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


spunko

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29 minutes ago, Errol said:

Just as a matter of historical record, this isn't the case. Empires and currencies always fail - without exception. I'm sure the French before the revolution were all sitting around saying 'Don't worry, the economy will fix itself'. The Romans were probably the same. I could go on.

And when the challenger to an existing Empire takes the stage, the conflict has always - without exception - lead to large-scale warfare and massive destruction.

History is not linear. We don't get to just carry on with everything getting better and the same systems in place for ever. Things die. Economies die. Nations fall.

Sure, the human race will endure, but the costs may be prohibitive (see WWI, WWII etc).

True individual currencies always fail,but the economies of advanced countries nearly always recover.The key is to avoid the wipe outs along the way.Capital itself is never destroyed,simply moved.As you know Errol those who owned gold in the Weimar republic lost nothing.If they then sold that gold and bought US shares,then sold and bought gold again in the 70s,then bonds in the 80s etc they would end up very rich indeed.Currency wipe out and revolution are the two main risks for people at extremes.Currency wipe out is the likely endgame of the next cycle,not this one.Deflation is the huge risk facing us now.At least a credit deflation.

45 minutes ago, Tdog said:

In the long term ... as you know the economy isnt being allowed to function properly to fix its problems. Nanny state is just adding to them.

Indeed.Although we could argue the economy is doing exactly as can be expected given CB action.

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On 12/11/2019 at 07:37, spygirl said:

No, slightly more complex.

You are dealing with a huge shock - everyone in a town works for X corp. Them poof!, noone does.

 

Nutshell explanation of structural unemployment.Using that as the main parameter makes Leicester's current top 6 employers interesting to say the least.council,3 hospitals,2 universities............not a single private sector employer comes near them.

Think you're absolutely right that cheap housing is the beginning of the new beginning if an area is going to get one.

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1 hour ago, DurhamBorn said:

True individual currencies always fail,but the economies of advanced countries nearly always recover.The key is to avoid the wipe outs along the way.Capital itself is never destroyed,simply moved.As you know Errol those who owned gold in the Weimar republic lost nothing.If they then sold that gold and bought US shares,then sold and bought gold again in the 70s,then bonds in the 80s etc they would end up very rich indeed.Currency wipe out and revolution are the two main risks for people at extremes.Currency wipe out is the likely endgame of the next cycle,not this one.Deflation is the huge risk facing us now.At least a credit deflation.

Indeed.Although we could argue the economy is doing exactly as can be expected given CB action.

So why is having gold on anyone's radar now? 

Why not just load up the debt, inflate it away and then buy PMs in 7 years time?

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On 12/11/2019 at 23:28, Bear Hug said:

Just to check that my understanding is correct: is smaller=better for this ratio? 

Except that EBITDA doesn't include expenses, so New Gold may show a high EBITDA and therefore low TEV/EBITDA but overall position is probably a loss (net earnings are negative)

as MP and K say, one ratio doesn't fit all ,there are nuances.

having said that,Fresnillo,Goldfields,Newmont,Barrick,Anglo,Kinross leap out to me as the value plays there worth investigating more.Having said that we already have 1%+ positions in each.

We've been buying Kinross over the few days after it's recent drops.

Every time I lookat XAU,I think Barrick looks particualrlygood value for where we are,

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12 hours ago, kibuc said:

There's no single measure that will tell you definitely which stocks are good value. With New Gold, for example, they may seem cheap by both measures you mentioned, until you take a look at their FUBAR balance sheet.

TEV/EBITDA is backward-looking by nature, so WDO looks expensive as its price partially includes future production from Kiena.

First Majestic is super-duper expensive, no doubt about that, but I guess it's a premium you pay for owning one of very few intermediate miners that haven't delivered any nasty surprises recently. Personally I'm massively reducing atm and I might end up selling the whole lot.

Fortuna Silver = China, thanks but no thanks.

And so on. Might use it as a starting point but by no means a "be all - end all" kind of measure.

Fortuna is Peru/Mehico non?

https://www.fortunasilver.com/mines-and-projects/

Silver Corp is China iirc.......

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always worth reading la Hodge

I've been looking at Apple's share price and wondering how long it can keep going...............bubble meh!!!!

