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


spunko

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10 hours ago, Tdog said:

Doombrose from the DT who is a permanent bear, is bullish for 2020.

Not sure if this is good as like me he is constantly wrong in wishing the economy to crash.

................................

The indicators for global growth are set fair for next year – but it is premature to talk of a new dawn: the financial system is still riddled with problems

The China-US trade truce sweeps away the last big roadblock. The crushing defeat of expropriation ideology in Britain helps too. It is a warning to parties across the world tempted by hard-Left populism. Global property is safer.

The stars are aligned for another year of respectable growth – albeit robbed from the future by policy abuse of the intertemporal Euler Equation – and mostly likely a further leg up in the asset boom. It feels like the onset of 1999 after the Federal Reserve rescued the US banking system, East Asia, and peripheral Europe with emergency rate cuts, and in doing so stoked the final delirious dotcom spike.

Bank of America says equity breadth signals the all-clear. It has told clients to prepare for a “market melt-up” over the next quarter, but with one caveat: a bearish warning from “credit technicals”. That is where the danger lies and it is spelt out in the US Treasury’s December report to Congress, which I explore below.

The Warren Buffett dictum is to be most vigilant precisely when everybody turns bullish. But it does look as if the 180 degree U-turn by the Fed and the European Central Bank this summer pulled the world economy back from the brink.

The switch from policy tightening to rate cuts and fresh QE (a combined $93bn [£70bn] a month) has prevented an industrial/trade slump spreading to services and reaching metastasis. The New York Fed’s recession indicator peaked in August at levels that normally lead to serious trouble. It has since dropped sharply.

While talk of a new fiscal dawn has been exaggerated – budget policy is turning slightly contractionary in the US, and stimulus is painfully slow in the eurozone – some net expansion is likely. Briefings ahead of China’s annual Economic Work Conference this week suggest that a three trillion yuan shot ($430bn) of special bond issuance by local governments for infrastructure is coming in 2020.

Remember that China still accounts for more of the world’s incremental growth each year than Europe and the US combined – though not for much longer.

My working assumption is that Donald Trump has enough economic momentum to retake the White House in November, for good or ill depending on your view, but undoubtedly with huge consequences.

Cognisant that some readers are Trump supporters, my personal view as an internationalist, free market, green Brexiteer is that this is not benign, and I reject the linkage between Trumpian ideology and the UK’s quest for restored self-government as a liberal sovereign nation-state.

But the markets can still turn on Trump. The stability report of the US Treasury’s Office of Financial Research (OFR) does not receive the attention it deserves. This year’s report flags the risks.

Banks are rock solid. Household debt has dropped from 87pc of GDP to a manageable 65pc over the last decade. The problem lies in the corporate bond markets, stock markets, hedge fund leverage, and the plumbing of the New York repo market. “Market risk is elevated,” it concludes. 

It is not just that the ratio of corporate non-financial debt to GDP is at an all-time high of 48pc: there is latent stress in the structure of the debt. Bond duration has risen to 5.8 years from an average of 4.8 over the last quarter century, based on the Barclays US Aggregate Bond Index. 

The OFR says a one point rise in borrowing costs would lead to a $1.4 trillion decline in value. Reflation could bring this about in a heartbeat. Yields on US five-year bonds have already covered a third of that ground since mid-October. In other words, the asset boom contains the seeds of its own destruction within it. My guess is that the trigger threshold is low.

More than half the $4.8 trillion market for investment-grade corporate bonds tracked by the OFR is rated BBB or lower, a fivefold increase since 2008. Some $800bn of these securities are perched just above junk at BBB-. The slightest shock risks a cascade of downgrades and ‘fallen angels’. 

Funds with strict mandates would be forced to sell these derated junk bonds. This is how fire sales begin, liquidity dries up, and a credit crunch takes hold. The junk category is already flashing a red alert. The number with debt-to-earnings ratios above six has risen to 30pc. 

