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

[Yellow_Reduced_Sticker]

2 hours ago, Errol said:

This wasn't me. I already have one.

...

 

@dgulThe other thing is when house prices collapse, many here saying 50% or even by 70%

When i bought my 1st house in 1987 price was 65k it hit 90k in 1989 ...in 1993 when the dust settled they were going for 30 / 35k...

now roll on today, in the SE average semi where i live, they are £400k can you imagine debtors taking a hair-cut with negative equity and being DOWN by £200K and still paying, i'll say this... back in 93 being down by 30k wasn't a big deal but if i was down by £200K f**k i think i'd be looking for a rope to hang myself!

interesting times ahead thats for sure, btw, hope ya make some sense of this post as i'm drinking some cheap french tesco larger £3.60 for 10 bottles!

 

 

 

[Thorn]

2 hours ago, Errol said:

This wasn't me. I already have one.

Thought you might alright!😎

[dgul]

37 minutes ago, Yellow_Reduced_Sticker said:

...

 

@dgulThe other thing is when house prices collapse, many here saying 50% or even by 70%

When i bought my 1st house in 1987 price was 65k it hit 90k in 1989 ...in 1993 when the dust settled they were going for 30 / 35k...

now roll on today, in the SE average semi where i live, they are £400k can you imagine debtors taking a hair-cut with negative equity and being DOWN by £200K and still paying, i'll say this... back in 93 being down by 30k wasn't a big deal but if i was down by £200K f**k i think i'd be looking for a rope to hang myself!

interesting times ahead thats for sure, btw, hope ya make some sense of this post as i'm drinking some cheap french tesco larger £3.60 for 10 bottles!

Yes.  We'll have negative equity and it'll have catastrophic effects on the housing economy.

IMO OOs will hang on (helped with legislation).  The killer will be BTL, where banks won't allow refinancing where there isn't sufficient equity, resulting in an avalanche of sells as investors have to sell choice properties and take whatever return they can to try to get their ltv high enough for the remainder of their portfolio.

But, at the same time we've got 'everyone' knowing that there's nothing quite like bricks'n'mortar and we'll have people buying the dips all the way down.  This is why I think that after a quick sharp shock we'll have a slow relentless grind down for 30 years, until there's no housing bulls left.

[dgul]

Any guesses as to the price of oil when the market opens tomorrow night?

[and what'll happen next...]

[Ashby]

9 minutes ago, dgul said:

Any guesses as to the price of oil when the market opens tomorrow night?

[and what'll happen next...]

Who knows, but I’m seeing £1:49 at some BP petrol stations around.  This week might start to pinch!

[dgul]

55 minutes ago, dgul said:

Any guesses as to the price of oil when the market opens tomorrow night?

[and what'll happen next...]

For the 'what next' I suppose I'll start with my ill-informed guesses:

• Oil up (duh).  Something like $75ish spike is my guess.  Not sure if it ramps up from there or sinks back to $60s
• Dollar up (? -- depends on geopolitics).  Euro down.  Pound not sure.
• US Stocks down (surely)
• UK stocks ?
• Treasuries up (yields down).
• Emerging markets down.
• Financial stocks ?
• PMs -- you'd have thought they would go up, but not clear (ie, the currency effect clouds).  The geopolitics is positive for PMs -- if Trump tweets...
• PM Stocks -- not clear (gold price vs cost of production).

[DurhamBorn]

14 hours ago, A_P said:

Not always though. There seems to be more good years than bad.

Too expand on this surely it would be the over leveraged (not strictly housing) and the poorly allocated/diversified that would suffer. But then they likely suffer all the time

Yes,but the poorly diversified is most of the population.Leverage is the key like you say.The CBs responded to the macro situation by holding rates low and QE.It was for the governments to keep house prices down through other means,instead they decided to inflate the bubble even more.HTB alongside tax credits probably the worst political policies of the last 20 years.At best going forward people buying them in the last few years will have a long difficult grind ahead,and for a long time.