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https://www.icis.com/chemicals-and-the-economy/2019/11/the-next-billion-phone-users-will-be-buying-10-smart-feature-phones-not-1000-iphones/

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Smartphone sales plateaued in Q3, down 9% since Q3 2017’s peak of 1.55bn, as the chart shows.  But the bigger threat from smart feature phones – now retailing for as little as $11 – continues to grow as Reliance and Vodacom launch new models in India and Africa.

Smartphone sales are also seeing important shifts in market shares:

  • Samsung has never recovered its 32% share in 2013 and is now around 21%
  • Apple’s share has slid gently downwards from 18% in Q4 2016 to 12% today
  • Low-cost Chinese companies, particularly Huawei, have been the big winners

The Top 3 Chinese companies’ share has nearly trebled from 12% in 2013 to 34% today.  And Huawei has gone from just 5% in 2013 to 18% in the same period.

This has important consequences, and not just for the smartphone market.  President Trump has been attacking Huawei on grounds of national security, but consumers outside the USA – where Huawei has only a small presence – clearly like their phones. And it is hard for European or other governments to ban Huawei from major telecoms contracts, if their citizens are happily using Huawei phones.

This may, of course, change if Huawei continues to lose access to the latest Google versions of Android. But for the moment, at least, the US pressure has fired up nationalist support in China itself, where its market share reached 42% in Q3. Apple, meanwhile, saw its Chinese market share fall to just 5% in Q3 – a far cry from the days when it was the No 1 aspirational buy.

Apple’s issue remains its decision to focus only on the high end of the market. This worked well when it was perceived as having the “best phones”. But today, aside from Apple aficionados, it is hard to find many consumers who believe Apple offers features that other phones lack. And on that basis, it makes little sense to pay the vast premium being demanded for the brand image.

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The writing has been on the wall for smartphone pricing for some time, as the Statista chart confirms.  The average global price peaked as long ago as 2011 at nearly $350 ($400 in $2019).  Since then, it has almost halved in inflation-adjusted terms to $215 today.

As I noted back in 2015, when Apple was riding high, it was inevitably going to have to introduce cheaper models to maintain market share.  But instead it chose to “double up” on the luxury end of the market, putting profit ahead of volume.  Last year’s decision to stop reporting unit sales for its key products was therefore no great surprise, given that no company wants to be always reporting bad news.

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In turn, of course, this has driven a growing disconnect between the stock price and Apple’s revenue growth, as the chart shows. Between 2016-2018, they moved in line in terms of percentage change. Revenue has flatlined since Q3 2018’s peak of $266bn, whilst profit has fallen 3% due to declining iPhone sales.

But investors continue to bid up the stock price from its low of $142 at the start of the year to $260 today. Technical indicators confirm it as a ‘strong buy’, but as common sense would suggest, also warn that the stock is highly over-bought:

  • Of course, Apple might be able to repeat its iPhone success in its new target areas of wearables and services
  • But its decision to undercut the $1099 iPhone 11 Pro Max with a $699 version suggests volume is still important after all

One day, as I noted back in August, investors may start to realise that low cost smart feature phones with a 4G connection are the new growth area.  Reliance’s Jio service is now offering them in India for just Rs 800 ($11), half the original 2017 launch price, whilst Vodacom South Africa is also offering them att Zar 299 ( $20).

The next billion users are more likely to be buying these than iPhones. Suppliers to the industry might want to rethink their current strategies.  At some point, perhaps not too far away, consumers in western countries might also start to realise these can provide most – if not all – of the features that they really need.

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Talking Monkey
5 hours ago, DurhamBorn said:

It will collapse,at the end of the next cycle,not this one.Inflation is the only answer they will get.They want some,they will get lots.

Cheers DB scary end point that, inevitable too I guess

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17 hours ago, spygirl said:

Posted on GE thread.

Should also be posted here.

https://surplusenergyeconomics.wordpress.com/2019/11/11/158-an-air-of-unreality/

Growth, output and debt – coming clean

If you were to believe official figures, British economic output increased by 11% between 2008 and 2018, adding £212bn (at 2018 values) to recorded GDP. This in itself is far from impressive and, since population numbers increased by 7% over that decade, left GDP per capita just 3.6% ahead.

