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

[Harley]

1 hour ago, DurhamBorn said:

Myself iv never really taken much time on allocation in the broad sense,more leaning towards deflation/inflation and tilting my holdings.However going forward i intend to start to focus more on it.Mainly as my assets are now at a level where i can retire.

Same impetus for me - approaching possible retirement so it's now income and retention of capital that take the lead from capital accumulation.

1 hour ago, DurhamBorn said:

Whats crucial is i think most asset allocation for what we are facing is wrong.If we do indeed see an inflation cycle then a 60% or more bond portfolio will prove a disaster in draw down.Cyclicals and broad based value shares with a leaning towards inflation look far better.If bonds are giving income of 1% then i figure silver and gold will do a much better job.

Bonds are an issue as I aim for a balanced "floor" portfolio with a 25% bond holding but share your concern.  Fortunately, I hold some NS&I inflation linked bonds from years ago which I have included in my portfolio so am almost there.  25% PMs has been easy as a long term PM bull.  Not very happy with 25% short term cash (short term bonds) though.  Other than that, that leaves equity which, given my separate upside income fund, means mainly international value plays.  Would be nice to include commodities at some point though so maybe producers in the equity section and/or reclassify the PM class as "hard assets" and include some pure commodities there.

[Harley]

49 minutes ago, Clueless Imbecile said:

However, with individual stocks I don't automatically reinvest the dividends. My reasoning is that I think a handful of, say, up to 25 different stocks is nowhere near as diversified as a tracker fund that might have 100 or more different stocks. I therefore plan to let the dividends mount up as cash in my S&S ISA. I would then "rebalance" perhaps once per year and manually reinvest the dividend cash into whatever stock(s) I think appropriate.

Same here except I think 25 to 30 stocks offers me sufficient diversification and focus (although I have other portfolios as well) especially as I prefer to own the stocks direct and not via an extra counterparty.  Some of those 100 could be patent junk (certainly were when I owned a FTSE income ETF and lost value as a result).  Each to their own though.

PS:  I do however own some ETFs but am keen to reduce exposure where possible.

[Harley]

1 hour ago, DurhamBorn said:

I dont think thats the main issue,i think its bonds paying 1%/2% when inflation runs to 8%+ that will destroy draw down pots.People seem to think its bonds up shares down,shares up bonds down,but they are forgetting their is another scenario that comes along now and again,stocks down,bonds down more ,commods up.

Indeed.  And for those moving into capital drawdown from capital accumulation, sequential risk is a big concern.  But this is usually mentoned in the context of equities, not collapsing bond prices or well below inflation bond yields.  Indeed some may be saying a higher bond allocation reduces sequential risk!  Gotta love QE, etc!

[Clueless Imbecile]

What are peoples thoughts on the PM miners at the moment?

I regret not selling mine when DurhamBorn said he'd sold some of his (late July or August?). I had only invested a modest amount, and afer reading DaveHcontrarian's comments on twitter I decided to hold on. I realise that as a UK investor the GBP to USD and GBP to CAD fx rates can affect the value of the shares in GBP terms, but I am hoping that the silver and gold prices rise enough to deliver a decent profit regardless of if GBP rises against USD and/or CAD.

I'm hoping that the PM prices rise over the next few months and drag the miners prices up with them. If that happens then I think I'll sell all my PM miners and maybe consider buying some of them again if their prices crash in a deflationary bust next year.

Cheers,
Clueless Imbecile

Disclaimer: I am not an expert. Anything I post here is just my opinions, which may not be factually correct. My posts are intended purely for the purpose of debate and are not to be taken as advice. If you act on any of the above then you do so entirely at your own risk. I do not accept any liability.

[Hardhat]

1 hour ago, Clueless Imbecile said:

What are peoples thoughts on the PM miners at the moment?

Long term hold for me. Will likely add GDX/J and SIL this week if I get time.

Mainly looking at that and energy (incl. Renewables) so far reflation wise. Still feel like I need to do more research into potential reflation/ commod stocks outside of PMs, especially as I would rather stay out of oil (just personal preference).

[Thorn]

2 hours ago, Clueless Imbecile said:

What are peoples thoughts on the PM miners at the moment?

I regret not selling mine when DurhamBorn said he'd sold some of his (late July or August?). I had only invested a modest amount, and afer reading DaveHcontrarian's comments on twitter I decided to hold on. I realise that as a UK investor the GBP to USD and GBP to CAD fx rates can affect the value of the shares in GBP terms, but I am hoping that the silver and gold prices rise enough to deliver a decent profit regardless of if GBP rises against USD and/or CAD.