The US leveraged loan market has risen to $2.4 trillion. The OFR is worried about the $1 trillion institutional chunk, mostly sliced, diced, and packaged into collateralised loan obligations (CLOs), and double 2011 levels.

Nearly all issuance is now on "cov-lite" terms with scant or no protection for creditors. Default losses will therefore be higher. “CLOs may perform worse in the next downturn than they did in the (Lehman) crisis,” it said.

You get the drift. The financial edifice is unstable, unsafe, and very late cycle. And remember, Dodd-Frank legislation and a straightjacket of post-crisis rules prevent the Fed from carrying another 2008-style rescue in extremis.

We had better hope that QE continues to blanket everything and hide all sins.

 

Is this not the screen play from `The Big Short` movie?...it seems we never learn from history where financial greed is concerned!

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8 hours ago, sancho panza said:

 

Glad to see that redundancy has had an upside DB.Without giving too much away and dyor natch,over what timeframe are you seeing 89.3.6-12 months?

going to be intriuging watching this unfold

It's a tragedy what successive govts have done to working people in this country.Not least through their flagrant abuse of inflation calcs....death by a thosuand cuts....good luck.,

 

have you thought of moving north?

I look about every so often for cheaper areas. It's amazing how much house can be rented in some areas.

We've both spent all our lives here. That seems to be the anchor holding us here as well as the kids being very settled.

It's a crying shame. We just need about 4 million less people in this neck of the woods.

Moving north also seems to just add to the migrant problem!

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All this talk of buying Oil.

 

What are peoples buying point for BP and Shell?

 

I was hoping to get BP for about 440p and Shell about 2100p.

 

I already have a 1000 shares in BP and 300 in Shell and they are about the only thing i can find out there that isn't overpriced.

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19 minutes ago, headrow said:

All this talk of buying Oil.

 

What are peoples buying point for BP and Shell?

 

I was hoping to get BP for about 440p and Shell about 2100p.

 

I already have a 1000 shares in BP and 300 in Shell and they are about the only thing i can find out there that isn't overpriced.

I'm 4 out of 5 ladders into Shell and looking for 1975 to be 100% allocated

I'm 2 out of 5 ladders into BP and need 385 to be 100% allocated but appreciate that I may not get there in this cycle.

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1 hour ago, CVG said:

I'm 4 out of 5 ladders into Shell and looking for 1975 to be 100% allocated

I'm 2 out of 5 ladders into BP and need 385 to be 100% allocated but appreciate that I may not get there in this cycle.

Iv tightened my ladders up a bit and started buying.Iv also been buying Repsol.Im trying to work out who is likely to be biggest in hydrogen going forward as well.Where i was working (worlds leading engine company probably) the engineers there think the industry will probably move to hydrogen,but arent sure on the route to market.They were leaning more towards all the spare wind power going into electrolysis.They were also buying in fuel cell tech.

The big players with the cash flow should take out the new players mostly and big oil should do the same.Especially as a big role for hydrogen will be mixing with natural gas for heating homes.

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3 hours ago, Noallegiance said:

I look about every so often for cheaper areas. It's amazing how much house can be rented in some areas.

We've both spent all our lives here. That seems to be the anchor holding us here as well as the kids being very settled.

It's a crying shame. We just need about 4 million less people in this neck of the woods.

Moving north also seems to just add to the migrant problem!

We rent in Leicester and it's a nice pad for a 3% gross yield.We're increasingly less tied to Leicester as friends and family move out and away.

Having said that, the two little Panzas are a in a nursery they love and we're settled for now.Moving disrupts kids no end.

Mrs P is on board with not buying as I prefer the liquidity/currency hedging/asset spread of equity investments but in the middle class world we live in,people think we're mad.I'd consider buying if we were renting on a higher gross yield but it's thoroughly depressing what we could buy for 3 times joint salary.

The age I am-49 now-I'm more prepping for my retirement.

Ref the bit in bold.couldn't agree more.

