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


spunko

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sleepwello'nights

The more I follow the less I understand. Following the cut in US rates gold has fallen to $1485. My understanding was that as interest rates fell the lack of yield on gold would lead to its price increasing as the yields on alternatives would fall and the cost of holding gold with no yield would represent less of an issue. 

Where is my understanding incorrect.

By the way I finally pulled the trigger on the silver ETF I was hesitating about, I called the top :S.

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3 minutes ago, sleepwello'nights said:

The more I follow the less I understand. Following the cut in US rates gold has fallen to $1485. My understanding was that as interest rates fell the lack of yield on gold would lead to its price increasing as the yields on alternatives would fall and the cost of holding gold with no yield would represent less of an issue. 

Where is my understanding incorrect.

By the way I finally pulled the trigger on the silver ETF I was hesitating about, I called the top :S.

The market anticipates moves.  The movements in price recently (weeks) suggested that the markets were pricing in something between .25 and .5.  The move suggests that .25 was a bit lower than consensus.

I'd say wait a few hours (or even days) to get the full/true market response (currently we've got lots of stuff going on and it is difficult to tell).

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22 minutes ago, sleepwello'nights said:

The more I follow the less I understand. Following the cut in US rates gold has fallen to $1485. My understanding was that as interest rates fell the lack of yield on gold would lead to its price increasing as the yields on alternatives would fall and the cost of holding gold with no yield would represent less of an issue. 

Where is my understanding incorrect.

By the way I finally pulled the trigger on the silver ETF I was hesitating about, I called the top :S.

DYOR etc but from what I have seen it seems to take 2 days for the pm miners to start going up after a Fed cut. 

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24 minutes ago, sleepwello'nights said:

The more I follow the less I understand. Following the cut in US rates gold has fallen to $1485. My understanding was that as interest rates fell the lack of yield on gold would lead to its price increasing as the yields on alternatives would fall and the cost of holding gold with no yield would represent less of an issue. 

Where is my understanding incorrect.

By the way I finally pulled the trigger on the silver ETF I was hesitating about, I called the top :S.

Leads and lags.18 months ago the Fed was way behind the curve,its just hardly anyone saw that and still dont.They think the Fed need to ease,but you read everywhere how "loose" the Fed is.They are not loose,they are way too tight for this stage of the cycle.Rates can be zero and too tight.There is a dollar shortage now and thats forcing a debt deflation yet the Fed worries about inflation.

For me the play now is UK cyclicals.Everyone and his dog said sterling was going much lower at $1.20,but that is wrong and as it does the opposite UK cyclicals will continue to go up in price.

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43 minutes ago, dgul said:

The market anticipates moves.  The movements in price recently (weeks) suggested that the markets were pricing in something between .25 and .5.  The move suggests that .25 was a bit lower than consensus.

I'd say wait a few hours (or even days) to get the full/true market response (currently we've got lots of stuff going on and it is difficult to tell).

40 minutes later and strange things happen.

I find the whole thing really weird.

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Just now, Errol said:

EEvn0wDWwAAeNLo.png:large

Is it time for a big reversal now? Oil service stocks have underperformed the S&P 500 for nearly a decade....

I bought Schlumberger a few weeks ago and they are up 17% so far.I fancy a couple more,but want ones that have a history of paying decent dividends in good times,and also exposure outside of shale.

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UnconventionalWisdom
On 16/09/2019 at 15:01, janch said:

Whilst thinking about liquidity I have a question for DB or anyone else.  In the last cycle QE all went to the banks and found it's way into assets primarily housing in the UK and stocks in the US but in the next round of massive QE if DB is right why and how will it go into the real economy?  In the last one banks were supposed to lend to small businesses but somehow that never really happened.  Why will it be different this time?  Is it because the money will go to the government for infrastructure projects and the banks won't get any so none of it will end up as mortgage lending this time.

Just to add, I think that usually one can increase economic activity by reducing rates and QE. If your rates are at the floor and you get a crash, it would be difficult to justify more QE if it lead to economic collapse. Once rates are low and a recession hits, theres no way to make money cheaper and easier to borrow. In this environment the government has to put money into the economy to get it going again. 

"Big debt crises" by Ray Dalio discusses this with the long term and short term debt cycles. Well worth a read

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1 minute ago, UnconventionalWisdom said:

Just to add, I think that usually one can increase economic activity by reducing rates and QE. If your rates are at the floor and you get a crash, it would be difficult to justify more QE if it lead to economic collapse. Once rates are low and a recession hits, theres no way to make money cheaper and easier to borrow. In this environment the government has to put money into the economy to get it going again. 

