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


spunko

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6 hours ago, DurhamBorn said:

Remember how much money is parked in bonds.The first sniff or reflation and that will flood into real assets.Velocity on steroids.The bond market wont blow up the real economy when it pops,it will instead cause some real old style inflation.

DB, do you plan to cycle into gilts in this period, as prices collapse and yields sky-rocket, in order to lock in long term guaranteed returns?

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5 hours ago, JMD said:

Any thoughts on Schiff's prediction, between 25-27 mins - he says the overriding political desire to prevent a US market crash will be the active driver for massive money printing - his point being during the build-up to next presidential elections the US government is prepared to sacrifice and devalue the dollar in order to make it appear to voters economy is doing fine - i.e. despite a fall in the real value of US stocks their nominal value will remain same.

Conspiratorial in terms of the political mischief maybe, but I suppose if dollar falls, investors in UK will effectively still be able to buy US stocks at cheap price (in pounds). I guess my question is do the specifics of any political maneuverings or market mechanics matter that much in terms of how the debt deflation and the coming reflation cycle plays out? 

 

 

I would think not, the debt deflation is global and pretty much guaranteed now, Trump played a part in foolishly keeping things going with his tax cuts, if he allowed things to collapse he could have lay blame at the door of the previous administration AND had ample opportunity for a recovery into the 2020 election. Now it seems along with his trade war (necessary long term) that he's carved his own political coffin.

If the bust occurs at the very start of 2020, and is perceived to be a mix of Fed over tightening and foreign factors, Trump may just be able to have the time in which to see some resemblance of a recovery, but unfortunately by then so many Americans will have been utterly traumatised by the wealth and social destruction, that I think the Dems (Warren?) will sweep up.

I think we see dollar down short term, then up strongly in the bust, and then a gradual decline over several years. God knows where the £ will be by then (especially with recent events), the one prediction I simply cannot make as have seen so many others either avoid at all costs or folks get it so wrong.

I believe Schiff is probably referring to what we might see rather soon before the bust, remember he's of the belief we go straight to stagflation/hyper inflation and don't have a deflationary bust first (because that would put a heck of a dent in his various Gold businesses).

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Could we be about to enter the final stock market melt up phase? 

- China has just agreed trade talks with US for October, dow futures surging on the news this morning

- No deal Brexit "off the table"

- Carrie Lam has withdrawn HK extradition bill

- China and India easing new car taxes 

- ECB and Fed to cut rates and announce QE this month (?), which will act to push long T bond yields back up in anticipation of bond purchases

- Positive car sales numbers out of US 

You can see how in a matter of less than a week (remarkably), pretty much all of the major political and economic headwinds have seemingly been temporarily dissolved as we enter what is usually a very turbulent couple months for the stock markets...

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2 hours ago, CVG said:

DB, do you plan to cycle into gilts in this period, as prices collapse and yields sky-rocket, in order to lock in long term guaranteed returns?

Towards the end of the cycle maybe.I will be roughly 55 by then so locking in high yields on long dated gilts and treasuries would be nice.However the end of the next cycle could see complete collapse.A lot depends on the structure and scale of the printing ahead and how the cycle develops.However the mistakes the Fed have made two years ago could see total collapse in around 8 years.Lots to get through before that though.

 

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2 hours ago, Cattle Prod said:

Cheers. Do you know of an instance where it hasn't? I'd like understand those conditions better.

No,we usually get high inflation,rising rates etc and that causes a recession/business cycle end.We have never had a debt deflation of this scale though,and the Fed have already been way too tight for the situation.The last time they made that mistake was the 30s,and if the war hadnt come then it would of made a double depression within a decade.

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To celebrate yet another China deal success, I've come up with a quick chart for silver.

image.png.42736b8263f3c8ce0803999adeb440c2.png

 

Markers as follows:

1) Fed's 25bp cut "definitely, totally, absolutely not a start of reversal of normalization policy"

2) China negotiations going extremely well, bigly!

3) We had a phone call with China, even if they don't know it. Great call, great leaders. Also, better get your electronics before Xmas.

4) The Chineese are coming to DC for a sleepover.