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80-90% allocated in my two FTSE income accounts.  Struggling to identify a few more stocks to hold and my last few purchases may have been barrel scrapping.  But the beauty now is I can mostly look at the monthly charts rather than the weeklies or dailies, possibly hedging any potential major falls, plus using them for any re-allocations.  Freezes up more time to look at some other accounts with other objectives.  I love the (sometime) clarity of the monthly charts.  Worth looking at a few with a few key technicals.

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Secotral rotations hide all manner of ills.Moves up in oil to June 08 covered up clear declines in banks/CRE in the headline numbers.Only sectoral ETFs here but they seem a reasonable proxy.

Follow on Q weould be what drove oil higher...weak $? demand?....weak $ seems most likely.As someone alluded earlier,recession got baked in at$100++ oil

Peak in the S&P on the weeklies was Oct 07 at 1561 ie 8.3%

There was a phoney war in equities until May 08 when S&P was 1425,having bottomed around 1300 in the march 08.

It then dropped off a cliff in Sept 08 from 1260 down to 760 in the Nov 08

Oct 07 to May 08

Went up
 

XLE(big oil ETF) from $76 Oct 07 to $86 May 08= +13%

XES (oil services) from $39.3 to $48.1 = +22%

 

Went down

XLF(financials)  from $27.4 to $20 = -27%

IYR(CRE) from $77 to $68 = -11.6%

QQQ(tech) from $54 to $49= -10%

XLY(cons Disc)  from $36.6 to $32.3= -11.7%

XLV (healthcare)  from $36 to $32= -11.1%

SOXX (semi con)  from $64.6 to $57.9 = -10.3%

XLI (industrials) from $40.5 to $38.8 = -4%

 

 

image.png.89fb49146a6ae61043cc2a71d97c3117.png

image.png.0ac4b5a8bd83dda9cb7d2ade326f6f17.png

image.png.1d7db8176c8694667dec4566f9b023f7.png

 

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11 hours ago, Cattle Prod said:

Last time Brent was $43 in August 2016, which is 34% lower than today, Shell (BP price history is distorted by Macondo payments) was 15% lower than today, not adjusting for dividends. OIH was 102% higher (I don't know if the composition changed much)!!

The oilies are already discounted, and I'm not worried about $43 a barrel. 

I would be a little squeaky bum about sub-$20, is $43 what you see possibly now, and the sub $20 in the deflationary bust?

The push for higher oil price will surely come from the fed,pushing some easy money if nothing else.

Russell 2000 off peak,lots of other sectors in peaking mood or certainly wayyyyyy too high for me to even put a toe in the air.

I think we may be on a timeline here hence my laddering by time rather than price.

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12 hours ago, Cattle Prod said:

Where did you manage to purchase those ETFs, if you don't mind my asking?

If you want to hold non-KIID certified ETFs,  you can take a position by selling in-the-money put options in the ETF, and waiting to be assigned the underlying.  I've got 100 GLD acquired this way in my Interactive Brokers account, which I'm using as a core position to trade options around. 

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17 minutes ago, Tdog said:

If you're going to do it, the younger the better. Ive got to move my 9 year old areas and schools shortly and im not looking forward to the disruption, id have done this in 2014 after nursery were it not for FFL/HTB. This is why ive a pure hatred for the Oxbridge blue team, the Oxbridge red team and the bubble theyve recreated!

I've added my thoughts.Couldn't agree more.I struggle to keep my boot from the TV when I hear

1) the blue team free market types extolling the benefits of capitalism when the taxpayer got his pockets filled with all the losing tickets RBS carried

2) the red team opining on the working classes when they did so much to push up rents and force wages down

 

 

 

on teh matter of weightings.an interesting titbit here

If Microsoft or Apple ever start tanking......

http://siblisresearch.com/data/weights-sp-500-companies/

image.thumb.png.a07b4ec5464cdec42f80d7d85f8ef248.png

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21 minutes ago, Tdog said:

If you're going to do it, the younger the better. Ive got to move my 9 year old areas and schools shortly and im not looking forward to the disruption, id have done this in 2014 after nursery were it not for FFL/HTB. This is why ive a pure hatred for the blue team and the bubble theyve recreated!

