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

[JMD]

On 30/09/2019 at 22:07, Harley said:

Hope @sancho panza returns at some point.

Agreed. Perhaps he's stuck on a permanent nightshift which I think I recall SP saying gets v. busy. 

[Barnsey]

1 hour ago, reformed nice guy said:

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

Absolutely, CEO retirements are through the roof this year! 

5 hours ago, Cattle Prod said:

@DurhamBorn I had a chat with you a while back about the DXY tagging 100 area before turning, got into the mid 99s this week. Rejected a trend line yesterday as eurusd tagged support on volume. And everyone is bullish, so let's see. Keen to hear your views. 

DXY may pop higher still, but the Fed really have to play catch up now after the dismal ISM Manufacturing figure the other day (worst since 2009), but worse still, new orders...

ADP just released is below expectations too, along with a hefty downward revision for the previous release. The flight to $ safety as "last economy standing" may be coming to an end.

Combine this with the ongoing overnight repo operations forcing the Fed's hand to expand the balance sheet, but just remember it's NOT QE OKAY! 

1 hour ago, Durabo said:

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.

Re: UK household debt , not looking good at all for us, we're going into this recession/deflationary bust in 4th place! Almost back to peak household liabilities in 2008! 

 

[Yellow_Reduced_Sticker]

well... well... well...with all this chat here and no mention of...

As i type, FTSE 100 down 240 points DOW down 500 points AND GOLD bounces up 20 dollars!

SURELY we MUST be VERY near the clip edge?

 

[DurhamBorn]

@sancho panza will be back,hes just taking a little break.

@Cattle Prod

I expect the dollar to go much lower,however im not trading it because the debt deflation is in full swing now.

My business cycle indicators are flashing worse signals than 08/09 and some are seeing quicker falls than the mid 30s.If the CBs loose money doesnt get into the system very soon i see it as game on.The CBs have a few weeks to make a massive action,or it will be too late.Road map on a few indicators i track very closely have both moved across the line of no return without massive fiscal and monetary pumping.The business cycle has turned in the US.

Cross market work is showing a lot depends on how fast oil falls.If its fast then that might keep the US economy going for a bit longer as it keeps the consumer spending.However that looks like the only thing that might,lots of profit warnings ahead,and then much worse.

 

[Bricks & Mortar]

25 minutes ago, Cattle Prod said:

Thanks DB, I'm not trading it either, but I'll go long in the 90 area

How will you do that, CP? With an ETF, or do you have a platform that allows FX trading?  Or even some other way I haven't considered?

Can imagine circumstances unfolding so I might want to do similar.

[Abu Hashim]

1 hour ago, DurhamBorn said:

@sancho panza will be back,hes just taking a little break.

@Cattle Prod

I expect the dollar to go much lower,however im not trading it because the debt deflation is in full swing now.

My business cycle indicators are flashing worse signals than 08/09 and some are seeing quicker falls than the mid 30s.If the CBs loose money doesnt get into the system very soon i see it as game on.The CBs have a few weeks to make a massive action,or it will be too late.Road map on a few indicators i track very closely have both moved across the line of no return without massive fiscal and monetary pumping.The business cycle has turned in the US.

Cross market work is showing a lot depends on how fast oil falls.If its fast then that might keep the US economy going for a bit longer as it keeps the consumer spending.However that looks like the only thing that might,lots of profit warnings ahead,and then much worse.

 

Thanks for the update DB, much appreciated.

You mentioned a caveat of massive CB action, how likely do you think it is?

Also do you think there is a chance of the SP500 going close to 4000 still for one final melt up, or this is it now?

[Abu Hashim]

I also wanted to add to the above point:

I went to view a house yesterday in south east commuter town, original asking price of 389 down to 369 (for a semi).

The estate agent was adamant that prices were not going down, any sloping off in prices was over and that they would most likely go up.  He looked at me as if I was insane when I mentioned prices going down.

