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

[Heart's Ease]

A little bit down the thread someone comments that the amount of £ the fund holds will remain constant, not increase.

[JMD]

19 hours ago, planit said:

Sorry for not replying, I was away.

It is insane for a lot of reasons but the main one from a survival point of view is that the world population needs oil to live. If supply falls more than 10% (could be less) people will start dying in large numbers.

Let's do a thought experiment:

You have 10 chickens producing eggs that your family needs in order not to starve to death

it might be a good idea to look after them. In fact I am sure you would put a lot of effort in to make sure they survived.

You would not start shouting at them, then poking them, then hitting them with a stick, then make a law that says 2 need to be destroyed, then make another law to say they all have to be dead in 9 years.

^This is what we have been doing the last 2 years and it is accelerating. 

 

I am not a denier that we have an effect on the environment [in the up direction]. But like @Cattle Prod said, you need to be very careful with the figures environmental 'scientists' trot out. It has become a religion so data is ignored if it doesn't fit the narrative. If one of them does say something against the prevailing wind, that person is shot down so they can't do it again. This is a very unhealthy situation, almost a criminal cartel. It has also become a big money game, they get hundreds of billions of dollars and the more they shout the more they get. 

It's like the new version of war, politicians can look good and divert attention by chucking money at green projects. Nearly all of that money is wasted and the projects will be white elephants. I am hoping lots of them will be bought up by BP in 5 years time (fits in with @DurhamBorn  funding difficult as they will be burning cash).

 

The worst thing we could do is take everything out on the oil companies, if we do then we will have the deepest depression we can imagine where we can't afford heating in the winter. I don't think it will come to that as it will become obvious we need more oil and the oil bashing will stop. People are missing the fact that the oil companies have all the knowledge and expertise to become the future green energy companies, they are the best option for a fast and safe transition to green.

We have a bit of chicken and egg at the moment with green energy production in that solar panels and wind turbines can't be made without oil/coal/gas so the environmental people need to be more patient. Technology will also catch up (hydrogen/planes etc). It needs more of an overarching plan on moving forward, not chucking billions of dollars at anything with 'green' in the title.

</rant>Sorry @nirvana 

 

Yes, I've written before that the 'war' analogy works for me (to 'help' focus my own personal investment macro thinking, etc). But context they say is everything. Ie Do you think the political policy ramping is for control/social reset reasons, or for inflation-rip/economic reset reasons? Or maybe both/neither/other? 

[Harley]

12 hours ago, wherebee said:

Anybody predicting a fall in oil demand from 100 to 25 is smoking crack and has drunk the cool aid.  Will China stop buying oil?  Will India?  Will Indonesia?  Will Malaysia?  Will Vietnam and Pakistan? You're looking at almost half the worlds population in that circle.  Will they fuck

The pressure will exist in the west for oil companies to to green stuff, but the oil demand will not go away (unless, as I say before, we have a new energy source/tech uncovered - cue the aliens on the other thread destroying my oilies investments).

As an example, I got this re Woodside:

• Australian operator Woodside Petroleum is looking to develop a large-scale solar project in Western Australia that could provide power for its Pluto liquefied natural gas development.
• The proposed Woodside Power Project would consist of roughly 210,000 solar panels, which the oil and gas operator claimed would make it one of the largest solar projects in Western Australia.
• Woodside is also evaluating supplying a further 50MW to Perdaman's proposed urea facility on the Burrup Peninsula, which will produce blue ammonia from natural gas.
• Woodside acting chief executive Meg O'Neill said the proposed Woodside Power Project was part of the company's vision for large-scale supply of renewable energy to existing and future industry on the Burrup Peninsula.
• Woodside stated Thursday it had already carried out a range of environmental, geotechnical and engineering studies for the proposed power project and was now progressing key stakeholder consultations ahead of seeking regulatory approvals.

Ta.  Nice to see WPL finally get the bid.  May have to top up?

 

[wherebee]

13 minutes ago, Harley said:

Ta.  Nice to see WPL finally get the bid.  May have to top up?

 

just remember that oil and gas exploration in australia is just as political as the USA.  Lefty gvts win at state level = no new drilling.  You need to have a view on the local politics to understand the headwinds.

[Barnsey]

As expected...