Even these uninspiring figures flatter to deceive. Over a decade in which GDP has increased by £212bn, debt has risen by £890bn, meaning that each £1 of recorded “growth” has been accompanied by £4.18 in net new borrowing.

This, to be sure, is an improvement over the 2000-08 period, which witnessed a reckless, credit-driven bubble in which debt increased by £5.63 for each £1 of “growth”. But the UK economy remains excessively dependent on continuing increases in debt.

At last, someone saying it as it is.  Except they don't finish the job:  real inflation probably makes it zero at best and the uncosted degredation from that population increase (housing, increased GP waiting times, traffic, environment, social spending, etc).  A total farce.

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3 hours ago, kibuc said:

Correct, I was looking at SilverCorp presentation at the time of writing the post and got confused. I'm an old man.

:Old: you n me both.

1 hour ago, Harley said:

At last, someone saying it as it is.  Except they don't finish the job:  real inflation probably makes it zero at best and the uncosted degredation from that population increase (housing, increased GP waiting times, traffic, environment, social spending, etc).  A total farce.

Agree on the bit in bold Harley.As regulars on here will know the only measure of hosuing used in inflation figures is the imputed rental equivalnce measure that's the 'H' in CPIH...............and independent types like Shaun Ricarhds pour scorn on it as a measure of rents.

Aslo worth us pointing out that the imputed rental figure that comprises 12% or so of GDP is an accounting fiction.

Scary chart time.Surprising lack of correlation S&P500 and oil

https://www.macrotrends.net/1453/crude-oil-vs-the-s-p-500

Crude Oil vs the S&P 500

This interactive chart compares the daily price of crude oil versus the level of the S&P 500 over the last 10 years. In 2008, it was the S&P that refused to confirm the final spike in commodity prices whereas in 2016, oil is the asset class that is indicating that global deflationary forces are setting in.

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worth noting commericals deeply net short the yellow stuff historically amidst record 2 year levels of open interest..Despite that,still finding myself buying dips at the mo.

second cot chart for longer term context.you can see the clear buy signals 2015 and 2018 when commercials went nearly net long and then net long.

but then commericals were deeply net short for most of the big bull to 2011.

 

http://cotpricecharts.com/commitmentscurrent/

 

GC.png

https://www.barchart.com/futures/commitment-of-traders/technical-charts/GC*0

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3 hours ago, Harley said:

At last, someone saying it as it is.  Except they don't finish the job:  real inflation probably makes it zero at best and the uncosted degredation from that population increase (housing, increased GP waiting times, traffic, environment, social spending, etc).  A total farce.

Unfortunately most economists speak with forked tongue - and that's so 'deflating', psychologically speaking or course(!) - but then I guess economists are mainly there to speak the economy 'up' (bit like a doctor's bedside manner approach to healthcare). Maybe it was ever thus, 'lies, damned lies...' etc - but today the 'experts' mangled stats/lies of omission (being generous) have a sense of python-esque unreality.   

As an aside, but to reference the 'air of unreality' article title in a literal sense, have people noticed the price of air at petrol filling stations? For many years (since early 90's as I recall it) I paid 20p to use the air-machine, this price remained static until only a few years ago when the cost rose to 50p - however I now notice that it has increased again - to a full £1... surely that's a psychological (and inflationary) trigger point if ever there was one!?  

 

HOWEVER - i'm not seeking to dismiss the article - it is interesting and hints at energy being the driver of the economy (not finance) - and hence why fracking will prove to be a temporary distraction. This is all part of the economic philosophy of De-Growth which could be seen by many as merely being a green political agenda, but (moving extinction rebellion aside for the moment) there does seem to be many moving parts coming together here, which chime with the investment predictions of this thread. Reminds me of the following link (ignore the title, its a little dry but I think worth listening to from start) that discusses the technicalities of the energy topic a little more...