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My recent re-flation stocks having a good day.Going to have to be very careful here though and stick to strict ladders.Easy to get sucked in to buying more into strength only for a smack down when the markets wake up to the fact the easy money coming is too late.

ref.JPG

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Positioning for reflation lending after the bust (deletion of Brexit mine :P)

Ministers eye finance council to back post-Brexit deflationary bust lending

Quote

While there is little evidence to suggest that SMEs are finding it harder to access credit from major banks amid the UK's ongoing political crisis, there are concerns that SMEs could find working capital facilities curtailed in extreme circumstances.

Ministers are not expected to seek a formal guarantee from banks that they will lend specific sums after a no-deal Brexit deflationary bust.

Such a move would have evoked echoes of Project Merlin, the industry-wide series of pledges introduced in 2011 as bankers sought to rebuild their reputation in the aftermath of the financial crisis.

One of the institutions created during the last decade, the BBB, has a guarantee scheme called Enable which has capacity for SME lending of roughly £1bn.

The BBB's Enterprise Finance Guarantee, which supports SME lending, also has £300m in headroom.

https://news.sky.com/story/ministers-eye-finance-council-to-back-post-brexit-lending

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12 hours ago, DurhamBorn said:

I think $10,000 gold is likely at the end of the next cycle and $200 to $300 silver.The reason is because we will be right on the edge of a hyper inflation.I dont think we will tip over but the high on my road map says 21% inflation.That sounds crazy,but thats exactly what it says based on the amount of printing i expect to turn around this debt deflation.We will probably undershoot and 12%+ more likely,but a couple of years of inflation in double digits will be enough.What sets the next cycle apart for me is the fact everyone will be printing and everyone reflating.That will cause a 70s style period.

Remember how much money is parked in bonds.The first sniff or reflation and that will flood into real assets.Velocity on steroids.The bond market wont blow up the real economy when it pops,it will instead cause some real old style inflation.

Nice turn of phrase on velocity,sums it up succinctly.

Dread to think of the potnetial losses some bond holders will face if they don't get out in time.

11 hours ago, JMD said:

SP, any idea how the huge increase in liabilities in 2018 came about? 

As per DM answer ,looks like it was all about the buybacks.Borrowed money to drive earnings higher.I'll reshort that when the time comes but have had some losses in my US trades this year

There's a lot of those buyback queens that are drawing my attention.

9 hours ago, Democorruptcy said:

Share buybacks?

It seems incredible to me that 'returning billions to investors' is enabled by "the company incurred a lot of debt to fuel all these buybacks".

How can they have surplus money to return if they have to borrow to do it? It seems complete Ponzi. If ever companies had to have zero debt before they could do buybacks, the stock market would suffer a very loud hissing sound as the air came out.

 

And that DM is the question.

If it looks and smells like a dog poo sandwich,then it's a dog poo sandwich.

3 hours ago, Barnsey said:

Could we be about to enter the final stock market melt up phase? 

- China has just agreed trade talks with US for October, dow futures surging on the news this morning

- No deal Brexit "off the table"

- Carrie Lam has withdrawn HK extradition bill

- China and India easing new car taxes 

- ECB and Fed to cut rates and announce QE this month (?), which will act to push long T bond yields back up in anticipation of bond purchases

- Positive car sales numbers out of US 

You can see how in a matter of less than a week (remarkably), pretty much all of the major political and economic headwinds have seemingly been temporarily dissolved as we enter what is usually a very turbulent couple months for the stock markets...

Agreed a lot of things that have been reining enthusisasm in obvver the last month have receded,but I think we're about to enter a downdraft phase.Time will tell.

Ref schiff,worth noting he has been wrong a lot over the years.Some amazing calls particuarly in 07/08 but also some amazingly bad ones.

4 hours ago, Cattle Prod said:

Cheers. Do you know of an instance where it hasn't? I'd like understand those conditions better.

 

https://fred.stlouisfed.org/series/FPCPITOTLZGUSA

image.thumb.png.dccc4b6cbee508d8f6888b5780609f38.png

 

worth noting bond yield inversions 10/2 yr constant maturity

https://fred.stlouisfed.org/series/T10Y2Y

image.thumb.png.af62b0aa674578cdafa415a5e30e6735.png

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Talking Monkey
24 minutes ago, sancho panza said:

Nice turn of phrase on velocity,sums it up succinctly.

Dread to think of the potnetial losses some bond holders will face if they don't get out in time.