 

[janch]

1 hour ago, Heart's Ease said:

A little bit down the thread someone comments that the amount of £ the fund holds will remain constant, not increase.

ZH are also reporting this:

https://www.zerohedge.com/markets/russias-186-billion-sovereign-wealth-fund-dumps-all-dollar-assets

[JMD]

12 hours ago, Cattle Prod said:

It's as simple as this: 'settled' or 'consensus' is anti-science. Its about open debate, challenge refinement experiment, repeatability. The balance of evidence is that our activity is affecting climate. Its just not discussed anymore whether this is a problem or not because the normal scientific progression has been seized by others for various reasons. @planit alluded to it up thread. Be very sceptical when science reaches 'consensus', there should be no such thing (see: SAGE and covid-19).

I've used Copernicus challenging an earth centred solar system as an example before. Maybe Einstein is a better example, for he proved Newton's theories at least partially wrong, hundreds of years later. Who the f**k would argue with gravity? A good scientist would. And an apple falling from a tree is a lot simpler than multivariate climate models.

Maybe I'm old school, but the problem I see is that we won't actually get to the root of the problem without healthy challenge and opposing debate. It's just dogma now.

Yes I agree. And I wouldn't characterise your thinking as old school either. Science however is perhaps 'experiencing a break in transmission', at least some parts of it are, but in the main Its mostly the statistics and the measurement that's being 'misinterpreted', and those types of 'errors' can be 'recalibrated' overnight, and I'm sure that they will be when the timing is right!                                                                  The other thing is, because of the propaganda, dogma and tribalism, we now experience all around daily, i have found that it's really given me a greater insight and understanding into history and of it's many dubious characters. Im very happy about that... However, i find it has had the opposite effect when looking forward - because the future suddenly becomes a more scary proposition when you come to mistrust your politicians motives and abilities, and moreover those of your fellow society, journalists, etc... Oh well, I keep having to remind myself that it is better to be forewarned... particularly crucial in fact when in the investment accumulation phase! (slight thread detour, but bought it back on topic right at the end!!)

[sancho panza]

On 01/06/2021 at 18:50, Democorruptcy said:

Amerman has done a piece on it:

Climate Change & Court-Ordered Inflation

cracking read there DM

'On the simplest level, the first level of inflation is the increase in the number of dollars that it takes each year to buy energy, whether it be gasoline, or natural gas, or the cost of a kilowatt hour of electricity. The second level is to multiply each year's increase by the previous year's multiplication. Nine straight years of 6.5% inflation increases energy prices by 76%, while nine years of 10% inflation increases energy prices by 136%, and nine years of 15% inflation increases energy prices by 252%.

The price increases would not be constrained to direct energy use. Once it gets going, inflation always wants to go forth and multiply, and then multiply again, it is the nature of the beast.

Even without direct judicial decrees, the cost of food goes up because the cost of energy goes up, and it takes a lot of energy to produce food.

The cost of everything that needs to be transported goes up as well, and this applies not just to gasoline, but to the charges involved in transporting the goods when using electric vehicles.'

 

On 01/06/2021 at 21:46, Cattle Prod said:

Seen a few posts here about 'wish I didn't put so much in oil, potash did better' etc, and that's fair enough. But its also hindsight. @DurhamBorn was at pains to tell us that there was no way to know which sector will run, so have a few of them. Even us here are hating on oil a bit which as a contrarian makes me all warm and fuzzy. A bit like yhe March 2020 lows.

What's happening in oil re. ESG requirements is just astonishing, it's pretty much throwing petrol on the fire. I don't know when oil (and gas) will run, and I really don't care. My conviction that it will, seriously run, just gets stronger and stronger. I now see where DB was getting his $300 from, he was mapping in all this crap that I hadn't seen yet.

Example. Not alone is the likes of XOM going to be hamstrung in its own production. Its going to be restricted in its R&D. And the tech from the big companies is what grows the rest of the industry. As in, all of it. And not just including national oil companies like Aramco, but especially them. Hurt these supermajor companies, you hurt the entire complex.

Good luck when you really need the stuff, its going to cost you. 

The more I examine the thesis the more I like the trade.I have to declare we're balls deep in oil&gas.

I'm guilty of the should have put more into potash type thoughts but on reflection,the reason I opted to prioritize energy investment is that it is the most fundamental to life.Without energy,food and water don't get to homes.