My eldest is 6. He's lived in 5 homes.

My loathing is reserved for all politicians.

They just don't get it. Why would they? They've no need to. 

George Carlin " It's a big club and you ain't in it.'

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reformed nice guy
2 hours ago, CVG said:

I'm 4 out of 5 ladders into Shell and looking for 1975 to be 100% allocated

I'm 2 out of 5 ladders into BP and need 385 to be 100% allocated but appreciate that I may not get there in this cycle.

Are you me? I had 385 for BP and 1975 for Shell

Spooky!

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Looks like a few of us have been taking stock at the macro pictures.  Precisely what I was doing yesterday as I was attempting to re-configure some SIPPS.  I use the Permanent Portfolio allocation model (others available) of 25% allocations for each of Equities, Bonds, Precious Metals and Cash.  My recent focus was on the equities and bonds. 

On equities, I have been using the following set of regional ETFs to fine tune allocations between geographical regions (e.g. to limit the bias to the US market), and here is their relative performance chart since they've all existed:

Capture.thumb.JPG.cdbf46d95e73fb92bc92409578e2ec5e.JPG

These are distributing ETFs so one would need to add the yields for total return numbers.  The UK (VUKE) has been dire (underlying and currency wise) and the USA (VUSA) has been streets ahead of the others, pulling up the All-World (VWRL) ETF.  But as SP says, you drill down on VUSA's holdings and that's mainly a tech story.  The trouble going forward is will this continue?  The risk of buying into this is these stocks correct, causing big falls overall.  A leveraged play.  I'm very pleased though to have focused the ISA based income accounts on the FTSE given its relative performance to date.  That leaves me to cherry pick the rest of the world in the SIPPs!

FYI I'm going to pull out of these ETFs and go with a single more income focused global ETF(s), accepting the default regional splits in those ETFs, which are better than VWRL (less USA) and (naturally) a lot less tech focused.  Such income focused ETFs can be dangerous as their selection methodology may result in just buying more troubled stocks (high yield for bad reasons).  I need to check this but I will also open a section of individual international dividend stocks.  I thought about going a sector route but I will save such plays for my trading account where price appreciation rather than dividends is the most important.  That will increase my ability to better play the themes here regardless of whether the stocks are dividend players or not.  Dividend players in the SIPP though for UK tax and US withholding tax purposes.  I just need to set sub-allocations for the 25% equity section of the portfolios, between the ETF(s) and individual stocks overall, and then for the individual stocks!    

That 25% bond allocation is a bitch!  I'm nowhere near that right now, especially since I reclassified NS&I stuff as cash (as they are closer to that than bonds as the principal is not at risk).  Bonds are coming back down atm but yields and the overall picture aren't attractive to me.  I would prefer to be able to hold individual bonds to maturity but that's quite limited in the UK.  Needs more creative thinking.

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2 hours ago, sancho panza said:

Secotral rotations hide all manner of ills.Moves up in oil to June 08 covered up clear declines in banks/CRE in the headline numbers.Only sectoral ETFs here but they seem a reasonable proxy.

Exactly what I've been doing for ages!  The overall indices mean little to me, it's the sectors beneath that which I used to trade in and out of, when we were allowed to buy US ETFs to do so!

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On 15/12/2019 at 01:26, Cattle Prod said:

Macrovoices is very good, with some great guests. I listen most weeks. Erik has been too cautious on gold, but is a long term bull, and has been directionally wrong on the dollar. I too think it has turned, and I think the reason is the "not QE" fed repo stuff easing the dollar liquidity problem. Jeff Sneider is a genius in this regard, he has predicted all 4 of the last dollar crunches. He's hard to understand/follow, but if you have time go into some of his Eurodollar university stuff. They also have Charlie McElligott on regularly, who consistently predicts turns in the S&P 500, with nothing more than a glorified spreadsheet. Its a free way to access his institutional letters. They offer great subs deals too, the most recent one for Hedgeye, kicking myself I didn't take it. They are worth watching too: they have just gone long oil too.

