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


spunko

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sancho panza
On 30/04/2021 at 21:21, Cattle Prod said:

Super interview here folks from Michael Kao on RealVision. It's subscription only but you can do a trial for $1. Ok, he's got a bull thesis and it may be my selection bias, but it's the best analysis I've seen in a while, Art Berman seems to have lost the plot since Covid stuck. Lots of nuggets in there. US shale, long cycle production starved of capital, OPEC, backwardation, problems producers have hedging, I've said a lot of it here but if you want to hear a professional managing money saying it rather than a randomer off the internet, check it out:

https://www.realvision.com/shows/the-expert-view/videos/is-crude-oil-the-best-inflation-hedge-and-other-oil-questions

FWIW he mentions the contango to backwardation flip @sancho panza, and studied it back 30 years. Significantly higher prices a year later in all but 4 cases (for specfic reasons). I cant remember if I shared it here, but my base road map is off backwardation flips, which happened on 23rd November.

Teaser (though the editor didn't actually catch the best bits):

image.thumb.png.df8de88663a137b273e785154bfeef65.png

Finally had the time to listen to that.Well worth the dollar.

Some key take homes

1) improtance of opex commodities in pushing inflation-particualrly in light of US stimulus being run through lower ocio economci deciles.

2) backwardation plays a key role in causing capital constraints on US shale as banks/producers are unable to hedge beyond the spot sprice almsot guranteeing capital starvation.

3) OPEC would be mad to let oil run too high to say $150 as it would hasten adoption of EV's.

4) if demand normalises as predicted then spare capacity gone by 2024

5) long cycle projects not been funded since 2016 and given they can take 4-7 years to come online means further supply restrictions.

6) spare capacity as per predictions around 10.5 mn.it sounds like he's taking Saudi spare capacity at face value,which you've warned us against CP(but would appreciate your take whether I've read that right)

7) US foreign policy on Saudi gurantees a hard line from them.

 

Like I said,many thanks,what an enlighening interview and a reflective bull thesis

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sancho panza
3 hours ago, DurhamBorn said:

They will,but until the bust arrives they will taper once inflation goes over 3%.Government has about 6 months to get its structural deficit under control i expect.Most companies etc go bust in the recovery,not the downturn.It will be very interesting to see the government once the BOE stop buying gilts.Of course the FED needs to stop first.

iirc UK govt issued £280bn net this tax year,BoE printed circa £250bn ..................between a rock and hard place.How can they get that strututral deficit under control when  they've haven't done so for 25 years.

All the QE/zirp/MBS buying hasn't been inflationary in a world where China was exporting deflation,however,that's changing.That Michael kao interview @Cattle Prod tipped had a great section where he talked about how funding stimmy cheques into lower socio economic deciles was highly inflationary because they spend it on commodities.

Interesting times.

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I know it's the Daily Fail but the MSM are starting to predict doom and gloom.

ALEX BRUMMER: Boom will give way to bust https://www.thisismoney.co.uk/money/comment/article-9538279/ALEX-BRUMMER-Boom-way-bust.html?ito=native_share_article-masthead

The Institute for Fiscal Studies notes that in the UK the ratio of housing wealth to national output is higher than before Japan's crash in 1991 and the subsequent lost decades.

In the US, the Financial Industry Regulatory Authority reports that total margin debt (cash borrowed to buy shares) stood at $822billion in March 2021 up from $479billion a year ago and $400billion as the financial crisis kicked off.

If you are not scared enough yet there is bitcoin. At $54,000 in the last week of April, it is up 600 per cent on a year ago. We should also consider the collapses of the Archegos hedge fund and Greensill.

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jamtomorrow

Interesting ... is this because an influx of deposits means banks are flirting with being undercapitalized (measured against, say, Basel 3 requirements)?

Presumably a MMF shows up on the would-be depositor's balance sheet instead of the bank's, thus helping the bank's capital ratio?

 

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DurhamBorn
3 hours ago, jamtomorrow said:

Interesting ... is this because an influx of deposits means banks are flirting with being undercapitalized (measured against, say, Basel 3 requirements)?