He also added that the owners had received close to asking price of 369, to which I commented, "Well they should take it then".

[Bricks & Mortar]

Email from Royal Mint.

"Dear Mr B&M

As you have previously purchased Signature Silver or Signature Platinum, we are contacting you to advise you of an important update which affects future orders which you may place with The Royal Mint.

All future purchases of Signature Silver and Signature Platinum will be charged VAT at the standard rate. Both the management fee and the sell back rate for Signature Silver and Platinum remains unchanged and there is no change to any existing holdings of either Signature Silver or Signature Platinum which you may have."

So, that kills that little wheeze.  I'm not going to pay VAT on an investment if I can't claim it back, or recharge it when I come to sell.  Gold still VAT-free from them, I believe.
Possibly only a few weeks left if anyone was thinking of ordering some coins from Europe.
 

[Errol]

1 hour ago, Abu Hashim said:

You mentioned a caveat of massive CB action, how likely do you think it is?

100% certain at some point. Unless they have decided that now is the time to let the entire Western Financial system end.

Of course it will end anyway - it's too late for anything else now. But the bankers can probably keep the music going for more years yet.

[Talking Monkey]

10 minutes ago, Errol said:

100% certain at some point. Unless they have decided that now is the time to let the entire Western Financial system end.

Of course it will end anyway - it's too late for anything else now. But the bankers can probably keep the music going for more years yet.

So Powell will do 50 basis points at the next Fed meeting, he will have to go some to get things moving

[sleepwello'nights]

8 hours ago, Durabo said:

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.

 

 

The missing information, which is the most critical, is what is the market price of the house?

The fact that he has an interest only mortgage again is not critical if he can service it from his income. The repayments at the moment are probably in the region of £5-600 a month. It would likely cost him more than that to rent a small apartment. 

What about doing as @stokiescum is thinking of doing; taking in a lodger on the rent a room scheme.  

I followed the link into Reddit and saw the answer to my question, the house is valued at £650k. A lifetime mortgage is a possible option. Fixed interest rates of around 3% are available. He would be able to release enough equity to clear his credit card debts and he would have the choice of allowing interest to roll up if he chose. 

I think the son is worrying about his inheritance.

[Moominpapa]

23 hours ago, DurhamBorn said:

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.

Those treasury calls certainly did. I agree that the linkys need to be timed properly and will most definitely be the last thing I purchase.

8 hours ago, JMD said:

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.'

The graph I meant was the multicoloured circles with the asset classes dotted on them.  The reason for the high percentage of linkys is because it seems like a good way to preserve capital in an inflationary environment and if we are looking at extended inflation environement it seems like a good place to park it for very low risk and little volatile. I'm currently thinking of keeping higher percentages in in bonds and gold (including proxies - i own gold, silver and gold miners) - then reducing those holdings and increasing ownership of equities.

13 hours ago, MrXxxx said:

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.

Don't understand this, is part of your post missing?

[DurhamBorn]

2 hours ago, Abu Hashim said:

Thanks for the update DB, much appreciated.

You mentioned a caveat of massive CB action, how likely do you think it is?

Also do you think there is a chance of the SP500 going close to 4000 still for one final melt up, or this is it now?

CB action is certain,the Fed is in the market already big at the short end,i think a big bank is in trouble somewhere and the Fed is trying to keep liquidity moving.Business cycle has rolled over though in the US now and that crunch is far ahead of the Fed on the curve.S+P could melt up if the Fed starts to buy treasuries and pump,but it would be short lived.From here in the route i see is to ladder into the reflation stocks and accept some losses.The recovery cycle will favour them but the market wont understand that for a long time.There is going to be some really nasty financial dislocation coming and we cant know who it will sweep away.Free cash and a big revolving credit facility are going to be crucial for companies to get through this.Inflation is coming in a few years with bells on once velocity gets moving,as it will.I expect the industrial companies in the US have had their top of cycle results now,but i expect the other side down to be swift.