 

 

Harley, all this talk about energy reminded me of the discussion you introduced a few weeks back concerning 'investing close to the sources'. Very relevant to the ethos of this thread of course. But for me (and others here perhaps) I think it was a particularly powerful idea for those who might wish to balance their portfolio between 'pure' reflation stocks and also having a 'sensible' investment allocation focused on the fundamentals/sources. I wonder, have you developed the idea further?   

 

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31 minutes ago, JMD said:

I wonder, have you developed the idea further?   

Alas I talk a good game but am not quite a hardened completer/finisher type!  Actually, TBF, I've been working hard getting stuff done before the weather turned.  Lots of logging and stuff, including building the log stores!  We're talking 15 to 20m3 tightly packed ash all cut and split, plus ample kindling.

Almost done now so thanks for the reminder as I do need to get back to things financial.  The browsing I have done suggests a mixed bag but it would be good to do a more structured review to see if there is a path.

PS:  Another reason for cracking on is a worry about uninvested cash given the repo, Deutsche Bank, etc noise.  With bail ins now in place (unlike last time) losing a bit on some investments may be lower risk!

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2 hours ago, sancho panza said:

Agree on the bit in bold Harley

I would actually cost the social costs of that increased population as at least as high.  I'm not just talking the touchy subjective stuff but stuff like increased benefits, NHS, police, education, social services,, etc spend, traffic congestion, housing costs, lower wages, and so on.  All the stuff borne by us plebs, not the corporates and the like who get cheap labour, higher demand, lower training costs, etc.  And the polos and civil servants who get to sit at the world's top tables as long as selection is only by total and not per capita GDP.

PS:  Regarding economists, most work for a living, so are mercenary and have a job to do.  No reason to expect them to be impartial.

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https://us10.campaign-archive.com/?e=72fd910da5&u=451473e81730c5a3ae680c489&id=348aa8d2f2

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43 minutes ago, Harley said:

Alas I talk a good game but am not quite a hardened completer/finisher type!  Actually, TBF, I've been working hard getting stuff done before the weather turned.  Lots of logging and stuff, including building the log stores!  We're talking 15 to 20m3 tightly packed ash all cut and split, plus ample kindling.

Almost done now so thanks for the reminder as I do need to get back to things financial.  The browsing I have done suggests a mixed bag but it would be good to do a more structured review to see if there is a path.

PS:  Another reason for cracking on is a worry about uninvested cash given the repo, Deutsche Bank, etc noise.  With bail ins now in place (unlike last time) losing a bit on some investments may be lower risk!

wondered where you'd been of late.Like @Barnsey been quiet too.

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1 hour ago, Harley said:

Alas I talk a good game but am not quite a hardened completer/finisher type!  Actually, TBF, I've been working hard getting stuff done before the weather turned.  Lots of logging and stuff, including building the log stores!  We're talking 15 to 20m3 tightly packed ash all cut and split, plus ample kindling.

Almost done now so thanks for the reminder as I do need to get back to things financial.  The browsing I have done suggests a mixed bag but it would be good to do a more structured review to see if there is a path.

PS:  Another reason for cracking on is a worry about uninvested cash given the repo, Deutsche Bank, etc noise.  With bail ins now in place (unlike last time) losing a bit on some investments may be lower risk!

Thanks Harley, glad to hear that you are well prepared and will be cosy for this forecasted cold winter. I get a similarly warm feeling as I read the comments on this blog and elsewhere regarding the commodity/PM universe, because the more convinced I am of the benefits of getting a bigger exposure into this 'sector'.  

Curious you mention the risk of holding cash, as I have the same 'problem'. Do you think investing cash in 'sources/fundamentals' might have reduced downside risk, but potentially a big upside, because if there is a 'path' as you mention above, we might expect that path to front-run most equites, i.e. allowing profits to be re-deployed in other equities if desired? I myself would prefer to stay in the fundamentals until mid-cycle, but just wondered if this aspect was one of the benefits you had considered. ...Perhaps this is going too low-level at this stage, but thought i'd mention as it is one of the benefits I had in mind. Anyway, I would definitely be fascinated to hear more as you develop this.        

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19 hours ago, Errol said:

Just as a matter of historical record, this isn't the case. Empires and currencies always fail - without exception. I'm sure the French before the revolution were all sitting around saying 'Don't worry, the economy will fix itself'. The Romans were probably the same. I could go on.