As I sit here and learn about oil from you ie conventional,shale,inventories,demand,supply constraints etc,the more compelling thsoe investments become to my family's security.I was recently explaining to Mrs P that to buy a hosue we'd have to surrender some of our oil stocks and at the moment,given the price level we're in at,I'm just not willing to do it given the way the oilies look like the BAT's trade from 2000...

 

[Loki]

14 hours ago, Cattle Prod said:

It's as simple as this: 'settled' or 'consensus' is anti-science. Its about open debate, challenge refinement experiment, repeatability. The balance of evidence is that our activity is affecting climate. Its just not discussed anymore whether this is a problem or not because the normal scientific progression has been seized by others for various reasons. @planit alluded to it up thread. Be very sceptical when science reaches 'consensus', there should be no such thing (see: SAGE and covid-19).

I've used Copernicus challenging an earth centred solar system as an example before. Maybe Einstein is a better example, for he proved Newton's theories at least partially wrong, hundreds of years later. Who the f**k would argue with gravity? A good scientist would. And an apple falling from a tree is a lot simpler than multivariate climate models.

Maybe I'm old school, but the problem I see is that we won't actually get to the root of the problem without healthy challenge and opposing debate. It's just dogma now.

This has been debunked, by fact checkers.

 

[sancho panza]

On 30/05/2021 at 19:26, Hancock said:

Cheers, this is the thing when you're looking to put in the money that was set aside for a house its going to take more balls then when i was putting SIPP money into the markets as to be honest i was playing with that money as if i'd found it. Now the SIPP is going to be 150k in the coming weeks, i'm starting to realise it'd not be so easy to earn again, and 150K at my age (46) could be all i need to put into it if i leave if for another 14 years.

I know in 5+ years oil, energy etc will perform far better than a £375k 2 bed terrace in Winchester ... but its the having the balls, to time my move, when everything is looking a bit toppy at the moment ... and the people who Sancho, yourself, and several others have followed for a long time are all predicting impending Armageddon. 

Think i will set up a couple of £5k ladders for BP and Shell  starting at 270 and 1250 to get the ball rolling. Fucked will i be buying Infrastrata and crap like that with this money!

obviously there' s huge dyodd warning here,however,that bit in bold right there is where I am tbh.

I posted some charts recently showing BATs/BLT from 2000.They actually rose through a 705 broad market drop.That's value investing and that's what a  lot of teh chat on this thread is taken up with.

There are issues in terms of whetehr we get a deflationary 'big kahuna ' type wave washing through markets,I certainly think it's a given we'll see the likes of Tesla 70% off peak and a lot more big tech besides.Whetehr we will see the run down in oilies we got last year is a thing I'm beginning to doubt.

Housing markets look frazzled imho and far more susceptible to a BK type wave washing through the levereaged residential and commercial landlords.

Our average price for RDSB as a family isn't far from where we are now £12.00-13.00,BP slightly below £3 somewhere around but for me these were potentially generational buys I might pass onto my kids if the worst happens in ten years.Our little family unit works so that if anything happens to me,the dividends will be flowing while my Mum/Mrs P start working through the book of instructions I've left them.(Generational buys being things you could hold 15-20 years+)

Having said that if we get a super spike in the oilies,I might sell them if I can be sure I'll be able to buy more back but given RDSB's 2008 low was £15 it's got to be a sure trade if tehy're under that.

[ThoughtCriminal]

17 hours ago, Hancock said:

My mam and dad have been looking for the last few years at Newcastle coastal prices, but the last year has been insane ... trying not to exaggerate but its probably 15-20% rises in certain places ... when the average worker in Newcastle area works for the govt in one form or another.

No idea south of the river, but aren't even the better places around Teesside relatively expensive. (i was about to use the word "posh" as opposed to "better", but then realised you're not allowed to put "posh" in the same sentence as Smoggland)

My view is its either got to be a better parts of Durham, York, Newcastle or if you like walking then Northumberland ... everywhere else is crap in Northern England. A southerner would be like a duck out of water if they went to some old pit village/town like Blyth

Fucking hell H, steady on. What if I had feelings? 😂

 

Go to Whitley bay if you want to see Insanity. 750k for a bang average sea front terrace. 

 

Agree with DB, it's Durham and teesside where the value is, even then parts of teesside are going nuts. 