[Majorpain]

35 minutes ago, Cattle Prod said:

Opec can open taps again like they do just before quotas are set to take the sting out, but that can only be done temporarily as they are damaging their fields. They need to get Saudi online quick. Saudi has been stupidly drawing down it's inventory since 2016 (as they don't want to admit their fields are in decline), so that won't last long either. It was at ten year lows before this. 

OECD storage? Price was ~80 a barrell in 2018 at the same inventory level as today, and ~110 a barrell in 2013 at the same level. The only difference is sentiment, and as I keep saying perception of supply. I mentioned recently that its almost like something needs to "break the spell" over oil markets, and this is probably going to do it. They have been so, so complacent on the supply side.

Could be violent. Price action, and sadly, the other kind of violent. I hope they get it sorted out.

Interesting thanks, i didnt think it was a co-incidence that the Saudis are still trying to flog a chunk of Aramco off, no doubt the difference in valuation between $50 oil and $100 must be hundreds of billions of dollars.

If your right then the 5% of oil thats just gone offline will make things interesting next week, not to mention the markets getting a dose of uncertainty that the rest of Saudi oil supply is vulnerable to a good Houthi (Iranian) droning.

[A_P]

31 minutes ago, DurhamBorn said:

Yes,but the poorly diversified is most of the population.Leverage is the key like you say.The CBs responded to the macro situation by holding rates low and QE.It was for the governments to keep house prices down through other means,instead they decided to inflate the bubble even more.HTB alongside tax credits probably the worst political policies of the last 20 years.At best going forward people buying them in the last few years will have a long difficult grind ahead,and for a long time.

They are not poorly diversified in their tracker pensions though. Very much on the contrary. 

People will always have a long grind, it's the nature of the beast. Their house underwritten by the gov will keep a roof over their head in most circumstances.

13 hours ago, Napoleon Dynamite said:

Just wanted to say thanks for the thread.  I've not commented much, or even invested off the back of it until recently, but I've followed from the start and tried to learn.

My cashflow's got a bit better lately and I've got some fundamentals in place (10 year low rate fix on mortgage, cars paid off, emergency fund etc.) So I'm now in a place to start trickling money in and building.

Plan is to save hundreds a month, then once I've got £1200 buy a share.  Spray and pray into FTSE 350 shares with information taken from this thread.  Two shares per sector.  Holding them long term.  Sound about right?

iweb looks like the best bet for me for a dealing account.  Will use an ISA to start with, then once I've built up a start using a LISA/SIPP for the Tax Relief.

Actually had a few thousand in a SIPP in Vanguard Life Strategy that I wasn't paying much attention to.  So sold that and I started with VOD and CNA last month, so far so good.  SIPP is HL and I think the fees are terrible for a small amount, will sort that out in future.

Will keep up to date with progress, assuming all goes to plan.

You may want to reconsider the fundamentals. You've taken a bet against the banks (10 year fix for your piece of mind?) but investing in one or two companies at a time. Some what of a contradiction it seems

 

11 hours ago, Yellow_Reduced_Sticker said:

...

 

@dgulThe other thing is when house prices collapse, many here saying 50% or even by 70%

When i bought my 1st house in 1987 price was 65k it hit 90k in 1989 ...in 1993 when the dust settled they were going for 30 / 35k...

now roll on today, in the SE average semi where i live, they are £400k can you imagine debtors taking a hair-cut with negative equity and being DOWN by £200K and still paying, i'll say this... back in 93 being down by 30k wasn't a big deal but if i was down by £200K f**k i think i'd be looking for a rope to hang myself!

When? How such certainty?

Your average 3-4 bed detached in the se is not going to drop 70% lol. 

[Harley]

So trump fires Bolton, who is Hawkish towards Iran, in favour of negotiation and Iran responds by an act of aggression?

[Errol]

52 minutes ago, Harley said:

So trump fires Bolton, who is Hawkish towards Iran, in favour of negotiation and Iran responds by an act of aggression?

More likely to be a planned operation by agencies operating in the shadows of the US administration. Or an Israeli special forces mission.

[DurhamBorn]

52 minutes ago, A_P said:

They are not poorly diversified in their tracker pensions though. Very much on the contrary. 

