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

[DurhamBorn]

The main thing driving a debt deflation is that liquidity (money in the system) has been falling relative to the demands on that money (debt payments).Once that happens,somebody ends up not paying.It doesnt matter if rates are 10% or 0.5%.The cost of money compared to the demands on it are what matters.

Debt deflation leading to a recovery cycle can be seen in the likes of Thomas Cook.Those bond holders are wiped out,and the prices Tui can charge will go up.Lots of financial dislocation ahead.

[MrXxxx]

Thanks (two posts above), I need these redefinitions a couple of times before I finally `get` some concepts...DB (or another) perhaps you can revisit the scenario of this threads concept again showing what has `played out`, the evidence for this and where we are going in short, mid and long-terms?

[Democorruptcy]

15 hours ago, DurhamBorn said:

No problem getting the money,they will be borrowing it on the market at around 0.5% and the BOE will be buying in the same amount from the market.

In other news

https://www.bbc.co.uk/news/uk-politics-49881980

£10.50 an hour minimum wage in 5 years.Theres some inflation right there.Of course  prices will increase to make up for it,and thats all about getting inflation higher,but anyone buying zero rate fixed income etc now is in for a shock.

Government will be running wages higher than welfare increases for the cycle as they need to increase the spread between work and welfare.

Velocity will start to pick up in around 18 months i expect from here,then move higher through the cycle.The cycle ahead is starting to unfold.

That will support nominal house prices?

10.50 x 2 earners x 40 hours x 52 weeks x 4.5x joint income = 196,560

That's on minimum not average wage before any deposit or equity from one they sold.

As rates rise then people's standard of living flatlines as their wage increases are sucked up largely by mortgage rate increases and other cost of living rises.   

[Democorruptcy]

Woodford Patient Capital Trust 'evaluating' Neil Woodford's future with the fund

[Don Coglione]

13 hours ago, kibuc said:

True. I'm sure there used to be a bit more money in my account.

Well that was pretty fucking brutal.

[dgul]

7 minutes ago, Ponty Mython said:

Well that was pretty fucking brutal.

But great for those who are short.  So, expect them to think it is pretty fucking brutal in 5, 4, 3...

[Talking Monkey]

14 hours ago, DurhamBorn said:

@Cattle Prod paper market could see below $20 for a short period in any big sell off.Im really torn,my road map says sub $20,but very short term then all the way to $270 .However oil should really run at this stage of the cycle before rolling over.Iv got ladders in place to take the emotion out of it.Rising oil prices will drive a lot of the recovery cycle.It will lead to big investment in green energy,energy saving,public transport etc.Portfolios will need a good leaning towards these areas if they are to outrun the inflation ahead.It will be oils last big run,but a hugely profitable one.

How do you see this effecting the airline industry DB, as Oil rockets along with the focus on climate change will air travel decline significantly both freight and leisure/business travel. If most people are going to get poorer in the next cycle I'm guessing eventually a lot of the foreign travel has to go

[Majorpain]

If anyone was wondering how the South East housing market was doing:

http://www.constructionenquirer.com/2019/10/01/lq-puts-all-future-housing-schemes-on-hold/

Quote

L&Q blamed a serious downturn in demand which had impacted market sale houses needed to fund the development of affordable housing.

It also warned that it was now experiencing rising costs from more stringent fire safety requirements and new quality standards.

In an email to L&Q staff, chief executive David Montague, wrote: “The whole housing sector is operating in one of the most challenging environments in recent history.

Relatively small fry developer has gone bust as well, but the reasons why are becoming repetitive.

http://www.constructionenquirer.com/2019/10/01/marcus-worthington-files-intent-to-appoint-administrator/

Quote

A statement from directors said: “The current economic uncertainty has led to us struggling to secure additional borrowing from our bank lenders.

“We have also been unable to attract fresh funding from other lenders because of these testing market conditions.