"Big debt crises" by Ray Dalio discusses this with the long term and short term debt cycles. Well worth a read

It was interesting that Powell mentioned fiscal policy in the presser.

[i found it astonishing, actually -- he basically said that monetary policy wasn't there to stimulate the economy and that that was the job of fiscal policy.  Which doesn't really explain the actions of central banks over the last 20 years]

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UnconventionalWisdom
2 minutes ago, dgul said:

It was interesting that Powell mentioned fiscal policy in the presser.

[i found it astonishing, actually -- he basically said that monetary policy wasn't there to stimulate the economy and that that was the job of fiscal policy.  Which doesn't really explain the actions of central banks over the last 20 years]

Prepping us probably

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3 minutes ago, UnconventionalWisdom said:

Prepping us probably

I took it as a kind of dig at Trump.

[ie, Trump is telling the central bank to cut rates, and he threw in a disguised 'and is government doing their bit?'  But it doesn't work that way -- Trump can only do fiscal spending (at the required magnitude) if the CB will fund it from printing]

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32 minutes ago, dgul said:

I took it as a kind of dig at Trump.

[ie, Trump is telling the central bank to cut rates, and he threw in a disguised 'and is government doing their bit?'  But it doesn't work that way -- Trump can only do fiscal spending (at the required magnitude) if the CB will fund it from printing]

Fed isnt allowed to directly fund the government as it cant buy treasuries direct from the treasury,it buys them on the open market and in doing so credits reserves to the banks.The reflation ahead will see increased government spending,but as the government is spewing out more and more at low coupons the Fed will be buying more and more at the long end to try to keep velocity flowing.Last decade has seen the Fed mainly messing around with the short end of the market not the long.The reserves force the banks to get them out into the real economy,mainly through loans,but highly likely this time it will slow into real assets,kicking off a full blown inflation alongside a distribution cycle,

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13 hours ago, kibuc said:

Ah, the curse of having too many options available.

I shop with HL and most the miners I'm interested in are only available throught their Canadian listings, even though most of them are listed in US as well. If I had a choice I'd probably go with Toronto anyway, but I kind of like the fact that I have one less decision to make and can focus on picking the right stocks instead.

What irks me is that many of smaller-cap miners are not available at all with HL :( 

Which broker do you use that gives you the option to pick the exchange?

kibuc, my isa, sipp, stock trading account are on three different platforms, I've noticed that commodity/miner shares and etf's are sometimes on different exchanges (perhaps other stocks as well, though I cant say i've noticed) depending on the platform im using. It got me thinking that I should probably be more aware of the pros/cons. 

  

12 hours ago, dgul said:

Pretty much always go for the most liquid exchange.  This'll be indicated both by daily volumes (higher is best) and in the spread (lower is best).

Currency risk is minimal -- if there's a currency difference someone will take the arbitrage and run with it until it doesn't exist any more.

thanks dgul

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7 hours ago, DurhamBorn said:

Fed isnt allowed to directly fund the government as it cant buy treasuries direct from the treasury,it buys them on the open market and in doing so credits reserves to the banks.The reflation ahead will see increased government spending,but as the government is spewing out more and more at low coupons the Fed will be buying more and more at the long end to try to keep velocity flowing.Last decade has seen the Fed mainly messing around with the short end of the market not the long.The reserves force the banks to get them out into the real economy,mainly through loans,but highly likely this time it will slow into real assets,kicking off a full blown inflation alongside a distribution cycle,

This is the bit I don't get with regards to house prices. You've said elsewhere they are toast but why will they simply not end up even more mentally priced.

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3 hours ago, Starsend said:

This is the bit I don't get with regards to house prices. You've said elsewhere they are toast but why will they simply not end up even more mentally priced.

Because their price depends on credit and the cost of credit.The cost will be going up of mortgages and so will council tax,fuel,food etc.My road map says relative to present prices the costs of owning a mortgaged home will more than double and so a cut in half is the likely action.The belief is house price are driven higher by household forming,but thats not true,its the cost and ease of credit.

Commods will be where the inflation goes as people try to front run their currency being de-valued and they feed direct into inflation.Money supply going into housing slows velocity,money flowing into commods forces velocity to speed up,and then go gangbusters.

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12 hours ago, dgul said:

It was interesting that Powell mentioned fiscal policy in the presser.

[i found it astonishing, actually -- he basically said that monetary policy wasn't there to stimulate the economy and that that was the job of fiscal policy.  Which doesn't really explain the actions of central banks over the last 20 years]

Powell is not an Economist or banker. 