 

Northumbria is cheaper and stunningly beautiful. 

[Hancock]

12 minutes ago, sancho panza said:

obviously there' s huge dyodd warning here,however,that bit in bold right there is where I am tbh.

I posted some charts recently showing BATs/BLT from 2000.They actually rose through a 705 broad market drop.That's value investing and that's what a  lot of teh chat on this thread is taken up with.

There are issues in terms of whetehr we get a deflationary 'big kahuna ' type wave washing through markets,I certainly think it's a given we'll see the likes of Tesla 70% off peak and a lot more big tech besides.Whetehr we will see the run down in oilies we got last year is a thing I'm beginning to doubt.

Housing markets look frazzled imho and far more susceptible to a BK type wave washing through the levereaged residential and commercial landlords.

Our average price for RDSB as a family isn't far from where we are now £12.00-13.00,BP slightly below £3 somewhere around but for me these were potentially generational buys I might pass onto my kids if the worst happens in ten years.Our little family unit works so that if anything happens to me,the dividends will be flowing while my Mum/Mrs P start working through the book of instructions I've left them.(Generational buys being things you could hold 15-20 years+)

Having said that if we get a super spike in the oilies,I might sell them if I can be sure I'll be able to buy more back but given RDSB's 2008 low was £15 it's got to be a sure trade if tehy're under that.

I'm working at the moment so my body is away from the internet, thus mind is away from investing .... though my insomnia meant i watched David Hunters latest 30 minute interview where he's still sticking to his BK scenario.

But since i've made the decision to emigrate, i am contemplating sticking £50,000 in BP, if i can get it for £3, and £50,000 in RDSB if i can get it for £12.50 .... which is about the levels i got them for when laddering ... bit of a gamble sticking them in 2 companies but will still have circa £150,000 should a BK happen.

I did post last week that i got the perception the people on this topic, were starting to get a sense of FOMO and weren't so certain about a BK, do wonder if this way of thinking is correct as the good thing with having a mind is you can change it ... or if its a touch of group think going on.

Googles new shares search showed Barrick is merely up 20% in 5 years, half tempted to drop 10k in there as well!
https://www.google.com/search?q=barrick+gold+shares&rlz=1C1CHBD_en-GBGB864GB864&ei=-OK4YL3KKsf4gQaisZnABw&oq=barrick+gold+s&gs_lcp=Cgdnd3Mtd2l6EAEYADIFCAAQkQIyCwgAELEDEIMBEJECMgUIABCRAjICCAAyAggAMgIIADICCAAyBQgAELEDMgIIADICCAA6BwgAEEcQsAM6BwgAELADEEM6HAguEMcBENEDELADEMgDEEMQiwMQqAMQ0gMQkwI6GQguEMcBENEDELADEMgDEEMQiwMQqAMQ0gM6FwguEMcBENEDEJECEIsDEKgDENIDEJMCOgUIABCLAzoLCAAQsQMQgwEQiwNKBQg4EgExUMcLWKcWYJYpaAFwAngAgAGpAYgB8wKSAQMxLjKYAQCgAQGqAQdnd3Mtd2l6yAEPuAECwAEB&sclient=gws-wiz

[Hancock]

16 minutes ago, ThoughtCriminal said:

Fucking hell H, steady on. What if I had feelings? 😂

 

If you had feelings you'd not have made the move from HPC!

But after my visit south, if it was the choice of renting some shite terrace for £1300PCM in the south/buying it for £350k; or getting a 3 bed detached house in the Durham to Smoggyland area for circa £180k then the latter has to be the better option for a simple and easier life.

(i do prefer to work with Smoggy's than people from Newcastle area, seem slightly less up themselves, though i'd never admit it in public)

[sancho panza]

 

 

On 31/05/2021 at 23:08, Majorpain said:

In a nutshell China is getting old before its getting rich, its interesting reading from the article how many people are priced out of having children.  How Western!

Robots are good at many things, but it will be a long time till they are looking after the elderly.  It will probably happen in my lifetime, but not quickly enough for the CCP.