People will always have a long grind, it's the nature of the beast. Their house underwritten by the gov will keep a roof over their head in most circumstances.

You may want to reconsider the fundamentals. You've taken a bet against the banks (10 year fix for your piece of mind?) but investing in one or two companies at a time. Some what of a contradiction it seems

 

When? How such certainty?

Your average 3-4 bed detached in the se is not going to drop 70% lol. 

They very well might drop 70% inflation adjusted by 2030,though 50% might be more likely.I think trackers will way under perform over the next cycle.A distribution cycle with inflation will narrow the winners and amplify the losers.You need to remember its inflation adjusted that matters going forward.

In 1929 at the start of the crash it took stocks until May 1959  to pass that peak.30 years.When the markets topped out in 1966 it wasnt until September 1995,29 years, that they regained their worth.Thats regained,zero growth above inflation.A working lifetime,just to get back to the value it was.Now that doesnt count dividends,so the figures would be much better,and anyone averaging in would also see much better returns,but the average stock is a very very poor investment during a deflation event,or an inflation cycle.We could be about to witness both in a short space of time.

Notice the recessions on the graph.The Fed policy mistakes are the same as they were after the GD.That time everything turned south again due to tightening too soon and only war turned things.Very nasty time ahead the next decade or trackers i suspect.

[Loki]

2 hours ago, Cattle Prod said:

Just to clarify my view on timings - I agree fully with @DurhamBorn that we will have a severe sell off before a secular bull. What Ive been talking about is tight supply (or the perception of it) causing a spike with will probanly trigger the stock market crash proper, an a big oil selloff. I was thinking this year or early next year, then planned to exit oil as soon as the dollar bottoms (like 2008). I suspect the market has been waiting for someting like the drone attacks to snap it out of a stupor.

So a black swan yes, potentiallyto trigger a price spike. But not the secular bull to 200 or 300. Yet.

Great post, I didn't think the event would negate durhamborns 'roadmap'  and you've put into words the scenario I had in my head

[A_P]

42 minutes ago, DurhamBorn said:

They very well might drop 70% inflation adjusted by 2030,though 50% might be more likely.I think trackers will way under perform over the next cycle.A distribution cycle with inflation will narrow the winners and amplify the losers.You need to remember its inflation adjusted that matters going forward.

In 1929 at the start of the crash it took stocks until May 1959  to pass that peak.30 years.When the markets topped out in 1966 it wasnt until September 1995,29 years, that they regained their worth.Thats regained,zero growth above inflation.A working lifetime,just to get back to the value it was.Now that doesnt count dividends,so the figures would be much better,and anyone averaging in would also see much better returns,but the average stock is a very very poor investment during a deflation event,or an inflation cycle.We could be about to witness both in a short space of time.

Notice the recessions on the graph.The Fed policy mistakes are the same as they were after the GD.That time everything turned south again due to tightening too soon and only war turned things.Very nasty time ahead the next decade or trackers i suspect.

 

Somewhat disingenuous. Given the time, the world and all the changes that were going on etc. The stock market returns averaged out certainly weren't that bad. In fact they had a very good ROI. I'm not going to go digging for it, however from memory returns were quite significant by 1933 let alone accounting for total returns over the proceeding years. The average yearly return has been something around 10% (again from memory)

trackers will not underperform the market (bar a nominal tracking error). They track the market by their very nature. as the indices change the trackers will so to match. Only a few will be able to outperform the market. The whole point of trackers is investing in the market long term. Total return is key. i suspect any given year(s) could be nasty any asset class or location, but over years it gets averaged out

[Durabo]

I like to keep an eye on reddit as a sentiment indicator, and I saw this post today

 

$120k income, with $7541 take home monthly. Monthly debt servicing cost = $4190 NOT INCLUDING THE MORTGAGE. Unreal. Myself and my wife are completely debt free with a decent chunk of savings - although we do not own a house. I wonder how unusual this makes us compared to the wider popultion?