As per DM answer ,looks like it was all about the buybacks.Borrowed money to drive earnings higher.I'll reshort that when the time comes but have had some losses in my US trades this year

There's a lot of those buyback queens that are drawing my attention.

And that DM is the question.

If it looks and smells like a dog poo sandwich,then it's a dog poo sandwich.

Agreed a lot of things that have been reining enthusisasm in obvver the last month have receded,but I think we're about to enter a downdraft phase.Time will tell.

Ref schiff,worth noting he has been wrong a lot over the years.Some amazing calls particuarly in 07/08 but also some amazingly bad ones.

 

https://fred.stlouisfed.org/series/FPCPITOTLZGUSA

image.thumb.png.dccc4b6cbee508d8f6888b5780609f38.png

Which other buyback heavy companies have caught your attention SP

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43 minutes ago, DurhamBorn said:

My recent re-flation stocks having a good day.Going to have to be very careful here though and stick to strict ladders.Easy to get sucked in to buying more into strength only for a smack down when the markets wake up to the fact the easy money coming is too late.

ref.JPG

A new tide of QE will lift all boats it would now appear, but at least you have a hedged position. For me this is too much like trading that i am not skilled at. Im in the wait and see camp now with cash reserves to see which way the mkt goes. 

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12 hours ago, DurhamBorn said:

I think $10,000 gold is likely at the end of the next cycle and $200 to $300 silver.The reason is because we will be right on the edge of a hyper inflation.I dont think we will tip over but the high on my road map says 21% inflation.That sounds crazy,but thats exactly what it says based on the amount of printing i expect to turn around this debt deflation.We will probably undershoot and 12%+ more likely,but a couple of years of inflation in double digits will be enough.What sets the next cycle apart for me is the fact everyone will be printing and everyone reflating.That will cause a 70s style period.

Remember how much money is parked in bonds.The first sniff or reflation and that will flood into real assets.Velocity on steroids.The bond market wont blow up the real economy when it pops,it will instead cause some real old style inflation.

Those figures are scary. If that is the case my gold and silver will return me a significant seven figure sum. Sounds alot today but if my council tax say runs to say £8,000PA and a loaf of bread is say a £5 then will I have only really stood still?

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42 minutes ago, sancho panza said:

Ref schiff,worth noting he has been wrong a lot over the years.Some amazing calls particuarly in 07/08 but also some amazingly bad ones.

Been following him since roughly 2010 and viewed his backdated stuff.

I'd say early more than wrong. For me it's just a reflection that he may make money from equities but he knows the long term truth and positions heavily for it.

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59 minutes ago, kibuc said:

To celebrate yet another China deal success, I've come up with a quick chart for silver.

image.png.42736b8263f3c8ce0803999adeb440c2.png

 

Markers as follows:

1) Fed's 25bp cut "definitely, totally, absolutely not a start of reversal of normalization policy"

2) China negotiations going extremely well, bigly!

3) We had a phone call with China, even if they don't know it. Great call, great leaders. Also, better get your electronics before Xmas.

4) The Chineese are coming to DC for a sleepover.

With a bit of luck,all this good news and the end of trade hosilties will get some reductions on PM miners

Fres/HOCM down this am.

I'm hoping for(being realsitic here) some pull backs that would enable me to add some to SAND/OGC/IAM/FRES/HOCM/GUY/RIO2

 

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57 minutes ago, Talking Monkey said:

Which other buyback heavy companies have caught your attention SP

Theyve all been at it ,but the larger the are,the more able they are to leverage.

Jsut do a  performance sift on investing.com and you'll be hitting some of the biggies eg Apple.

 

 

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for inflation watchers,years pass and they still manage to convince themselves that the price of a hosue should be excluded from inflation figures

 

highlights are mine alone

https://notayesmanseconomics.wordpress.com/2019/09/04/today-has-seen-a-shocking-decision-on-the-retail-prices-index-or-rpi/

Today has seen a shocking decision on the Retail Prices Index or RPI

Posted on September 4, 2019

This morning the Chancellor of the Exchequer has announced his plans for the Retail Price Index or RPI. This is an issue close to my heart and something I have put a lot of time and effort into since its future became the subject of doubt in 2012. The moment we were told on Monday that today was the day I feared the worst along the lines of the saying “a good day to bury bad news”. With the Chancellor’s Budget Statement and the ongoing debate in Parliament over Brexit today has proven to be a day that the UK deep state thinks it can get away with something it has been angling for since 2012.