I agree,I think China has a huge problem demogrpahically.Paul Hodges has written extensively on it.China has substantial problems inbound

https://www.icis.com/chemicals-and-the-economy/2021/03/chinas-dual-circulation-policy-aims-to-reduce-debt-reliance/

China is usually the case study for this analysis, as the chart confirms. It shows the rise in debt from 2002, when official data begins, versus the rise in debt. One would hope that the borrowing would have had a multiplier impact, creating value. But in reality:

• Debt grew from $2tn in 2002 to $39tn in 2020, as measured by Total Social Financing
• GDP grew from $1.5tn to $13.2tn, according to the National Bureau of Statistics

Even if we leave aside the problems associated with China’s GDP data – uniquely for a major economy, it is reported almost immediately  and never revised – we still face one key issue.  Each dollar of debt fails to increase GDP by the same amount.

In the 2002-2008 period, each dollar of debt only created $0.41 of GDP growth. Since then, each dollar has created only $0.45c of growth. So the value created by each dollar is less than half the cost of the debt created.

THE SPECULATIVE REAL ESTATE BUBBLE IS HARD TO CONTROL

I’ve been updating on the bubble for as long as I’ve been writing this blog. And like all speculative markets, it simply gets more and more insane.

I featured this “egg house” as long ago as December 2010 as an example of the way that China’s gender imbalance (117 boys to every 100 girls) gives prospective father-in-laws great leverage when assessing whether the prospective husband can properly support their daughter.

The housing market is around 25% of GDP, and has never been known to fall. 

LOCAL GOVERNMENT DEBT IS OUT OF CONTROL

A long and detailed analysis in China’s financial paper, Caixin, highlights Beijing’s latest attempt to bring local government debt under control.  It notes that:

“A report by Bank of China Ltd. in June said that the hidden debt of local governments likely amounted to Rmb49.3tn ($7.6tn) at the end of 2019, equivalent to nearly half of China’s GDP in 2019.”

 

 

https://www.icis.com/asian-chemical-connections/2019/02/chinas-fall-in-births-and-economic-decline-may-be-impossible-to-fix/

China’s economic success has been largely built on a surplus of young workers willing to move from rural to urban areas to work in factories making very cost competitive goods for export to the West. This surplus has now disappeared and is becoming an ever-growing deficit of young people.

China is in danger of becoming old before it is rich. Despite tremendous economic growth over the last 30 years, it remains a poor country relative to the West. China’s average per capita income was just $8,827 in 2017 versus $59,532 in the US, according to the World Bank. The IMF has warned that China’s pension and healthcare liabilities could rise to 100% of its GDP.

Between 2015 and 2040, China’s population aged 50 and over will increase by roughly 250m as the population under 50 falls by the same amount. During the same years the 15-29 age group – which across all modern societies has the highest education and is the most IT and tech savvy – will shrink by 75m.

Equally as bad will be the fall in the 30-49 age group during this same time frame. It is forecast to fall by a quarter or by more than 100m. This is the generation that tends to be the most innovative and entrepreneurial.

The only cohort that will grow in size will be the 50-64 age group and those over 64. In 2015-2020, the 65+ population will jump by almost 150% – from 135m to close to 340m.

On 01/06/2021 at 05:13, Barnsey said:

https://www.theguardian.com/business/2021/may/31/uk-growth-upgraded-but-oecd-warns-of-deepest-economic-scar-in-g7-brexit-covid-19

Key part:

The OECD examined how much potential output has been lost because of the coronavirus crisis, by comparing the latest projections for national income levels in 2025 with pre-pandemic forecasts.

It found that Japan, Canada and the US will only suffer limited scarring, with the US economy expected to be larger than previously forecast in four years’ time because of massive government stimulus.

Where the U.S. leads, the ROW follows...

 

The US GDP is only growing becuase it's debts are growing faster.Context is something modern journo's don't seem to do.

[ThoughtCriminal]

3 minutes ago, Hancock said:

If you had feelings you'd not have made the move from HPC!

But after my visit south, if it was the choice of renting some shite terrace for £1300PCM in the south/buying it for £350k; or getting a 3 bed detached house in the Durham to Smoggyland area for circa £180k then the latter has to be the better option for a simple and easier life. 

True! 

 

You ever looked at Thirsk area? Lovely little place and good value for north Yorkshire. 

 

Good transport links too. 