 

[DurhamBorn]

5 hours ago, Talking Monkey said:

How do you see this effecting the airline industry DB, as Oil rockets along with the focus on climate change will air travel decline significantly both freight and leisure/business travel. If most people are going to get poorer in the next cycle I'm guessing eventually a lot of the foreign travel has to go

I would think it will suffer yes.Could be the discounters do ok though,but its a sector im avoiding as i see no need to invest in it.I sold my Tui as had taken around 20% in them,and had no interest in them longer term.I bought them for Thomas Cook going under.

[Starsend]

In the event that oil does indeed plummet at some point, even for a brief period, what is the best instrument to leverage this?

I guess if oil drops to $20 a barrel there won't be an equivalent drop in the oil producers like shell, BP etc.

So how to leverage? What instrument is best?

[dgul]

22 minutes ago, Starsend said:

In the event that oil does indeed plummet at some point, even for a brief period, what is the best instrument to leverage this?

I guess if oil drops to $20 a barrel there won't be an equivalent drop in the oil producers like shell, BP etc.

So how to leverage? What instrument is best?

I don't know other than in a massive deflationary episode there's no guarantee that ETFs will stay liquid or even continue to exist.  (recalling stuff happening in 2008ish).

[Starsend]

3 minutes ago, dgul said:

I don't know other than in a massive deflationary episode there's no guarantee that ETFs will stay liquid or even continue to exist.  (recalling stuff happening in 2008ish).

Yeah that's certainly an issue. Maybe a spread across a range of instruments, but which ones.

DB How are you planning on taking advantage of it?

[Democorruptcy]

6 hours ago, Majorpain said:

If anyone was wondering how the South East housing market was doing:

http://www.constructionenquirer.com/2019/10/01/lq-puts-all-future-housing-schemes-on-hold/

Relatively small fry developer has gone bust as well, but the reasons why are becoming repetitive.

http://www.constructionenquirer.com/2019/10/01/marcus-worthington-files-intent-to-appoint-administrator/

 

Aye it's a challenging time for David Montague and L&Q.

L&Q Salaries from 2016/17

190,001 to 200,000	2
200,001 to 210,000	1
210,001 to 220,000	1
220,001 to 230,000	-
230,001 to 240,000	1
240,001 to 250,000	-
250,001 to 260,000	-
260,001 to 270,000	-
270,001 to 280,000	1
280,001 to 290,000	1
290,001 to 410,000	-
410,001 to 430,000	1

[Moominpapa]

 

Hello all

Don’t know if any of you remember me from the days over at House Price Crash. I was the guy who suggested IBTL as an alternative to TLT during the whole KIID fiasco and Durhamborn reviewed it and thought it looked like a good alternative (which was good enough for me to buy and make a handsome profit, cheers). I also had a few convos with Sancho re’ getting my head around the velocity of money argument and lack of demand. Gents it has been an education and I’ve gone out and read and learned more including subscribing to Steven Kaplan’s offering.

I think I’m in a position now where I understand the basics of the macro picture, which has taken much longer than I anticipated, there is just so little well written information out there so you have to piece thousands of pieces of info together and that is why it has taken so long.

The three big takeaways I’ve learned are

1.      Talking heads and the majority of public analysts don’t know anything and they’re basically there to sell investments, whether they’re right for you or not – so everything they say can be disregarded because all they want is a sale, whether its to sell the investment or sell advertising.

2.      The asset markets go through similar but not identical cycles.

3.      I’m not intelligent enough / have enough time / lucky enough to pick individual assets (but can pick asset classes) so I will stick to ETF and similar.

To that end, what I believe would work for me is identifying:

1.      What are the stages of the cycle,

2.      What asset classes do well in each stage of the cycle,

3.      The quantity of assets to own relative to each other at each stage of the cycle,

4.      Where we are in the cycle now, where are we going.

SO my work so far has been on answering questions 1-3. I believe I know the answer to 4 based on what people here and elsewhere have said AND provided evidence for.