In essence HM Treasury has wanted to scrap the RPI because it is expensive in terms of the interest paid on UK index linked Gilts and for various pensions. Of course those making such decisions often benefit from RPI linked pensions it is for others and particularly younger readers that they want it to go. The last 7 years have seen various methodological efforts mostly around the formula effect but they have found themselves up against opponents like me and their cases have foundered and sunk.

Housing Costs

This is another area where up until today the HM Treasury effort had mimicked the Titanic. If we go back to 2002/03 the UK introduced a main measure of inflation that excluded owner occupied housing costs called CPI. Why? Well in a familiar theme it is cheaper for the Treasury as it gives a lower reading than the RPI, and more subtly when it is put in the GDP numbers it gives a higher reading ( averaging about 0,23%).

Next they though they could do better and find a way of measuring housing costs and further reduce the inflation number. That hit the barrier that house prices are soaring so instead of real numbers they decided to make some up. This is the Rental Equivalence system where they assume home owners pay rent to themselves when they do not. Rental Equivalence is the inflation version of Imputed Rents. In the UK the measure based on this is called CPIH and partly due to my efforts has been widely ignored.

House of Lords

The Economic Affairs Committee published a report in January after taking evidence from various sources including me and here is an example.

The Deputy National Statistician, Jonathan Athow, said that the lack of a measure of owner-occupier housing costs in CPI was its “major weakness”. Shaun Richards, an independent adviser to pension and investment funds, said that “if there is something untenable in my opinion it is a measure of inflation which completely ignores a very important sector which is owner-occupied housing.

In their report they then went on to reject the Rental Equivalence methodology of CPIH.

We are not convinced by the use of rental equivalence in CPIH to impute owner-occupier housing costs. The UK Statistics Authority, together with its stakeholder and technical advisory panels and a consultation of a wide range of interested parties, should agree on the best method for capturing owner-occupier housing costs in a consumer price index.

Over to the UK Statistics Authority

Here is their response to this.

In light of the 10 years of development and consultation, ONS are not minded to undertake any further engagement with users and experts specifically on rental equivalence and owner-occupier housing costs. There is never likely to be agreement on a single approach.

As no doubt many of you have spotted that is shifting the goalposts as the EAC from the House of Lords had rejected an approach. Why are they shifting the goalposts? Well they are back with the rejected approach.

ONS views rental equivalence as the correct approach conceptually for an economic measure of inflation, and one where sufficient data is available to make it practical. Of
course, they remain committed to ongoing monitoring and development of the CPIH and the Household Cost Indices.

Here is the crux of the matter. They have made a decision and regardless of the objections and argument they keep making the same decision. They lose the debate but come back again.Over time I have rallied support at the Royal Statistical Society ( which in another “accident” of timing is in a conference this morning and cannot reply) and as you can see above the House of Lords. So it leaves me mulling this from Hotel California.

And in the master’s chambers,
They gathered for the feast
They stab it with their steely knives,
But they just can’t kill the beast

Another problem with Rental Equivalence

Tucked away in the House of Lords report was something of a bombshell.

 We note that the private rental market is subject to its own distortions and may not provide a good proxy for owner-occupier housing costs.

The fantasy structure of Rental Equivalence relies on good data from ordinary rents. Just for clarity I have no problem at all with the concept of using rents for those who do. But there are two catches. They are hinted at in the quote above and let me specify them. There are doubts that the properties which are let are that similar to those which are owned. But more fundamentally I have seen experts post concerns that due to the mixture of new and old rents being incorrect in the survey used the number is up to 1% too low. Since it claims currently rental inflation is of the order of 1% that is quite an issue!

Research

This is something we are regularly denied as for example work was done around 2012 around the Formula Effect but has never been published. I and others are of the opinion that fashion clothing and more recently computer game pricing are factors here. Today is not for the detail but I wrote to both the EAC and the Treasury Select Committee on this subject on February 26th as follows.

My understanding of this which I have checked with others is that the exact impact of the change is unknown because the Office for National Statistics suspended its investigation into this back in 2012. Perhaps one day it will properly explain why it did this but for now the main issue is that we do not know the precise impact until the proper research is completed and peer reviewed. I am sorry to have to point out that your letter is therefore potentially materially misleading and has already had a market impact on the price of index-linked Gilts.

