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

[Don Coglione]

10 hours ago, Majorpain said:

https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart

Treasury Bonds are the key, not the inflation stat.  Worldwide commodities are in $.

Its already flattened off around 2%.

 

10 hours ago, Ponty Mython said:

Stupid c*unt strikes again.

Humble apologies, Majorpain, I quoted the wrong person.

What you state is bang on.

[TheCountOfNowhere]

9 minutes ago, MrXxxx said:

Now I understand...seriously!...I have been struggling with the concepts on here from the beginning (despite going away and reading up), and thinking I get it only to find myself confused again...now with the Broccoli example I understand finance :-)

When I read... Dis inflation I though deflation. It all makes when you realise they're taking about the rate of inflation. 

Has anyone considered negative dis inflation 😏

The one fly in the ointment that I can see is the powers that be are so entrenched in protecting the rich, the bankers, the establishment, their power that they'll let the world burn before raising rates. 

I. E. Ww3. 

[No One]

14 hours ago, Bobthebuilder said:

This would be interesting for some of us i think. Im starting to build my SIPP and will buy stocks in £1k blocks as a long term hold.

Not taken as advice of course DYOR and all that, i will buy stuff i like anyway but would be nice to see a general direction of group mind thinking.

Thanks everyone as always.

Get a trading 212 for practicing like i am doing. There’s a part of the forum for tips.

 

ndivia has been doing very well since I started but I’m not sure how much it can continue.

 

i bought card factory after the crash and it’s been doing very nicely too and so has Lockheed Martin since Iran cirsis this year

[DurhamBorn]

1 hour ago, TheCountOfNowhere said:

When I read... Dis inflation I though deflation. It all makes when you realise they're taking about the rate of inflation. 

Has anyone considered negative dis inflation 😏

The one fly in the ointment that I can see is the powers that be are so entrenched in protecting the rich, the bankers, the establishment, their power that they'll let the world burn before raising rates. 

I. E. Ww3. 

Thats right,dis-inflation is a trending lower of inflation.Its why almost everyone gets it wrong when we get a cycle turn.The key for macro strategy is the fact dis-inflation has lots of cross market affects.In its first instance it leads to a fall in the cost of money (interest) and that is the no1 driver of everything in a money system like we have.

The simple Broccoli example above is a nice easy way to see it.The price has hardly increased for 12 years,an average of 0.4% a year,,sometimes it jumped up a bit (weather/fuel spikes),but the trend has been getting cheaper compared to incomes.That means extra income has been able to go on other things,holidays,lease cars,houses,imported goods etc.

Now there is nothing stopping the price dis-inflating much longer.However,as the economy slows (Fed tightened liquidity) governments now need to invest.The political cycle demands it,as does the macro situation.That will put demand up for inputs,workers,energy etc.The broccoli farmer will see his margins go to zero as these input costs go up,and he will have to increase prices.Everyone across the economy will follow.

Now most of the things people need are cheap right now,and a few increase's wont hammer people at first,but its the direction.Its also the transfer of money.That 10p on Broccoli isnt all going to the farmer or supermarket,its going to the oil company,the potash maker,the tractor spares maker etc.

In simple terms the economy starts to divert money from a trampoline manufacturer in China (the consumer has less money),to the oil companies,the energy companies.

In a disinflation you want to be as near to the consumer as you can be .In a reflation you want to be as far away as you can be.Or in areas where the consumer is forced to swap.An example would be drop the 2nd car and use public transport,or keep the car an extra two years (transfer money from car dealers to car repair).

[Bobthebuilder]

45 minutes ago, No One said:

Get a trading 212 for practicing like i am doing. There’s a part of the forum for tips.

 

ndivia has been doing very well since I started but I’m not sure how much it can continue.

 

i bought card factory after the crash and it’s been doing very nicely too and so has Lockheed Martin since Iran cirsis this year

Thanks,

I have been buying stocks in a trading account and ISA since 2005 so not a complete novice, i have always up until now drip fed monthly. I have started a SIPP for the tax relief and being self employed will be putting lump sums in as i wont know my annual limit until nearer the end of the tax year.

I will stress that i am not looking for any advice just interested in peoples ideas.

I walked past a Card Factory shop on Friday afternoon and had a glance inside, yes it was surprisingly busy.

I have had some nice risers (and fallers) over the years, made 70%ish on the gold miners last year (thanks everyone)and current nice greenies include National Grid,SSE,Stagecoach, Standard Life Aberdeen and Tesco(not one talked about on here).

Thanks again everyone hope you are all doing well.

[TheCountOfNowhere]

43 minutes ago, DurhamBorn said:

Thats right,dis-inflation is a trending lower of inflation.Its why almost everyone gets it wrong when we get a cycle turn.The key for macro strategy is the fact dis-inflation has lots of cross market affects.In its first instance it leads to a fall in the cost of money (interest) and that is the no1 driver of everything in a money system like we have.

The simple Broccoli example above is a nice easy way to see it.The price has hardly increased for 12 years,an average of 0.4% a year,,sometimes it jumped up a bit (weather/fuel spikes),but the trend has been getting cheaper compared to incomes.That means extra income has been able to go on other things,holidays,lease cars,houses,imported goods etc.

Now there is nothing stopping the price dis-inflating much longer.However,as the economy slows (Fed tightened liquidity) governments now need to invest.The political cycle demands it,as does the macro situation.That will put demand up for inputs,workers,energy etc.The broccoli farmer will see his margins go to zero as these input costs go up,and he will have to increase prices.Everyone across the economy will follow.

Now most of the things people need are cheap right now,and a few increase's wont hammer people at first,but its the direction.Its also the transfer of money.That 10p on Broccoli isnt all going to the farmer or supermarket,its going to the oil company,the potash maker,the tractor spares maker etc.