I'm hoping that the PM prices rise over the next few months and drag the miners prices up with them. If that happens then I think I'll sell all my PM miners and maybe consider buying some of them again if their prices crash in a deflationary bust next year.

Cheers,
Clueless Imbecile

Disclaimer: I am not an expert. Anything I post here is just my opinions, which may not be factually correct. My posts are intended purely for the purpose of debate and are not to be taken as advice. If you act on any of the above then you do so entirely at your own risk. I do not accept any liability.

Same here held on watched them slide and lost all the gains. 

So.... been looking at cycles etc and could be wrong but I reckon over next few weeks Silver hits about 1650-ish then skyrockets up to 26.

meanwhile watching DBs reflation busters like GVC and BT In particular.

Not advice and DYOR obviously... I’m only learning.

[dgul]

3 hours ago, reformed nice guy said:

I have been buying a small amount of miners, about 10% of my portfolio and only a few per month, in these stocks in the following order. I sold at the last peak (thanks DB!) and the amount Im using is less than I made - the rest is in divi stocks. I am using a similar logic - a mix of big, medium, small and geographically diverse. It might not be the best allocations and I am far from an expert, but Im hoping that the spread will help shelter from any specific regional problems. All available from Hargreaves. Hopefully the list at least provides some ideas for people to start researching from.

• Anglo American - international
• Barrick Gold - international
• Anglogold ashanti  - international
• Polymetal -Russia
• Gold fields - Australia, Peru, Ghana
• Kinross - international
• Sibanye - South Africa
• Yamana - Americas
• Centamin - Egypt
• Harmony Gold - South Africa
• Eldorado gold corp - international
• Acacia Mining - Tanzania
• Couer Mining - Americas
• Wesdome - Canada

Acacia's gone (taken over by Barrick).

[sleepwello'nights]

Can anyone explain what happened on Friday. My UK index linked gilts fell from a unit price of £220 to £208, whilst a number of the shares I hold jumped. Also Gold and Silver fell.

[DurhamBorn]

1 hour ago, Thorn said:

Same here held on watched them slide and lost all the gains. 

So.... been looking at cycles etc and could be wrong but I reckon over next few weeks Silver hits about 1650-ish then skyrockets up to 26.

meanwhile watching DBs reflation busters like GVC and BT In particular.

Not advice and DYOR obviously... I’m only learning.

I sold a few GVC friday,they had gone up nearly 50% in a couple of months and bought a few more BAT with the money.

42 minutes ago, sleepwello'nights said:

Can anyone explain what happened on Friday. My UK index linked gilts fell from a unit price of £220 to £208, whilst a number of the shares I hold jumped. Also Gold and Silver fell.

Uk cyclicals rocketed when people decided sterling wasnt toast.

[Thorn]

Sweet Je*us DB it’s like I am just after starting to go jogging and I am trying to keep up with Mo bloody Farah. 

And that’s a compliment. 

Your turns have been so early I can’t get my head round them yet. 

In fact know what? I think it’s like I am flying a big heavy Wellington and I’ve to follow your Spitfire.

and bloody hell your Spitfire turns really quick and fast. 

[Loki]

Just now, Thorn said:

Sweet Je*us DB it’s like I am just after starting to go jogging and I am trying to keep up with Mo bloody Farah. 

And that’s a compliment. 

Your turns have been so early I can’t get my head round them yet. 

In fact know what? I think it’s like I am flying a big heavy Wellington and I’ve to follow your Spitfire.

and bloody hell your Spitfire turns really quick and fast. 

Now imagine doing it without any legs

Welcome to my world 

[sleepwello'nights]

3 minutes ago, DurhamBorn said:

 

Uk cyclicals rocketed when people decided sterling wasnt toast.

So index linked gilts were sold and the proceeds used to buy cyclicals?

I think someone watched me buy some more Vanguard UK index linked gilt ETFs earlier in the week and decided it was a contrarian signal  meaning it was time to sell. Bastards.

[Thorn]

7 minutes ago, Loki said:

Now imagine doing it without any legs

Welcome to my world 

[Bear Hug]

56 minutes ago, sleepwello'nights said:

Can anyone explain what happened on Friday. My UK index linked gilts fell from a unit price of £220 to £208, whilst a number of the shares I hold jumped. Also Gold and Silver fell.