The stats I've found seem to suggest average household debt of 58k including mortgages. I've found a figure of 15400 for unsecured debt per household, rising from 11146 in 2008 - so about a 40% increase. 

https://www.theguardian.com/business/2019/jan/07/average-uk-household-debt-now-stands-at-record-15400

https://themoneycharity.org.uk/money-statistics/

[Durabo]

It's insane. In the meantime, me and my wife are getting fucked because our savings get fuck all interest and inflation is eating away at it. The current system rewards fecklessness and punishes the sensible.

[dgul]

13 minutes ago, Durabo said:

I like to keep an eye on reddit as a sentiment indicator, and I saw this post today

 

$120k income, with $7541 take home monthly. Monthly debt servicing cost = $4190 NOT INCLUDING THE MORTGAGE. Unreal. Myself and my wife are completely debt free with a decent chunk of savings - although we do not own a house. I wonder how unusual this makes us compared to the wider popultion?

The stats I've found seem to suggest average household debt of 58k including mortgages. I've found a figure of 15400 for unsecured debt per household, rising from 11146 in 2008 - so about a 40% increase. 

https://www.theguardian.com/business/2019/jan/07/average-uk-household-debt-now-stands-at-record-15400

https://themoneycharity.org.uk/money-statistics/

But don't you think that there are just too many people like that, and a simple 'bankruptcy' model won't work without blowing up the economy (and the banks)?

What's far more likely is for there to be some sort of debt forgiveness or at least mandated maximum interest rate (22%!).  They only need to get their CC and personal loan aprs down by a few % to get back to positive.

[Not to say that they're not mad and completely irresponsible -- but that's the median, not the outlier]

[AlfredTheLittle]

Could easily reduce those expenses by the 300 dollars a month he needs, or much more ( internet, phones, food, insurance - there must be 300 of savings there). His focus seems to be all on increasing income rather than reducing expenses. He doesn't seem too badly off to be honest, has some equity at least

[leonardratso]

got to agree there, we want to keep everything we currently do but cant finance it, rather than we need to get rid of some stuff we currently do that is sheer luxury and slum it for a while.

[Majorpain]

29 minutes ago, A_P said:

Somewhat disingenuous. Given the time, the world and all the changes that were going on etc. The stock market returns averaged out certainly weren't that bad. In fact they had a very good ROI. I'm not going to go digging for it, however from memory returns were quite significant by 1933 let alone accounting for total returns over the proceeding years. The average yearly return has been something around 10% (again from memory)

trackers will not underperform the market (bar a nominal tracking error). They track the market by their very nature. as the indices change the trackers will so to match. Only a few will be able to outperform the market. The whole point of trackers is investing in the market long term. Total return is key. i suspect any given year(s) could be nasty any asset class or location, but over years it gets averaged out

Your assuming that all the companies in the index will survive the recession, and not go under.  In that scenario the Index presumably would stay the same as new companies rotate in to replace the bust ones, but everyone invested in the tracker funds who owned shares would take a hit to their portfolio.  Equally a lot of the weighting is taken up by behemoths like Apple, if the index funds cant rotate out at a decent price to rebalance the overall portfolio then there will be another hit to performance.  

This is before you get to the firms offering redemptions whenever investors want, in a downturn when all the investors run for the exit at once its going to be Woodford x100 as liquidity dries up.  At least investing individually you only have to worry about company and broker solvency.

[DurhamBorn]

1 hour ago, A_P said:

Somewhat disingenuous. Given the time, the world and all the changes that were going on etc. The stock market returns averaged out certainly weren't that bad. In fact they had a very good ROI. I'm not going to go digging for it, however from memory returns were quite significant by 1933 let alone accounting for total returns over the proceeding years. The average yearly return has been something around 10% (again from memory)

trackers will not underperform the market (bar a nominal tracking error). They track the market by their very nature. as the indices change the trackers will so to match. Only a few will be able to outperform the market. The whole point of trackers is investing in the market long term. Total return is key. i suspect any given year(s) could be nasty any asset class or location, but over years it gets averaged out

True,but this thread isnt about tracking the market long term,its about the end of this cycle and the next one,probably a period of around 8 years.Passive investing is easy in a falling rate dis-inflation cycle.However during a full on reflation with rising rates alongside it passive investment should prove a very poor investment,unless you are tracking commods and inflation loving assets of course.The facts remain that after the last big debt deflation cycle,and after the last great reflation cycle it took a combined 60 years to make a profit if you bought at the top.Of course hardly anyone will be investing a big lump sum right at the top,and most will drip feed in and catch bottom,but dividends of 3% from companies seeing profits fall for a whole cycle and their shares with it will be poison in a 5% to 12%+ inflation economy.Inflation adjusted is going to be the test going forward.