I think 1-3 can be answered by this image below. Starting in the top left and moving clockwise, lets call each quarter: quad 1, quad 2, quad 3 and quad 4.

Hello allerg Commodity UCITS ETF A GBP

I think most here are of the belief we are in quad 4 (slowing growth, slowing inflation) having just moved from quad 3 (slowing inflation, rising growth) and we are transitioning into quad 1 (slowing growth, rising inflation). I have spent the last year and half moving into Quad 4 and will soon be moving into quad 1 (slowing growth, rising inflation). I have bought my full gold allocation already and am thinking of getting back into long dated US treasuries. As a rule I will not invest in emerging markets bonds, I find it difficult to keep on top of all the volatility.

Here is the portfolio I am in the process of putting together on the belief that we will transition in to quad 1:

1.      INXG – 55%
iShares II plc iShares Barclays Capital GBP Index Linked Gilts

2.      SGBX – 15%
ETFS Metal Securities Ltd Physical Swiss Gold (GBP)

3.      Cash – 10%

4.      SPGP 5%
iShares V plc S&P Commodity Producers Gold ETF (GBP)

5.      CMOP – 5%
Invesco Markets plc Bloomberg Commodity UCITS ETF A GBP

6.      INFR – 4%
iShares II plc FTSE/Macquarie Global Infrastructure 100

7.      XDWS – 4%
db x-trackers MSCI World Consumer Staples Index UCITS ETF (DR)

8.      SPAG
iShares V plc S&P Commodity Producers Agribusiness USD Acc (GBP)

9.      BlackRock Global World Energy – 4%
Class D4 - Income (GBP)

10.   INFR - 4%
iShares II plc FTSE/Macquarie Global Infrastructure 100

I know there is some duplication of companies in these funds but I’m not too bothered about this as they don’t make up much of the total portfolio. For now I am interested in what others here think of this portfolio on the basis that we are moving in to quad 1. I will eventually put a portfolio together for every quad.

My main interest is preserving capital, I am not looking into outsize gains and that is why I have not followed the percentage volume suggested in the graph. 10% a year for me is great. 20% would be outstanding and compounded would make a real difference to me.

The position I am most unsure of is the index linked gilts. I have no experience in these and also I will only own them as a fund. I understand that they should work but if anyone else has any thoughts on why it wouldn’t (in a quad 1 scenario) I’d be very interested and I also wonder why I haven’t seen these mentioned here before and if they’re not a good idea what is a good proxy.

This is all a work in progress and this is just one step in my long term plan. Thanks for all your insights over the years.

[DurhamBorn]

4 hours ago, Starsend said:

Yeah that's certainly an issue. Maybe a spread across a range of instruments, but which ones.

DB How are you planning on taking advantage of it?

The big oil service companies will be big winners.I have to say though im not looking to multi bag my investments here.Im looking to outrun inflation by around 2%pa.My poertfolio is already at ok to retire size,my work now is to keep it that way through a brutal cycle.

[DurhamBorn]

Good to see you here @Moominpapa ,yes those old treasury calls provided fantastic returns to us sterling investors.Index linked gilts should do fine in the next cycle.We will be able to outperform them if it is inflation because of how we structure,but a very decent place to park some funds to use later,though they will dip in the deflation bit probably.Id probably keep much less than 50% in them though as nothing is risk free.

[MrXxxx]

10 hours ago, Moominpapa said:

main interest is preserving capital, I am not looking into outsize gains and that is why I have not followed the percentag

OK, I am a complete newcomer to this `game` (far more experienced posters on here worth listening to than me) but the impression looking down your list was just that with 80% in `safe` areas.

[Talking Monkey]

20 hours ago, Cattle Prod said:

If you don't mind me chipping in, TM.