I have ~10% in IL gilts in my work pension contributions which I considered to be quite safe against any spikes in inflation as they are index-linked.  With all the talk of the negative rates, I have checked the BoE yield curve data, here it is:

UK instantaneous implied real forward curve (gilts)

* The curve on the day of the previous MPC meeting is provided as reference point

Sources: Bloomberg Finance L.P., TradeWeb and Bank calculations

https://www.bankofengland.co.uk/statistics/yield-curves

It makes sense: if gilts are popular, the price increases. The yield may be index-linked, but if the price is bid up, the return gets lower.  So if you hold it to expiry, you'd get less than inflation return even though it is inflation linked.  

I suppose if inflation becomes 10%, then 7%-8% is probably not a bad return compared to losses on holding it as cash.

I understand this doesn't answer your question.  I suppose QE but without expected increase in inflation should drop their price?

[sancho panza]

On 11/10/2019 at 23:35, Talking Monkey said:

I put a tiny short on them this morning, can't see them barrelling much higher

 

I'll be reopening BDEV/BKG/BWY tmrw I reckon.Amzing how quickly they bounced back from the sell off.Interesting times

On 12/10/2019 at 11:36, Barnsey said:

Times have changed, the Fed HAS to protect markets as they have a new diligent focus on 401k pension funds for the boomers retiring at a rate of 10k retirees per day for the next 17 years.

 

Ultimately,when the big downdraft comes,I suspect the fed will have little terms to move if inflation has begun to run/debt deflation has begun in earnest/negative rates are destroying banks ability to lend....pick anyone that may be prevalent.

Not sure the 08 playbook will work this time.

On 12/10/2019 at 12:12, DurhamBorn said:

I know a lot of people are looking at the oil sector,and my road map says to start buying when oil goes below $42 (with a maybe below $20 short term drop in a deflation).However i have started to buy a few myself.I was waiting to buy in my SIPP most of the buys in this sector and im waiting on a transfer in.However i started buying Vermillion Energy yesterday.I really like its exposure to European gas price increases in the next cycle.They also have a nice model that means they wont be underwater long in an oil down draft.

I am wanting some of the big players and have a few (Equinor,Repsol) but im opening positions on some lower down the pecking order.Vermillion might deliver some more pain yet,but if it survives any big sell off (it might suspend the divi for a year in real extremes) i see this as a ten bagger in the next cycle,maybe a 20 bagger.

I also opened a very small position in Torc oil and gas an one in Encana Corp.These were only small positions,but i wanted to do some work on the sector and opening some positions does that.

DYOR etc this is not advice to buy for anyone,.

I hope we get oil below $42

Also bought initial ladder in potash miners -added some Nutrien/Yara/Mosaic/Israeli Chemical/SQM pondering Incitec Pivot/K+S

Thanks for the heads up re Vermillion,I'll have a look.

[Thorn]

Right what do you all think of this set up...

[Bear Hug]

On 11/10/2019 at 11:17, kibuc said:

Nope, no news aggregator, I simply start my day by visiting each company's website.

I currently own GUY, GPR, EDR, AXU and IPT, and also follow WDO, HMY, YRI, NGD and FR. Scanning 10 websites doesn't take longer than two minutes, unless there's actually some news.

GPR, EDR and NGD have reported already - good, bad and really good, respectively. I'd expect WDO, FR, YRI and GUY to mid-week next week at the latest, AXU and IPT will probably wait for the financials and HMY won't report Q3 at all, as they report on a bi-annual basis.

That being said, we're talking about junior mining sector, the scum of the industry, so if the production turns out to be sub-par I wouldn't be surprised to see the report delayed and hidden within the financials, at least with some of those names - looking at you GUY in particular.

I'm afraid your hope might be misplaced. As if their 2019 hedge wasn't bad enough ($1300/oz ceiling, FFS), they have already hedged 2/3rds of their 2020 RR output as well!

"In addition to the current corporate hedging strategy for 2019, the Company has entered into gold price option contracts covering 168,000 ounces of gold production for 2020 that provides downside price protection of $1,300 with upside to $1,355 from January to June and $1,415 from July to December. Details of these contracts are included in the Company’s Second Quarter Financial Statements."