[planit]

3 hours ago, JMD said:

Yes, I've written before that the 'war' analogy works for me (to 'help' focus my own personal investment macro thinking, etc). But context they say is everything. Ie Do you think the political policy ramping is for control/social reset reasons, or for inflation-rip/economic reset reasons? Or maybe both/neither/other? 

Neither, I think the political class are spineless idiots all acting in their own interests and they take every action on a

'will this make me look better/worse in the polls' basis.

Every idiot acting in their own interests has interesting outcomes, like a school of fish avoiding a shark. The individual effects are very small but the outcome is very visible.

 

Edit: to make clear that the political class don't care about the environment and no one cares enough about their personal carbon footprint to actually impact their lives adversely. So the politicians are just making decisions to look good and avoid negativity. 

[sancho panza]

 

On 01/06/2021 at 23:39, DurhamBorn said:

Its really difficult because a lot of capital will be pulled from the financial system for spending and investment as things open.With the repo situation its crucial the governments keep fiscal injections going for a good few months yet.I think a BK that takes everything down is getting less likely,so it could be a quick 15% off some areas as others crash and a rebound in inflation sectors.However if the BK came from flaws in the derivative markets it could still take everything down.

Im trying to look at my roadmap across sectors and where i see them in 2028/30 and for that i see a treble including divis as likely in most of our areas.

The banks balance sheets in the US and UK are fine,Europe is a problem.I think a reflation is certain now though,and looking at the structure of the recovery and the political situation the energy complex and inflation are now in a feedback loop.Higher energy prices,higher inflation,higher rates,less green investment,oil and gas higher and higher.Im not sure of the structure of green projects debt and if it needs rolling over or if it amoratises over the loan,but if much needs rolling over they will be loss making mid cycle.

It needs remembering as well inflation and more energy inflation means building renewables is going to get a lot more expensive,apart from for big oilies.They will have exploding cash flow.

The liquidity is fast approaching the level where it will eat away government and private debt,so if we do see big falls in some areas its likely a direct transfer to something else.

 

Before I begin rambling,I'd like to define a BK (to me) as a huge generational deflationary wave in the credit markets.

There are a few caveats when I predict a BK(and I do) and that's that whilst one may not be apparent from looking at nominal GDP if fiscal stimulus is added immediately and to good effect,it will still have an effect in terms of structural unemployment as the stimulus is put through govt rather than the banks.

In terms of the banks,I'm not sure the UK banks are fine.I think the US faces a different set os issues given that fannie and freddie are such a big part of their mortgage lending bubble.The UK banking sector jsut doesn't have that fall guy in place to tkae the biggest hit.

If we take HSBC's msot recent set of accounts as an example.(Let's remember they get something like 60% of their profits from Hong Kong.)

Balance sheet gives shareholder equity at 6.5% of assets.But that comes with a warning about risk weighting assets using IRB approach which is based on their own data rather than the standardized approach used by smaller banks(and likely less skewed by sample bias)

If we dig a little deeper.Goodwill and intangibles=$20bn,

net laons and other assets $2,417,846mn 2020 up from $2,103,091mn 2017 so the increase is nearly one and a half times equity.

deposits have grown to $1,765,749mn in 2020 from $1,517,271mn an increase of $248,478 mn or one and a quarter times.

long story short it won't take much of a hit to HK/UK home prices/CRE or a drop in deposits and HSBC is heading up rights issue creek.

if we take the preferred measure of capital adequacy from Prof Kevin Dowd& Dean Buckner  then HSBC's capital ratio is

$124bn/$2984bn=4.1%

and HSBC is probably the pick of the bunch.

from May 20

http://eumaeus.org/wordp/wp-content/uploads/2020/05/Can UK banks pass the COVID-19 stress test 6 May 2020.pdf

The core metrics of the Big Five UK banks have deteriorated sharply since the New Year, and even more since the end of2006, i.e., the eve of the Global Financial Crisis. Their market capitalisation is now £140.6billion, down 61% since December 2006; their average price-to-book ratio is 39.2%, down from 255% at end 2006; their average capital ratio, defined as market capitalisation divided by total assets, is 2.3%, down from 11.2% at the end of 2006; their corresponding leverage levels are 43.3, up from 8.9 (end 2006). By these metrics, UK banks have much lower capital ratios and their leverage is nearly 5 times what it was going into the previous crisis.