I think you're right about oil prices smacking costs and wallets smacking demand, but it never ceases to amaze me about the tech curve in aviation. Exponential progress from the wright brothers to Concorde, then it actually went backwards, and levelled off to be static, or with minor efficiency comfort and safety inmprovements. For about 50 years!

I don't believe it's technological limits if Concorde was designed over 50 years ago, more likely inertia. I hope high oil prices are a disrupting force on aviation, its stone aged.

Cheers CP, I've always wondered how Concorde came about all those years ago but we never improved on it, they retired the plane and there is nothing equivalent in the world today, real shame it was a wonderful piece of engineering

 Considering lead times I wonder how much things will change by 2030, will Boeing and Airbus come out with anything radically different in a 10 year timeframe

The driver for my initial question on air travel demand in the future was actually about demand for pilots I should have articulated it better. Mate's son is talking about training to be a pilot and so got me thinking would demand be there for pilots if we see significant shrinkage in air travel in the next 5-20 years due to cost, environment concerns, then on top possible automation. How long before we have pilotless planes. I just can't see someone starting out today getting a decent 30 year career being a pilot, too many potential headwinds on the horizon.

[Talking Monkey]

17 minutes ago, Cattle Prod said:

I think it was probably military spending, and Concorde is a child of the cold war. So many technological leaps were made because of world war 2 and the cold war. Unfortunate circumstances, but showed what happens when we are fully mobilised. The effects of $200 oil might have the same effect.

I'm a keen aviation nerd, and one comment about pilots is the backing off from ever larger planes. A higher quantity of smaller planes means more pilots. Not sure of that would reverse with higher fuel prices, but might even out some headwinds. 

Edit: and yes, Concorde is a real beauty, and a staggering engineering achievement. Went on the one at Brooklands, highly recommend 

Edit edit: I dont think we'll ever get pilotless planes. People, including me, won't get on them. Trains on rails are one thing, but the variables in flying are orders of magnitude more complex

Thank you for the insight CP on the move to smaller planes. Makes sense we are a long way from pilotless  planes, I wouldn't fly on one too and nobody I know would either.

[dgul]

21 minutes ago, Cattle Prod said:

I think it was probably military spending, and Concorde is a child of the cold war. So many technological leaps were made because of world war 2 and the cold war. Unfortunate circumstances, but showed what happens when we are fully mobilised. The effects of $200 oil might have the same effect.

I'm a keen aviation nerd, and one comment about pilots is the backing off from ever larger planes. A higher quantity of smaller planes means more pilots. Not sure of that would reverse with higher fuel prices, but might even out some headwinds. 

Edit: and yes, Concorde is a real beauty, and a staggering engineering achievement. Went on the one at Brooklands, highly recommend 

Edit edit: I dont think we'll ever get pilotless planes. People, including me, won't get on them. Trains on rails are one thing, but the variables in flying are orders of magnitude more complex

Tech progress didn't stop at Concorde -- rather, that was the end of the 'premium' stage of growth.  After that all the progress was on cheap flying -- so cheaper planes that could carry more people for less money.

Re pilots -- there's currently a move to reduce pilot numbers on long haul -- at the moment most long haul have to carry at least two crews with two pilots in control (bar the odd toilet visit) at all times.  They want to move to one pilot for the cruise stage.  This will have a surprising impact on required pilot numbers (downwards) if it is passed.  They also want to reduce pilot layover time (after a hard day at the stick) which might well happen, but that's more open.

The really big expected change in the industry is China -- there's an expectation that China will drive significant growth in the near future, both for airframes and pilots.  However, I'm not sure it'll work out so simply -- China will buy Chinese made airframes, train Chinese pilots and won't be so worried about trivial things like reducing pilots in control and automated everything (without pilot backup).  I suppose there'll be a fair few incidents if they do this, but given where they're starting from (hardly any flights a few years back) I don't think anyone will even notice, let alone complain.