Full credit to Adams for turning Rainy River around, and for pushing on with New Afton expansion. Operationally they finally seem to be in good shape. However, their financials are a mess, only exacerbated by their inability to take advantage of current and future gold prices. They'll have to dillute like there's no tomorrow if they are to meet their obligations. It's already started, with that $150mil deal in August, and there will be more to come.

Many thanks for your analysis, it's very useful as coverage even on Kitco and Seeking Alpha tends to be quite sparse, and no equivalent of ADFN for PMs as far as I can tell.  

In particular, your calls on bad news in have been spot on: quite a few times I have observed small initial drops in price which then continued over the period over the few days, so selling ASAP would have made a massive difference (New Gold and Endevour).

One of my big regrets this year was looking at shit results from Fresnillo, holding finger over "sell" button on AJ Bell at 905 (a drop from over 1000 from few days ago) and then not going through with it.

[DurhamBorn]

45 minutes ago, sancho panza said:

I'll be reopening BDEV/BKG/BWY tmrw I reckon.Amzing how quickly they bounced back from the sell off.Interesting times

Ultimately,when the big downdraft comes,I suspect the fed will have little terms to move if inflation has begun to run/debt deflation has begun in earnest/negative rates are destroying banks ability to lend....pick anyone that may be prevalent.

Not sure the 08 playbook will work this time.

I hope we get oil below $42

Also bought initial ladder in potash miners -added some Nutrien/Yara/Mosaic/Israeli Chemical/SQM pondering Incitec Pivot/K+S

Thanks for the heads up re Vermillion,I'll have a look.

Iv got Mosaic and K+S already.K+S are also the biggest salt company in the US so a bad winter would help them.BHP could rock the potash boat if it builds its Jansen mine,but it hasnt even worked out how to ship it yet so even a fast track might take years.They are expecting the market to double by 2040,but i think it will quadruple by 2027,in price anyway.

[leonardratso]

nutrien is quite a big compnent of baglar;

https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/b/barings-global-agriculture-class-i-gbp-accumulation

 

[sancho panza]

On 12/10/2019 at 21:12, DurhamBorn said:

Its even worse than that,a lot of pensions go for corporate bonds in junk companies.Like you say even the conservative ones are having to buy gilts and treasuries on tiny interest rates.Whats happened is everyone thinks inflation is dead,but it isnt,its doing what it always has through history,its waiting for velocity to start to move.

Imagine a £200k pension with an £8k draw down and 1% fees.Then imagine instead of increases we get falls of even 5% a year.Within 5 years the pension has been cut in half.

 

That's the problem with the suppossed eradication of inflation,people forget the importance of hedging it.

Added to that QE/Zirp has created more junk bonds than ever before.

Despite the fact I anticipate us buying heavily into UST's next year,doesn't stop me believing theyre a crap long term investment.

 

21 hours ago, JMD said:

thanks Kibuc,

Would you have a view on these type of companies? I have listed 3 large established ones (1st line, >$1bn cap), and 3 medium size younger ones (2nd line, $100m-$1bn cap). These look solid prospects to me. Are there any others that you personally favour or maybe hold?   

Franco-Nevada, Royal Gold, Wheaton Precious Metals                                                                                                                              Osisko Gold Royalties, Sandstorm Gold, Maverix Metals 

 

I'm thinking also about which small operators (< $100m cap) might be good ones, risky yes, but worth a punt if they have signed themselves up to a potentially lucrative project?

 

WPM/RG/FN all look very toppy to me

Decl of interest: held Sand since Nov 18 and bought first stake in OR last week as they've dropped quite a bit recently.

 

14 hours ago, DurhamBorn said:

Dont forget most reflation stocks are connected to commods and their price increases.Even the transports do well because the oil price goes up,they hedge  years out and it forces people out of their cars.Its actually the cost of the basics that drive the cycle.Even the defence equipment makers gain because more conflicts are likely over resources,real,or just the threat.In this long dis-inflation people have got used to energy being almost free compared to earnings,that will change.Aldi can be cheaper than Sainsbury as much as they want,but they still have to fill their lorries with diesel.What catches people out in a reflation as well is the fact economies can be struggling yet commods going up in price.Thats because once velocity moves and people sense the currency being printed away they buy real assets.Allocation is going to be tricky for everyone and likely this thread ,if it is still going will focus more and more on that as we enter the cycle.

And thats what the CB's forget.They've printed into declining velocity.Heaven forbid it starts going up and they're still hoping to print.