This is a familiar theme where there are claims of research but when you ask for it then it does not appear. If I ever get a reply to that letter I will let you know.

I had other concerns but I am here just establishing a principle.

Comment

There are various conceptual issues here of which the simplest is that over the past 7 years the UK statistical authorities have pursued a campaign which has been one of propaganda rather than argument. We have done much better here as those of you who have followed the replies of Andrew Baldwin will know. He has made the case for the RPIJ measure which revealingly was first promoted but then abandoned by the UK statistical establishment when it did not give them what they wanted. Their behaviour was similar to a spoilt child taking their football home with them.

On a conceptual level the statistician Simon Briscoe has covered it well I think.

The details of the opportunities missed are in the table below but with ONS producing sub-standard documents like the infamous “shortcomings” paper, OSR failing (I think ever) to criticise anything that ONS has done on RPI, and the UKSA board not even trying to sort anything out (and being subservient to the Treasury), there is little hope.

https://simonbriscoeblog.wordpress.com/2019/09/03/how-poor-governance-led-to-the-problems-with-the-rpi/

The OSR is the Office for Statistics Regulation to which I gave evidence and I would say they ignored it but for the fact I believe it went straight over their heads.

Let me also address why the Bank of England supports this. Their main game is to inflate house prices. So if you keep house prices out of the inflation measure it is all growth or from their perspective jam today. First-time buyers or those trading up face inflation and face in many cases unaffordable properties yet according to the inflation numbers they are better off!

But there is a glimmer of good news. I suspect that the Chancellor Sajid Javid thought he would kick this particular can onto somebody else’s watch.

Today the Chancellor has announced his intention to consult on whether to bring the methods in CPIH into RPI between 2025 and 2030, effectively aligning the measures.

I intend to continue to fight on as the establishment view has crumbled so many times before. There is hope around the Household Cost Indices mentioned above although they are a good idea which the establishment are trying to neuter ( You will not be surprised that it is in the areas of housing costs and student loans). So let me leave you with the Fab Four.

The long and winding road
That leads to your door
Will never disappear
I’ve seen that road before
It always leads me here
Lead me to you door

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Otavio (Tavi) Costa @TaviCosta

Keeps getting worse. Another contrarian indicator at its highest level in 40 years! Consumer confidence-to-sentiment ratio at a cyclical high? Happened prior to every recession. Now spiking after sentiment had its worst monthly drop in 7 years. Stocks never looked so toppy.EDo5mIbVUAEvFWg.jpg

11:04 AM - 4 Sep 2019

 

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2 hours ago, Agent ZigZag said:

Those figures are scary. If that is the case my gold and silver will return me a significant seven figure sum. Sounds alot today but if my council tax say runs to say £8,000PA and a loaf of bread is say a £5 then will I have only really stood still?

Yes, but almost everyone else will have moved backwards. Nice position to be in... until the tax bill arrives, anyway.

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My harmony top slice sell order for a free ride didn't go through earlier, not as problem I thought at the time but a tad annoying now!

Oh well, have to wait another few weeks I suppose.

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2 hours ago, sancho panza said:

I'm hoping for(being realsitic here) some pull backs that would enable me to add some to SAND/OGC/IAM/FRES/HOCM/GUY/RIO2

 

Fill your boots :)

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7 minutes ago, Majorpain said:

My harmony top slice sell order for a free ride didn't go through earlier, not as problem I thought at the time but a tad annoying now!

Oh well, have to wait another few weeks I suppose.

I resolved to shift some of my goldies once the North American markets opened too...

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13 hours ago, Democorruptcy said:

Share buybacks?

It seems incredible to me that 'returning billions to investors' is enabled by "the company incurred a lot of debt to fuel all these buybacks".

How can they have surplus money to return if they have to borrow to do it? It seems complete Ponzi. If ever companies had to have zero debt before they could do buybacks, the stock market would suffer a very loud hissing sound as the air came out.

 

DM, I was aware of corporate share buy-back manipulation, but $10Bn for Starbucks in one year using borrowed money - wow, I mean wow!! Ok, perhaps shouldn't be surprised given the information and wisdom regularly contributed to this thread but these figures are truly the stuff of the Twilight-Zone. I'm assuming the loans were short duration ones (stupid ceo), and not 0.0005% 20 year sbux corporate bonds (clever ceo?).       

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