevin Dowd/Dean Buckner wrote a great paper last year on how the UK banks are more levered than 2006 and I suspect a lot of loans will go sour in the CRE world.A lot fo those businesses will be cashflow negative already after the lockdowns and I suspect they won't be able to charge more than 40%-60% max of previous rents given how the High ST has haemorraged footfall over the last 12 months.Once people go online for purcahses theyrarely come back.

Obviously,a lot of CRE has been sold to local councils eg Spelthorne,Leicester,who will have deeper aka taxpayer funded pockets for losses,but the profits are gone,if they were ever there.

Thanks . Yeah and that’s massive impacts for councils both on the investment side and the business rates revenue. I’m pretty much there in thinking a lot of Local authorities/ councils will need bailouts from central  (some already are bankrupt). It’s not really discussed much about the early council bailouts. Of course central will transfer this (and maybe pension liabilities) to central else without the council tax rise cap we’d be seeing bills rising double digit percentages. That would result in riots so it’s being managed.