 

 

 

On 02/06/2021 at 13:16, DurhamBorn said:

Where people go wrong with a reflation cycle,is they think there is going to be a big recession and mass unemployment.However this isnt how inflation does its work.CBs and governments are doing everything they can to stop unempolyment with massive fiscal interventions.This isnt about 15% of the workforce losing their jobs,its about 50% of the workforce seeing their wages and savings inflated away.Reflation cycles favour assets over services and brain jobs.

So where the real damage will be done is to service industry workers spending power,and here i mean the middle class range of jobs upwards.

Employers in lots of sectors will have to pay much more,and service sector jobs will pay more,just not as much as inflation thats hitting them on every input cost.

 

As above DB,I jsut don't see a way we can get through the next ten years without a number of zombie companies and banks going to the wall.I've been a deflationist for 15 years at least now and I still hold to that.Where I've been persuaded to alter course is in this transfer from bank stimulus to govt stimulus and the inflation that will result.I was listening to an excellent jeff Snyder interview on Macrovoices the other day and whislt I hear his argumetns,I think a lot of deflationistas aren't getting their head around the size of the hole we're in and are relying on govt utilising the same stimulus methods psot BK as they did post 2008.

Overall small headline drops in GDP could mask a massive sectoral shift.Personally,I think we're headed for a junk bond collaspe/CRE collapse/Rresi collapse and all the resultant bail outs that will be needed to keep voters in their homes.Further zombifying an already zombified economy.

The worst of all worlds is where we get defaltionary collapse and rising prices.I feel too many deflationistas eg Snyder/Rosenberg think that credit deflation and price inflation are mutually exclusive.They're not imho

[sancho panza]

22 hours ago, Lightscribe said:

One look at any inflation article on the FT comments section and most think house prices will continue to rise with inflation. If salaries kept up with inflation too you could argue that maybe the case.

I look at house values as ‘growth’ assets like the FAANGs. They’ve risen into sky high bubble territory with QE since 2008 with asset inflation in a low interest rate environment. But rising interest rates will change the whole ball game, just the same as we’re investing in ‘value’ commodity stocks that will (hopefully) outperform inflation and see the market following shifting allocation away the under-inflation performing ‘growth’ sector that’s already in a bubble.

The housing market is linked to debt. There’s 2.5 million BTL landlords of which 60% are 55 years or older owning multiple properties and have been investing to seek a return in a low interest rate environment. Most will have paid off their own property, but with BTL mortgages if the tide turns their own house would be up for collateral.

The demographic is also a ticking time bomb, as the older generation die out there will be an oversupply of 3/4/5 bed houses. The younger generation are settling down far later in life, due to shouldering the costs of 40 years of disinflation. High housing costs, student debts, minimal savings mean they’re not having kids like their parents would have. Why would they need a 4 bedroom house, with no hope of paying it off on a 35/40 year mortgage, especially with the costs of running it rising with inflation and possible property levy or land value tax?

Rising interest rates will also mean that mortgages rates will be going up and will become harder to fill the requirements to borrow. The myth is that it’s supply and demand behind it all when it’s entirely down to the banks willingness to lend. People will happily borrow themselves into millions of debt if they could, but in an inflationary environment the costs will become increasingly harder to meet the repayments.

The unwind could happen in two ways. Either with declining annual housing value statistics it causes a mass rush for the exits (could also at the same time of the BK). Or a slow stagflation and gradual decline in prices not keeping up with inflation and demand decreasing. Of course this will be area dependant at first, but what happens in the London then ripples out eventually.

London has relatively flatlined now for years, most new build flats have already gone into negative equity with a backlog of cladding and fire safety requirements, and on top of all that it’s lost a million in population which may never come back with WFH. That in itself will have a knock on effect to coffee shops, restaurants and the service industry dependant on traffic.

The annual statistics had already begun to turn at the start of the pandemic, but the stamp duty prop made sure to skew statistics up the higher end nationally and staved off the inevitable, whilst the FTB was priced out even further. With that link now gone it’s only now a matter of time.

I personally think it will be panic stations due to the sheer amount of this countries finances tied up in property. If they see rising interest rates, most will want to sell up to put it in the bank which will be far easier returns than the stress of evicting tenants which will be instilled in their mind fresh from the pandemic.