I should add i think UK cyclicals might hold up as they are already in target zones 6 to 9 PEs and any falls might be short lived.

 

[Talking Monkey]

23 minutes ago, DurhamBorn said:

CB action is certain,the Fed is in the market already big at the short end,i think a big bank is in trouble somewhere and the Fed is trying to keep liquidity moving.Business cycle has rolled over though in the US now and that crunch is far ahead of the Fed on the curve.S+P could melt up if the Fed starts to buy treasuries and pump,but it would be short lived.From here in the route i see is to ladder into the reflation stocks and accept some losses.The recovery cycle will favour them but the market wont understand that for a long time.There is going to be some really nasty financial dislocation coming and we cant know who it will sweep away.Free cash and a big revolving credit facility are going to be crucial for companies to get through this.Inflation is coming in a few years with bells on once velocity gets moving,as it will.I expect the industrial companies in the US have had their top of cycle results now,but i expect the other side down to be swift.

I should add i think UK cyclicals might hold up as they are already in target zones 6 to 9 PEs and any falls might be short lived.

 

If we do get a melt up DB would you sell any of the ladders in the reflation stocks with a view to buy back in on the way down or would you simply hold on for the long haul

[Democorruptcy]

5 hours ago, DurhamBorn said:

I expect the dollar to go much lower,however im not trading it because the debt deflation is in full swing now.

My business cycle indicators are flashing worse signals than 08/09 and some are seeing quicker falls than the mid 30s.If the CBs loose money doesnt get into the system very soon i see it as game on.The CBs have a few weeks to make a massive action,or it will be too late.Road map on a few indicators i track very closely have both moved across the line of no return without massive fiscal and monetary pumping.The business cycle has turned in the US.

Cross market work is showing a lot depends on how fast oil falls.If its fast then that might keep the US economy going for a bit longer as it keeps the consumer spending.However that looks like the only thing that might,lots of profit warnings ahead,and then much worse.

 

Hargreaves Lansdown usually drops on down days for shares but 7.5% today seems a lot in one go. It's Ex Dividend but that was 26/9 to be paid 18/10. They won't want a 'game on'

[reformed nice guy]

36 minutes ago, DurhamBorn said:

,i think a big bank is in trouble somewhere and the Fed is trying to keep liquidity moving

I saw on twitter that some are pointing to JP Morgan. Il try and find the post I saw

[dgul]

14 minutes ago, reformed nice guy said:

I saw on twitter that some are pointing to JP Morgan. Il try and find the post I saw

https://www.zerohedge.com/markets/here-megabank-behind-septembers-repo-shock

[Agent ZigZag]

1 hour ago, DurhamBorn said:

CB action is certain,the Fed is in the market already big at the short end,i think a big bank is in trouble somewhere and the Fed is trying to keep liquidity moving.Business cycle has rolled over though in the US now and that crunch is far ahead of the Fed on the curve.S+P could melt up if the Fed starts to buy treasuries and pump,but it would be short lived.From here in the route i see is to ladder into the reflation stocks and accept some losses.The recovery cycle will favour them but the market wont understand that for a long time.There is going to be some really nasty financial dislocation coming and we cant know who it will sweep away.Free cash and a big revolving credit facility are going to be crucial for companies to get through this.Inflation is coming in a few years with bells on once velocity gets moving,as it will.I expect the industrial companies in the US have had their top of cycle results now,but i expect the other side down to be swift.

I should add i think UK cyclicals might hold up as they are already in target zones 6 to 9 PEs and any falls might be short lived.

 

Very forthright explanation that DB. Your not the only one very concerned at the moment. The London mkt I am engaged in I am down in money terms 23% yr on yr. 

[King Penda]

2 hours ago, sleepwello'nights said:

The missing information, which is the most critical, is what is the market price of the house?