He's a lawyer, at weasel cunt they may be, but its blatantly obvious to everyone bar Economists/CBs, that whats wrong with the economy is now  too high IRs. And that the Economist solution - lower IRs have made the situation worse.

In short - Economists models are laughably wrong.

They were wrong in the massive expansion of debt - 'Im sure the market would mark down/price bad banks'

They were wrong when it blew up - Bail out the banks. Nah, just destroy them and create new ones, CB lending directly if ness.

They were wrong about the cost of assets, esp housing. High housing cost is a massive fucking drag on the economy. And housing is only high as the bank have lent way too much to housing.

 

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14 hours ago, UnconventionalWisdom said:

Just to add, I think that usually one can increase economic activity by reducing rates and QE. If your rates are at the floor and you get a crash, it would be difficult to justify more QE if it lead to economic collapse. Once rates are low and a recession hits, theres no way to make money cheaper and easier to borrow. In this environment the government has to put money into the economy to get it going again. 

"Big debt crises" by Ray Dalio discusses this with the long term and short term debt cycles. Well worth a read

 

14 hours ago, dgul said:

It was interesting that Powell mentioned fiscal policy in the presser.

[i found it astonishing, actually -- he basically said that monetary policy wasn't there to stimulate the economy and that that was the job of fiscal policy.  Which doesn't really explain the actions of central banks over the last 20 years]

 

14 hours ago, UnconventionalWisdom said:

Prepping us probably

 

13 hours ago, DurhamBorn said:

Fed isnt allowed to directly fund the government as it cant buy treasuries direct from the treasury,it buys them on the open market and in doing so credits reserves to the banks.The reflation ahead will see increased government spending,but as the government is spewing out more and more at low coupons the Fed will be buying more and more at the long end to try to keep velocity flowing.Last decade has seen the Fed mainly messing around with the short end of the market not the long.The reserves force the banks to get them out into the real economy,mainly through loans,but highly likely this time it will slow into real assets,kicking off a full blown inflation alongside a distribution cycle,

Great article from John Hussman last month regarding the lack of effectiveness of QE creating inflation, and it'll be fiscal policy which will do just that, perhaps uncontrollably (scroll down at link for juicy stuff)

How to Needlessly Produce Inflation

https://www.hussmanfunds.com/comment/mc190805/

Quote

After years of extraordinary monetary policy and quantitative easing in Europe, Japan, and the United States, one thing should be clear: quantitative easing, in itself, does not produce inflation. Rather than asking why this has been so, many observers have been quick to pronounce inflation “dead,” as if the world has permanently changed, and there are no conditions that would cause inflation to bear its fangs. Advocates of “modern monetary theory” (MMT) are attracted to this idea. Others have argued that an even deeper foray into extraordinary policy is required, involving additional rounds of quantitative easing and negative interest rates. This is a popular view among central bankers.

Setting aside the rather deranged presumption that igniting inflation would somehow be durably beneficial to the economy, or that the genie, once out of the bottle, would even be controllable, we’ll focus our present discussion on the most fundamental questions: What produces inflation, and why hasn’t quantitative easing done so?

Quote

Why anyone would desire that outcome is utterly beyond me, and frankly, I’m alarmed by the entire notion of “targeting a higher inflation rate,” because my sense is that the associated revulsion would become very difficult to control. Still, if you want more inflation, the way to get it is by running government deficits that are out of line with sustainable norms. The U.S. has already placed itself on that course, but it’s not clear that we’re at the point of revulsion quite yet.

Quote

Put simply, quantitative easing merely changes the mix of securities that the public holds. Historically, inflation has been provoked by government deficits that create new government liabilities at a “cyclically excessive” and unsustainable pace. Conversely, episodes of runaway inflation have regularly been ended by restoring public faith that fiscal and monetary policy have returned to a sustainable course. In his analysis of major hyperinflations, Nobel economist Thomas Sargent (also my former dissertation advisor at Stanford) observed:

“In each case we have studied, once it became widely understood that the government would not rely on the central bank for its finances, the inflation terminated and the exchanges stabilized. We have further seen that it was not simply the increasing quantity of central bank notes that caused the hyperinflation, since in each case the note circulation continued to grow rapidly after the exchange rate and price level had been stabilized. Rather, it was the growth of fiat currency which was unbacked, or backed only by government bills, which there never was a prospect to retire through taxation.