And when the challenger to an existing Empire takes the stage, the conflict has always - without exception - lead to large-scale warfare and massive destruction.

History is not linear. We don't get to just carry on with everything getting better and the same systems in place for ever. Things die. Economies die. Nations fall.

Sure, the human race will endure, but the costs may be prohibitive (see WWI, WWII etc).

Errol, I think your referring to the Thucydides Trap. For what its worth my take on this is that the looming China/US confrontation will take the form of a new 'cold war', and hopefully China will eventually self-destruct from within. China, historically within its own borders, has periodically suffered from warring kingdoms and factions emminating from its many diverse provinces. China is highly centralised at present with a president for life, but things could easily change if/when its economy fails. For example, the US effectively bankrupted the USSR by competing with it militarily/'space race', etc. The US is in a weakened state today but the stakes are high so I expect the US to game the capitalist system to its advantage. How China responds is unknown, but it is an outlier philosophically in Asia with N. Korea its only friend, and has many internal critics that it regularly locks up.    

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https://www.zerohedge.com/s3/files/inline-images/the%20best%20bull%20market.1573743376642.png?itok=y80mcE5w

Very interesting that the current market isn't actually that bubbletastic by historical standards, that's not something that i'd expected to see!  

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8 hours ago, sancho panza said:

worth noting commericals deeply net short the yellow stuff historically amidst record 2 year levels of open interest..Despite that,still finding myself buying dips at the mo.

second cot chart for longer term context.you can see the clear buy signals 2015 and 2018 when commercials went nearly net long and then net long.

but then commericals were deeply net short for most of the big bull to 2011.

If by "commercials" they mean the miners,  wouldn't they almost always be net short? After all, they get to cover their shorts with actual delivery of the stuff they dig out of the ground.  Or am I over-simplifying?

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1 hour ago, MvR said:

If by "commercials" they mean the miners,  wouldn't they almost always be net short? After all, they get to cover their shorts with actual delivery of the stuff they dig out of the ground.  Or am I over-simplifying?

Commercials are the players who use gold on a daily basis or have a need for it.Inherently,as you say,they will be net short as they use futures to hedge their exposure to the physical ie they don't want to be left with overpriced inventory.Someone such as a jewellry manufacturer will be sat on gold (ie long) for a period of time and will hedge it dropping in value while he/she holds it.Which was why I was referncing the depth of the commercials short positions which are historically sizeable and also the amount of open interest,clearly a lot of people looking for direction and willing to spend to hedge it.

 

The net long of 2018 was indeed unusual it was effectively regular users of the yellow stuff saying they saw no point hedging their long physical position.

 

 

 

1 hour ago, Majorpain said:

https://www.zerohedge.com/s3/files/inline-images/the%20best%20bull%20market.1573743376642.png?itok=y80mcE5w

Very interesting that the current market isn't actually that bubbletastic by historical standards, that's not something that i'd expected to see!  

the start of the 1950's bull was from an intergenerational low.the 2008 run was from en elevated position

image.png.5445ee6a9e09ac5faec15b4612701ddb.png

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Anyone has a view on BT given Openteach nationalisation plan? I suspect nothing may come of it but slightly worried as I still have a massive holding.  Cashing out now will just about not lose any money.

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6 hours ago, Bear Hug said:

Anyone has a view on BT given Openteach nationalisation plan? I suspect nothing may come of it but slightly worried as I still have a massive holding.  Cashing out now will just about not lose any money.

Labour has no chance of winning the election these are fantasy politics,laughable actually.The point is though the fact that all these areas are places that will see investment and growth going forward.Even if Labour had a minority government,that i doubt very much,the Libs wouldnt support this kind of rubbish.Just noise.

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9 hours ago, sancho panza said:

the start of the 1950's bull was from an intergenerational low.the 2008 run was from en elevated position

image.png.5445ee6a9e09ac5faec15b4612701ddb.png

Yes, It was more an observation that its easy to think the world is in a unique situation, I look at things like that and think its rarer than thought that this time is different and history wont repeat itself!

1950's Bull was followed by half a working life of flat to declining stocks.

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