Of course that could be wrong and we will only know what the direction of travel was by looking back in about 2028.Lets hope we are all still around to do it.

[A_P]

44 minutes ago, Majorpain said:

Your assuming that all the companies in the index will survive the recession, and not go under.  In that scenario the Index presumably would stay the same as new companies rotate in to replace the bust ones, but everyone invested in the tracker funds who owned shares would take a hit to their portfolio.  Equally a lot of the weighting is taken up by behemoths like Apple, if the index funds cant rotate out at a decent price to rebalance the overall portfolio then there will be another hit to performance.  

This is before you get to the firms offering redemptions whenever investors want, in a downturn when all the investors run for the exit at once its going to be Woodford x100 as liquidity dries up.  At least investing individually you only have to worry about company and broker solvency.

I'm assuming they'll survive? or you're assuming an apocalypse?

Weighing is defined by the index. So which index are you referring to? Holdings might be 100 or several thousand. Depending on the index Apple might be as high as 4% or 0%.

Most won't be running for the hills as they won't even know their money is in there lol.

[Castlevania]

1 hour ago, Durabo said:

I like to keep an eye on reddit as a sentiment indicator, and I saw this post today

 

$120k income, with $7541 take home monthly. Monthly debt servicing cost = $4190 NOT INCLUDING THE MORTGAGE. Unreal. Myself and my wife are completely debt free with a decent chunk of savings - although we do not own a house. I wonder how unusual this makes us compared to the wider popultion?

The stats I've found seem to suggest average household debt of 58k including mortgages. I've found a figure of 15400 for unsecured debt per household, rising from 11146 in 2008 - so about a 40% increase. 

https://www.theguardian.com/business/2019/jan/07/average-uk-household-debt-now-stands-at-record-15400

https://themoneycharity.org.uk/money-statistics/

If the private loan and credit card figures are correct he’s repaying ~$1600 a month. He’ll be fine. 

[A_P]

1 hour ago, dgul said:

But don't you think that there are just too many people like that, and a simple 'bankruptcy' model won't work without blowing up the economy (and the banks)?

What's far more likely is for there to be some sort of debt forgiveness or at least mandated maximum interest rate (22%!).  They only need to get their CC and personal loan aprs down by a few % to get back to positive.

[Not to say that they're not mad and completely irresponsible -- but that's the median, not the outlier]

They already have CC debt forgiveness in the US. Many don't know about it though. To cut a long story short, basically ignore the debt and the contact letters. After enough time by law the cc companies can no longer chase you and then it falls off your credit report.

Student debt though, there is no getting away from that.

[Majorpain]

41 minutes ago, A_P said:

I'm assuming they'll survive? or you're assuming an apocalypse?

Weighing is defined by the index. So which index are you referring to? Holdings might be 100 or several thousand. Depending on the index Apple might be as high as 4% or 0%.

Most won't be running for the hills as they won't even know their money is in there lol.

Both i think!  I still think 50% of UK construction companies are going to go out of business, we are up to about 10-15% at the moment so there is a long way to go.....

In a nutshell, the current market structure, with its focus on passive investing, has never been through a major downturn.  In that situation mechanically plowing money into an index, regardless of company fundamentals, will end badly when zombies start going out of business.   All im saying is there may well be a situation where the Index and its following ETF decouple as bankrupt companies drop out, with the ETF's money in them going to oblivion, whilst new companies join the Index.

Just because its never happened before doesn't mean it cant happen, double whammy of your money is trapped in the ETF whilst holdings within it are going to £0 (see Woodford!).