 

This is a super explanation and I'd agree with msot of it @Noallegiance. The only thing I'd emphasize is the fragile nature of many UK banks balance sheets,issues with risk weighting models etc.A mortgage crunch/downward price spiral is the msot likely outcome here and as per my psot on HSBC,the UK banks are in worse shape than 2006 mainly because they never had to pay the price for being overleveraged in 2006

15 hours ago, wherebee said:

Anybody predicting a fall in oil demand from 100 to 25 is smoking crack and has drunk the cool aid.  Will China stop buying oil?  Will India?  Will Indonesia?  Will Malaysia?  Will Vietnam and Pakistan? You're looking at almost half the worlds population in that circle.  Will they fuck

The pressure will exist in the west for oil companies to to green stuff, but the oil demand will not go away (unless, as I say before, we have a new energy source/tech uncovered - cue the aliens on the other thread destroying my oilies investments).

As an example, I got this re Woodside:

• Australian operator Woodside Petroleum is looking to develop a large-scale solar project in Western Australia that could provide power for its Pluto liquefied natural gas development.
• The proposed Woodside Power Project would consist of roughly 210,000 solar panels, which the oil and gas operator claimed would make it one of the largest solar projects in Western Australia.
• Woodside is also evaluating supplying a further 50MW to Perdaman's proposed urea facility on the Burrup Peninsula, which will produce blue ammonia from natural gas.
• Woodside acting chief executive Meg O'Neill said the proposed Woodside Power Project was part of the company's vision for large-scale supply of renewable energy to existing and future industry on the Burrup Peninsula.
• Woodside stated Thursday it had already carried out a range of environmental, geotechnical and engineering studies for the proposed power project and was now progressing key stakeholder consultations ahead of seeking regulatory approvals.

I think the otehr option for the likes of Shell is to delist from countries like hooland and find a more receptive jurisdiction to home yourself in.

 

[sancho panza]

4 minutes ago, Cattle Prod said:

One thing I noticed about both Snyder and Rosenberg is recency bias. They are not looking back far enough. "QE1, 2,3,4 didn't work so why would it now?" or "Velocity of money has been dropping for the last ten years" or "Japan". They aren't looking at the 40s or even the 70s. I try and listen to them to check my own bias, but I find it a narrow view.

Me too.I was too focused on what the banks would/could do/aggregate demand and it's mainly thanks to @DurhamBorn that I've been able to learn about the possiblity of govt stimulus replacing credit demand.

I'm still a credit deflationist,but I now think we'll see rising prices (there'll be the odd Hunter freak pullback) in msot commodities and anyhting bought with cash eg food.Prices down in things bought with credit eg housing.

[Loki]

I am confused why the DXY has rocketed on the day Russia announced it is selling its dollar assets - does this mean there was a lot of demand for them?

Just trying to understand, I am not concerned.

[DurhamBorn]

1 hour ago, sancho panza said:

Me too.I was too focused on what the banks would/could do/aggregate demand and it's mainly thanks to @DurhamBorn that I've been able to learn about the possiblity of govt stimulus replacing credit demand.

I'm still a credit deflationist,but I now think we'll see rising prices (there'll be the odd Hunter freak pullback) in msot commodities and anyhting bought with cash eg food.Prices down in things bought with credit eg housing.

I think thats right,governments replacing other forms of credit was what most people missed.I always learned that it was the fear of unemployment that fired up the 70s inflation and that the oil shock and unions etc were simply after affects for all the liquidity.Its striking how history is repeating here.Governments fear of unemployment and another looming energy crisis.It was obvious credit would fall,but its interesting to see why and how.The repo market is saying their is nobody solvent to lend it too for a positive return.So governments grow the economy or nobody does,at least for  while longer.

 

[Hancock]

1 minute ago, DurhamBorn said:

.Governments fear of unemployment

That is true.

https://www.independent.co.uk/news/uk/politics/furlough-extension-uk-michael-gove-b1858798.html

[Loki]

Why did they import a load of labour from Eastern Europe if they're scared of unemployment?  

[Castlevania]

2 hours ago, Loki said:

I am confused why the DXY has rocketed on the day Russia announced it is selling its dollar assets - does this mean there was a lot of demand for them?

Just trying to understand, I am not concerned.

Better than expected economic data was released.

[Loki]

2 minutes ago, Castlevania said:

Better than expected economic data was released.

That makes sense, thank you