Quote

In my view, the United States is already running what I’d describe as “cyclically excessive” deficits. It’s not clear yet that public revulsion has kicked in, so in the near term, economic weakness seems more likely to depress inflation and interest rates than to aggravate them. But an economic downturn would almost certainly drive U.S. government deficits to unsustainable levels, which could increase the search for alternatives to bonds and currency, adding to the upward pressure we’ve started to see in gold prices.

At present valuation extremes, the Consumer Price Index would probably need to triple before higher inflation would benefit stocks, because downward pressure on valuations would vastly outweigh the benefits of higher nominal growth rates. It’s not clear that we’re at a major inflection point for inflation yet, but it will remain important to monitor inflation-sensitive asset prices for fresh pressure on that front.

 

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It would seem from all I've gleaned from this thread and @DurhamBorn and my very simplistic way of trying to make sense of things, that the 2 crucial factors the CBs need to consider are:

       a) liquidity and

       b) velocity                (but they haven't been very good at looking at these)

In the US there is the added complication of the dollar being the world's reserve currency so there need to be plenty of dollars to spare for trade to take place smoothly.  There was an interesting article about this in AJ Bell's Shares magazine:

When the latest meeting of the US Federal Open Markets Committee concludes on 18

September chair Jay Powell is widely expected to announce an interest rate cut, according to the CME Fedwatch tool.The only debate concerns whether it will be a quarter-point or half-point reduction from the current level of 2.25%.And yet the US dollar continues to rise despite the huge U-turn in Fed monetary policy and President Trump’s attempts to lean on the central bank for more action to talk the dollar down.Using the trade-weighted DXY (or ‘Dixie’) index as a benchmark, the dollar stands at a 2.5 year high, around the 99 mark.He argued that the greenback’s global reserve currency status would come at a cost – either to America or the world.Triffin asserted that to provide the world with enough dollars, America would always have to run a trade deficit and import more than it exported, paying out more in dollars than it received, and run an ever-growing budget deficit for good measure.This is all well and good while confidence in the dollar remains, lenders are happy to hold US Treasuries and the US is happy to run a trade deficit. But it becomes a problem if lenders lose faith (as they did briefly in 2008) or America’s trade policy is changed.This is where President Trump enters the equation. While he is happy to run ever-bigger budget deficits his policy to put ‘America first’ means he is trying to reverse 48 years of economic history and reduce the US trade deficit.If Trump succeeds, dollars would flow back to America and drain the global economy of the greenbacks upon which it is reliant.The President has only made little, if any, progress with the US trade deficit so far but the dollar has gained during this period and the world’s economy and financial markets have already started to feel the effects. His actions have put the spotlight back on something called ‘the Triffin dilemma’TRIFFIN EXPLAINEDWhen then-US President Richard Nixon took America off the gold standard in 1971 the dollar effectively became the world’s reserve currency. Yet Professor Robert Triffin had already seen the catch in a book he produced in 1960 called Gold and The Dollar Crisis: The Future of Convertibility

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4 hours ago, DurhamBorn said:

Because their price depends on credit and the cost of credit.The cost will be going up of mortgages and so will council tax,fuel,food etc.My road map says relative to present prices the costs of owning a mortgaged home will more than double and so a cut in half is the likely action.The belief is house price are driven higher by household forming,but thats not true,its the cost and ease of credit.

Commods will be where the inflation goes as people try to front run their currency being de-valued and they feed direct into inflation.Money supply going into housing slows velocity,money flowing into commods forces velocity to speed up,and then go gangbusters.

For a moment I was wondering why people like you don't run countries. Then I realised that they do whilst at the same time fibbing.

The beauty of being in control is that in order to stay in control, certain information is never divulged.

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TheCountOfNowhere

Heads up. 

Just between ye and me. 

A nice lady in London just told me they're trying to offload properties for 50% lower than some of the current asking prices. Market is dead. Some people need to offload quickly, the term she used that I liked was some people are trying to realign to current market value.

This might be a one off or it might be the start of something sustained, who knows. The madness has to end at some point 

Good luck folks. 

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What post codes and types of properties is she selling. At 50% discount I might be interested in discussing matters with her. If short leases or with regulated tenants not interested

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TheCountOfNowhere
6 minutes ago, Agent ZigZag said:

What post codes and types of properties is she selling. At 50% discount I might be interested in discussing matters with her. If short leases or with regulated tenants not interested

Shires, outside m25. 

I was quite surprised by the information myself. 

If we are seeing the start of the debt deflation then get yourself ready now as I was quite shocked by the conservation I had earlier. 

If not... As you were. 

Look out for @ukpropertylion on twatter for an current asking price index update in 3 weeks time. Should make for very interesting reading going forward. 

 

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