 

Just listening to McElligott now.very good.Thanks for psoting.

 

Jsut listenign to the Sneider/Gromen piece.Good explanation of USD shortage offshore vs onshore.Fed may well need to print to stop offshore dollar system imploding.Poss inflationary clearly.IR's less powerful tool given scale of offshore dollar problem.What matters more is offhsore banks unable to manage their balance sheets like they did before.

Fed out of ammunition.ECB never got off negative rates.

Eurodollar system infintely levered unless 'epic ' amounts of liquidty are produced.

2008 not a one off,system decaying,increasing responses from CB's that have increasingly little effect.

Private banks not creating dollar loans ie USD offshore.

Fed has no remit over offshore moeny

https://www.macrovoices.com/683-macrovoices-184-luke-gromen-jeff-snider

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Chewing Grass

Business banking, financial incentives to fuck-off from RBS.

Get £500/1000 to take your business elsewhere from RBS if you piss off to ones of these, make your customers feel like they are being booted out the door courtesy of Fred the Shred and the EU.

The choice is these...

Why we're asking you to consider switching to another bank

In 2008 and 2009 we received financial support from the UK Government. As a result, we made a commitment to help increase competition in UK business banking and reduce our market share.

Pretty uninspiring choice, including the Habib Bank.

1173051922_Screenshot-2019-12-18BusinessBankingSwitch-RoyalBankofScotland.png.fffdf01cc3e9644d0594583206c8c392.png

https://businessbankingswitch.rbs.co.uk/

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10 hours ago, CVG said:

I'm 4 out of 5 ladders into Shell and looking for 1975 to be 100% allocated

I'm 2 out of 5 ladders into BP and need 385 to be 100% allocated but appreciate that I may not get there in this cycle.

Thanks for posting your valuation range. Iv created a couple of alerts in my SIPP.

As I am a hopeless trader I have been drip feeding quietly for the last 3 months into the oil and gas sector hoping things will even out over the long run. Laddering I dont have the time to do keeping an eye on so many shares.  I consider it is important to at least have a position in the sector especially as the dividends on offer are favourable. 

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Bobthebuilder
46 minutes ago, Loki said:

Is before Christmas a good time to pick up stocks and shares at a lower price? 

 

Many city traders get paid on a Xmas bonus so 9 out of 10 years we have a santa rally, looking the same this year an all.

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14 minutes ago, Bobthebuilder said:

Many city traders get paid on a Xmas bonus so 9 out of 10 years we have a santa rally, looking the same this year an all.

Thanks mate

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11 hours ago, Noallegiance said:

My eldest is 6. He's lived in 5 homes.

My loathing is reserved for all politicians.

They just don't get it. Why would they? They've no need to. 

George Carlin " It's a big club and you ain't in it.'

Been thinking all day about your comment.We've been lucky by comparison.

Without being political-but I'm obviously goingto be-I'd never expect the Tories to change the law in favour of tenants a little more,but I do wonder if Labour could have done something(but then a lot of them had BTL's eg Alistair Darling-the man whop bailed RBS)

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6 hours ago, sancho panza said:

Been thinking all day about your comment.We've been lucky by comparison.

Without being political-but I'm obviously goingto be-I'd never expect the Tories to change the law in favour of tenants a little more,but I do wonder if Labour could have done something(but then a lot of them had BTL's eg Alistair Darling-the man whop bailed RBS)

I doubt it. Labour’s reform of housing benefit to Local Housing Allowance was disastrous. In the middle of a recession you had rents increasing by double digit % every year. The best thing Osborne did for me was freeze LHA. It stopped rents on new tenancies increasing every year. Then again this was London where you have half of all households renting, and over half of those requiring LHA to pay the rent I.e. over a quarter of all households can’t afford to live there. Not surprising when you see how high the rent is, which is only so high due to LHA...

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