12 hours ago, Talking Monkey said:

Just reading that looks like some epic pension crises coming towards the middle to end of the next decade. Would the Fed be able to prevent a 40-50% decline in the S&P during the market downturn

Not a lot they'll be able to do to stop it in many circumstances

 

[sancho panza]

20 hours ago, JMD said:

thanks SP for your previous information on oil/gas. Are you able to share any info., perhaps the sancho-coma-scores, on the European utilities you found?

On first read that '70%' allocation sounded very high, but I think I remember you saying that you expected those commodities to be first to run high, from which point you anticipated gradually/tactically selling in order to buy long term reflation stocks. If my recollection is correct is this still your plan? Its just that i'm interested in the time-frame for this, would you be making a judgement on a stock by stock basis, say between how 'high' some commodities had got against how 'cheap' a reflation stock was? i.e. it may take months or may take years to reinvest from commodities to reflation stocks.        

I  developed the coma scores precisely to prevent a rerun of my underperformance ref CNA.

I'll have a look on those utilities next week when I have time.Just saying CNA has traded as a basket case when actually its numbers arent unusual in the sector.

I wouldn't be nervous if by late Dec 19  (around current prices) we were around 20% PM miners,35% big oil&gas(BP,RDSB etc),3% potash, 5% copper, 3%oil services, 10% mid tier US oil & gas producers...off the top of my head.I'll take our chances.

Genereally we build positions slowly but then sell in a oner.When these get shifted on,hopefully next year,it'll be fore UST's and cash

DB is buying reflation stocks,I'll generally be buying back the ones we sell next year for hopefully a lot less than we sold.

As ever,all the best laid plans etc.

[sancho panza]

1 hour ago, Bear Hug said:

I have ~10% in IL gilts in my work pension contributions which I considered to be quite safe against any spikes in inflation as they are index-linked.  With all the talk of the negative rates, I have checked the BoE yield curve data, here it is:

 

BoE is 50% index linkers iirc.Youre in good company........do as they do not as they say.

 

......tell the public inflation is dead then load their pension und the other side of the trade.

[Bear Hug]

50 minutes ago, sancho panza said:

BoE is 50% index linkers iirc.Youre in good company........do as they do not as they say.

 

......tell the public inflation is dead then load their pension und the other side of the trade.

Good point. Although I suspect they may have offered slightly better value when they bought them compared to now. 

I have pretty much the usual Ftse / world options in work DC and just can't bring myself to switch any of it to cash. At least with cash in the bank, I can get 1.5%. In cash fund it's pretty much nothing. Half of it was employer contributions so can't complain too much I suppose.

[Castlevania]

12 hours ago, Clueless Imbecile said:

Just wondering...

Do you guys have automatic dividend re-investment switched on in your share accounts?

When I buy equity index-trackers I ususally buy accumulation units so that the dividends get automatically reinvested. I believe that is where most of the compound growth comes from over the long term.

However, with individual stocks I don't automatically reinvest the dividends. My reasoning is that I think a handful of, say, up to 25 different stocks is nowhere near as diversified as a tracker fund that might have 100 or more different stocks. I therefore plan to let the dividends mount up as cash in my S&S ISA. I would then "rebalance" perhaps once per year and manually reinvest the dividend cash into whatever stock(s) I think appropriate.

Cheers,
Clueless Imbecile

Disclaimer: I am not an expert. Anything I post here is just my opinions, which may not be factually correct. My posts are intended purely for the purpose of debate and are not to be taken as advice. If you act on any of the above then you do so entirely at your own risk. I do not accept any liability.

Personally I don’t think it matters much if you auto reinvest or if you save up the dividends and manually buy into something else when you have enough. The key part is that you don’t go spending that dividend cheque down the Dog and Duck.

[Castlevania]

11 hours ago, Harley said:

Same impetus for me - approaching possible retirement so it's now income and retention of capital that take the lead from capital accumulation.

Bonds are an issue as I aim for a balanced "floor" portfolio with a 25% bond holding but share your concern.  Fortunately, I hold some NS&I inflation linked bonds from years ago which I have included in my portfolio so am almost there.  25% PMs has been easy as a long term PM bull.  Not very happy with 25% short term cash (short term bonds) though.  Other than that, that leaves equity which, given my separate upside income fund, means mainly international value plays.  Would be nice to include commodities at some point though so maybe producers in the equity section and/or reclassify the PM class as "hard assets" and include some pure commodities there.

That sounds a lot like Harry Brown’s Permanent Portfolio.