[Starsend]

12 hours ago, DurhamBorn said:

The big oil service companies will be big winners.I have to say though im not looking to multi bag my investments here.Im looking to outrun inflation by around 2%pa.My poertfolio is already at ok to retire size,my work now is to keep it that way through a brutal cycle.

Companies like Schlumberger then. Agree they'll do well over a longer period and will also be a part of my portfolio.

I'm also interested in directly leveraging the price of oil. If it drops to $20 then I want to back the truck up and buy an instrument that directly equates to that $20 a barrel. If prices then rise to $100 a barrel then the instrument returns me a direct five fold increase. If anybody has any ideas as to what ETFs can achieve this best I'd be very interested in hearing. A lot seem risky so it would seem a good idea to spread across a range. 

 

[Durabo]

Another reddit sentiment indicator - 55yr old fella earning 40k a year as a builder/carpenter. 40k credit card debt and has been on an 25 yr IO mortage which comes due in 6 years - he's paid none of the principle off.

He's lucky he has an asset to sell in order to bail him out.

What is especially interesting is all the comments telling him to "sell fast as a recession is on the way"

[kibuc]

"He can earn 40k per year but his body is falling apart" ...so he cannot, not really.

I don't know if it's a cultural thing, but whenever I read a story like this one I find myself thinking it must be made up, because no one in his right mind would ever put himself in a situation like this. I mean, there has to be a breaking point where you realize that you have too much debt already and should not take on any more, and that point surely must be long before your freaking credit card balance meets your annual gross earnings! I start feeling uncomfortable when the balance on my only CC hits £1k, which happens maybe twice a year as I use it to purchase our flight tickets.

But then I realise that the same logic should apply to obesity, and still there are people north of 150kg, and quite a lot of them too. Maybe binging on debt is no sifferent to binging on sugar.

[reformed nice guy]

Lots of CEOs appear to be retiring, some unexpectedly. Another sign?

[JMD]

16 hours ago, Moominpapa said:

Here is the portfolio I am in the process of putting together 

1.      INXG – 55%
iShares II plc iShares Barclays Capital GBP Index Linked Gilts

2.      SGBX – 15%
ETFS Metal Securities Ltd Physical Swiss Gold (GBP)

3.      Cash – 10%

4.      SPGP 5%
iShares V plc S&P Commodity Producers Gold ETF (GBP)

5.      CMOP – 5%
Invesco Markets plc Bloomberg Commodity UCITS ETF A GBP

6.      INFR – 4%
iShares II plc FTSE/Macquarie Global Infrastructure 100

7.      XDWS – 4%
db x-trackers MSCI World Consumer Staples Index UCITS ETF (DR)

8.      SPAG
iShares V plc S&P Commodity Producers Agribusiness USD Acc (GBP)

9.      BlackRock Global World Energy – 4%
Class D4 - Income (GBP)

10.   INFR - 4%
iShares II plc FTSE/Macquarie Global Infrastructure 100

The position I am most unsure of is the index linked gilts. I have no experience in these and also I will only own them as a fund. I understand that they should work but if anyone else has any thoughts on why it wouldn’t (in a quad 1 scenario) I’d be very interested and I also wonder why I haven’t seen these mentioned here before and if they’re not a good idea what is a good proxy.

Moomingpapa, thanks for sharing this. Let me first say I am a novice investor and others here have far more knowledge than me. However that said, I also wish to protect capitol but personally I wouldn't allocate 55% to gilts, i'd rather use reflation stocks which are much discussed here... maybe use dividend paying utilities companies which I believe can be viewed as a bond proxy. Not to be taken as advice of course, please do your own research.

 

Also, could you explain the following extract from your post (is there a 'graph' missing from your post?). I ask because informed asset allocation and rebalancing is always of interest to me... 'the only free lunch in investing', I think they call it.  

'...that is why I have not followed the percentage volume suggested in the graph. 10% a year for me is great. 20% would be outstanding and compounded would make a real difference to me.'