Presumably a MMF shows up on the would-be depositor's balance sheet instead of the bank's, thus helping the bank's capital ratio?

 

One of the first things the FED did last March was change the rules so banks could buy up money market funds.It was one of the first things they did to inject liquidity,mainly to cover the fact corporate entities were pulling down credit lines back onto their balance sheets in case they needed it.The FED lost a money market fund during 08 and knew they needed to keep them liquid.Its called the MMLF scheme.

If the banks are telling corporates to move that liquidity back into money market funds it would see M3 fall back heavily.This says to me the FED is pushing the banks to get some of this massive liquidity back into the short end of the curve to keep rates down.If the cash sits on deposit its one step from being very inflationary.This says to me again the FED smells big risk from inflation now,and is trying to stall it without removing government fiscal support.The short end being below inflation helps fund the government deficit.

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Animal Spirits
15 minutes ago, DurhamBorn said:

One of the first things the FED did last March was change the rules so banks could buy up money market funds.It was one of the first things they did to inject liquidity,mainly to cover the fact corporate entities were pulling down credit lines back onto their balance sheets in case they needed it.The FED lost a money market fund during 08 and knew they needed to keep them liquid.Its called the MMLF scheme.

If the banks are telling corporates to move that liquidity back into money market funds it would see M3 fall back heavily.This says to me the FED is pushing the banks to get some of this massive liquidity back into the short end of the curve to keep rates down.If the cash sits on deposit its one step from being very inflationary.This says to me again the FED smells big risk from inflation now,and is trying to stall it without removing government fiscal support.The short end being below inflation helps fund the government deficit.

This could get interesting if the loan/deposit ratio returns to pre Covid levels:

657847657_Loantodepositratio.thumb.png.a5f3f5f8de2ac750de832ccefa06a1dc.png

 

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geordie_lurch

Not seen this guy before but he sees $200 oil within 5 years for a lot of the reasons those who know the oil markets have said in this thread via this 13 min video

 

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sancho panza
1 hour ago, DurhamBorn said:

One of the first things the FED did last March was change the rules so banks could buy up money market funds.It was one of the first things they did to inject liquidity,mainly to cover the fact corporate entities were pulling down credit lines back onto their balance sheets in case they needed it.The FED lost a money market fund during 08 and knew they needed to keep them liquid.Its called the MMLF scheme.

If the banks are telling corporates to move that liquidity back into money market funds it would see M3 fall back heavily.This says to me the FED is pushing the banks to get some of this massive liquidity back into the short end of the curve to keep rates down.If the cash sits on deposit its one step from being very inflationary.This says to me again the FED smells big risk from inflation now,and is trying to stall it without removing government fiscal support.The short end being below inflation helps fund the government deficit.

Fascinating reply DB.Even after all these years,I'm sometimes amazed at the subtlety of some of the nuances you explain in laymen's terms.Sorry to sound like a suck up,but I could have googled for three horus and not come up with that answer.

On anotehr matter,copper running hot.Every man and Goldman Sachs is calling copper higher,missing possibly one of the most important correlations of all.Until copper looks like turning,we'll be staying long oilies here.

image.thumb.png.648cb820d97f47e8547398862fc82947.png

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DurhamBorn

Copper runs hot first because the swing demand is when China increases investment in its power network,thats where most of the copper demand increase goes,and that has a lag on other demand,mainly oil.Id expect oil to follow copper with a small lag.

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geordie_lurch
10 minutes ago, nirvana said:

YELLEN SAYS RATES MAY HAVE TO RISE TO STOP ECONOMY OVERHEATING

Lol we shall see if they dare! I still remember her saying the following back in 2017: https://www.reuters.com/article/us-usa-fed-yellen/feds-yellen-expects-no-new-financial-crisis-in-our-lifetimes-idUSKBN19I2I5

"U.S. Federal Reserve Chair Janet Yellen said on Tuesday that she does not believe that there will be another financial crisis for at least as long as she lives, thanks largely to reforms of the banking system since the 2007-09 crash."