The fact that he has an interest only mortgage again is not critical if he can service it from his income. The repayments at the moment are probably in the region of £5-600 a month. It would likely cost him more than that to rent a small apartment. 

What about doing as @stokiescum is thinking of doing; taking in a lodger on the rent a room scheme.  

I followed the link into Reddit and saw the answer to my question, the house is valued at £650k. A lifetime mortgage is a possible option. Fixed interest rates of around 3% are available. He would be able to release enough equity to clear his credit card debts and he would have the choice of allowing interest to roll up if he chose. 

I think the son is worrying about his inheritance.

He could also sell and move to somewhere cheaper my lodgers just got a house ironicly

[dgul]

Looks like the clamour from QE is getting louder

https://www.ft.com/content/33674380-e4f4-11e9-9743-db5a370481bc

Quote

 

    The Federal Reserve is facing urgent calls to find a permanent fix to short-term funding strains that unsettled markets last month, and avoid another bout of volatility at the end of the year when the demand for cash is expected to rise again.
 

 

[MvR]

1 hour ago, Cattle Prod said:

I've used IBTL before, but I expect sterling to rise with the dollar this time. I use spreadbets mainly for fx hedges in unsophisticated way, but I want to look into buying long dated call options. Should be nice and cheap then. One of our esteemed colleagues here @MvR uses them successfully, I think on Interactive Brokers.

Yup, you can trade Dollar Index futures and options on IB. They only go out about a year, but that may be enough to play a bounce.  

https://www.theice.com/products/1216/US-Dollar-Index-Options

https://www.barchart.com/futures/quotes/DXU20/volatility-greeks?moneyness=allRows

TO clarify the pricing, this particular contract has a multiplier of 1000, so for example a "Last" price of 0.500 means a options contract value of $500. Once in the money it gains $1000 of intrinsic value per whole point in the Dollar Index. The futures contract moves with the same 1000x multiplier.

Alternatively there are the FXB, FXE, FXJ and other currency ETFs that represent various currencies against the dollar, so if you wanted to go long the dollar against the euro for example, you could short FXE, or buy FXE puts.

[Thorn]

Looking into the Velocity of Money to try and understand it and I came across this which seems to explain it- M2 money explanation 

[XswampyX]

19 minutes ago, Thorn said:

Looking into the Velocity of Money to try and understand it and I came across this which seems to explain it- M2 money explanation 

That's all well and good, but isn't the velocity of money also a representation of the amount of tax paid?

If it (£100) goes round once (Tesco's get it) £1 tax gets paid. Low velocity as nobody else can get hold of it!

Or it (£100) goes round locally many times £50 tax gets paid. We all pass the same money around and it gets taxed at every opportunity.

I get paid... £100. 10% income tax = £90 on Bread.

The baker gets my £90. 20% VAT & 10% tax = £60 on meat.

The butcher gets £60. 20% VAT & 10% tax = £36 on candles.

The Candle stick ....

 

 

[Sugarlips]

5 hours ago, reformed nice guy said:

I saw on twitter that some are pointing to JP Morgan. Il try and find the post I saw

Is it not odd that HSBC flicked John Flint suddenly after just 18 months in the top job? Whilst they are famed for lending conservatism I wonder how prudent they really are?  In periods of global trade wars and local(HK) trouble, the ‘worlds local bank’ could surely step on a land mine at any time...like the HK housing market in a time of escalating tensions with the motherland for example.

[DurhamBorn]

7 hours ago, Talking Monkey said:

If we do get a melt up DB would you sell any of the ladders in the reflation stocks with a view to buy back in on the way down or would you simply hold on for the long haul

No,apart from maybe the odd one top sliced to put in another.The buying im set up in now is for the whole cycle.In simple terms il be down 20% before dividends across the portfolio if all ladders hit and the shares will be down from highs by around 80% average.In context i made roughly that on the gold miners as a % of my portfolio.