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Silver crashed a dollar on that Yellen news!!! Just when the fooker was breaking over 27 bucks too...I'm sure these cnuts do it deliberately O.o

BUY USD now???xD

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DAVE SAYS the market is about to take off again.......

Now is he the messiah or is he just a very naughty boy? xD

 

EfP6CMDWAAAfCRM.jpg

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DurhamBorn

I told you they would shock the market and maybe go for rate increases while still printing to support government fiscal spending.B| ,nobody mentioned that anywhere or even crossed their minds ,yet us basement dwellers know ;)

Look at the markets today,look at the FTSE,biggest risers,oil,telcos,tobacco while NASDAQ gets whacked ,this is a money supply fiscal injection recovery direct into the economy as we always said,and the Fed is surely thinking now it needs to keep the fiscal going,but tighten through rates.

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3 minutes ago, DurhamBorn said:

I told you they would shock the market

yeah it'll defo need a shock after suffering a heart attack if rates rise!!! Still can't see it happening myself......they'll reverse decision after a massive market crash.....then all the FED members will get a massoof payoff from their Wall St paymasters ;)

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DurhamBorn
Just now, nirvana said:

yeah it'll defo need a shock after suffering a heart attack if rates rise!!! Still can't see it happening myself......they'll reverse decision after a massive market crash.....then all the FED members will get a massoof payoff from their Wall St paymasters ;)

The fact is they are thinking about it though.They need to keep fiscal pumping going while at the same time trying to hold inflation in the 3% zone,this is about real rates ,i think they are aiming for 2% negative.Huge risk for the Fed now,if that liquidity enters the economy at once big inflation.

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Castlevania
22 minutes ago, Cattle Prod said:

Whatever are they going to going to panic about now?

 

They can go back to their favourites of Climate change and White supremacy

 

 

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@Cattle Prod

I have been watching that every day and agree, today looks like it might end on ~355k so flat on the figure 7 days ago. 

From there we only need another day around the same level for the 7 day average to start turning down.

This is an earlier peak than everyone is expecting and I also hope for a faster drop.

The deaths peaking at the same time as cases is interesting but it would be a good bonus if deaths start falling too.

 

image.png.a4e042a414dacf4c939d3df1e55ba8f5.png

World cases have also rolled over and with India falling the decline should accelerate. Markets should be very happy about this and Europe (inc UK) all talking about summer flights this week.

 

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Lightscribe

Quick crypto update, LINK now on the bull run, on the way to $50. ETH 2.0 now looks like it’s ascertaining it’s dominance going forward to all the rivals negating gas fees etc. Big things are coming in combination with Chainlink. 

https://medium.com/offchainlabs/scalable-low-cost-computation-of-ethereum-smart-contracts-using-arbitrum-on-the-chainlink-8985c6542d4e

C867BEC5-6D26-4E46-B787-7F01557C5B0D.jpeg

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Majorpain
2 hours ago, DurhamBorn said:

The fact is they are thinking about it though.They need to keep fiscal pumping going while at the same time trying to hold inflation in the 3% zone,this is about real rates ,i think they are aiming for 2% negative.Huge risk for the Fed now,if that liquidity enters the economy at once big inflation.

I'm interested to see if they can actually do anything to control it, a lot of the inflation is cost push off the commodity prices, not just demand pull consumer side.  If you couple that with the unprecedented scenario of the past year, high household savings and lockdown there is no guarantee that the average person is not going to spending a lot of time and money enjoying life to the full over the summer.

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DurhamBorn
36 minutes ago, Majorpain said:

I'm interested to see if they can actually do anything to control it, a lot of the inflation is cost push off the commodity prices, not just demand pull consumer side.  If you couple that with the unprecedented scenario of the past year, high household savings and lockdown there is no guarantee that the average person is not going to spending a lot of time and money enjoying life to the full over the summer.

I dont think they can,but they need to look like they are trying,like you say we are seeing huge cost push inflation.A crank up means everyone else will push to keep up.

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