In simple terms the economy starts to divert money from a trampoline manufacturer in China (the consumer has less money),to the oil companies,the energy companies.

In a disinflation you want to be as near to the consumer as you can be .In a reflation you want to be as far away as you can be.Or in areas where the consumer is forced to swap.An example would be drop the 2nd car and use public transport,or keep the car an extra two years (transfer money from car dealers to car repair).

Based on that.. Halfords share price at all time low?

[Harley]

11 hours ago, DurhamBorn said:

Those are all business cycle moves withing a long term cycle.......

 

30 minutes ago, DurhamBorn said:

Thats right,dis-inflation is a trending lower of inflation.Its why almost everyone gets it wrong when we get a cycle turn.......

Combined (with the original Treasury one), probably your best ever posts on the subject.  To have a version of the big picture (I personally buy into, although worry about what peversions TPTP are capable of) should provide tremendous comfort and support for many.  A really top job! 

We maybe just need to complete the series with a simple timeline (maybe with proxy dates) showing which sectors to be focussing on and why. 

It's more the phasing/sequencing than actual dates (for reasons you've previously mentioned).  Now that would be a roadmap. 

Someone produced something along those lines (but more generic and not sequenced) a while back.

[Bobthebuilder]

9 minutes ago, TheCountOfNowhere said:

Based on that.. Halfords share price at all time low?

I have said before on this thread that i like Halfords, they could have a much larger audience with what they stock, tools, paints etc. If money does get tight then more people might turn to repairing/ servicing the car/bicycle etc themselves.

[TheCountOfNowhere]

49 minutes ago, Bobthebuilder said:

I have said before on this thread that i like Halfords, they could have a much larger audience with what they stock, tools, paints etc. If money does get tight then more people might turn to repairing/ servicing the car/bicycle etc themselves.

Are they in debt? 

 

Might be a buy on Monday 

[spygirl]

On 15/01/2020 at 16:28, spygirl said:

The original budget was 4m, which is beyond a joke for small town showhouse.

To blow that out to £25m is beyond a joke.

The Tees barrage, which is a huge bit of civil engineering, cost ~50m.

The theatre is just a crappy little town show house.

High streets wont regenerate, theyll change.

In Stocktons case, its throwing good money after bad.

The way coucils do is they loo to levy ctax  and taxes to pay for their mispsending.

In this case, the the small nubmer of tax paying citizens and business will have to bshoulder a large waste of  money.

 

 

https://www.gazettelive.co.uk/news/teesside-news/its-been-big-part-life-17590974

Stockton New Look joins MnS and Debs in quitting.

[DurhamBorn]

3 hours ago, TheCountOfNowhere said:

Based on that.. Halfords share price at all time low?

Exactly.Who needs Halfords when everyone has a lease car?.Who needs Halfords when cars are sold on before they need new batteries,wipers,bulbs etc.Who needs Halfords when the only people with cars that need lots of parts are likely people who can do a bit themselves and buy the parts from cheap sources.Halfords are a classic example of a company who struggles in dis-inflation.Its a company you would pick up on cross market work.Interest rates increase,people hold their cars longer,less money goes to Ford plants,more goes to companies that make the parts or fit them outside the main dealers.

Halfords is a retailer,and its got a lot of online competition.It might  carry on down to nothing.BUT,the next cycle is on its side.If you look the management have cut the divi,but are investing in the service area.Buying up garage chains (supply their own garages parts) and also just bought the rest of TyresontheDrive for almost nothing.Its likely that business is losing money and why the other owners sold out,but Halfords will be able get it to profit i expect and maybe even expand to fitting batteries etc.

Now im not saying Halfords is a fantastic buy.I am happy though to take a very small holding in it and increase to 0.3% of my portfolio.

These are the sort of things a macro strategy road map can show up to a contrarian investor.

Not all prove right of course,you can easily get a 50% down like Centrica,but what does that matter when you get some 400% up like Sibanye,130% up like Harmony etc.

Its all about tilting your wealth however much you have to areas that as a whole should get a tailwind from the next cycle,and even better if they are on their arses share price wise due to the affects of this cycle.Keeping a balance,so even if you are wrong,it simply means you under-perform,not get cleaned out.

[Loki]

https://www.zerohedge.com/economics/bank-englands-governor-fears-liquidity-trap

It is to laugh.

[DurhamBorn]

2 hours ago, TheCountOfNowhere said:

Are they in debt? 

 

Might be a buy on Monday 

£62million debt ,probably about 1.2x free cashflow or 0.7 EBITDA.

[Democorruptcy]

17 hours ago, DurhamBorn said:

Those are all business cycle moves withing a long term cycle.The US long bond topped out around 1982.Since then we have been in a dis-inflation cycle.Rates have trended lower and assets that increase in value with lower rates (houses for instance) have increased in price to assume the rates will remain where they are now.Houses are priced on rates at 0.5% (or actually around 2% mortgage rates).Road maps are so we can ignore mid cycle moves (or trade them with cross market work).

For instance Broccoli in 2007 was 180 on the RPI index.December it was 189.In 12 years its increased in price by around 5% or 0.4% a year.The rate of price increases fell to almost nothing.

The only real inflation in the system for a long time has been increased taxes and government spending.They have mostly gone into imports for consumption and China mostly has swallowed the dis-inflation.Thats all about to change.I think the dial will swing back all the way to 1982,perhaps past,but at the very least half way would be 7% on the long bond and 6% inflation on the CPI.That is the minimum target by 2028,though i expect much higher.

Input costs have started to rise over the last 18 months as the cycle is ending and that is seeing margins crushed.This disinflation will end with a debt deflation as is happening now and then a full on inflation cycle.Its that nobody expects and hardly anyone is positioned for.

Thats right,and the long bond is the key,the Fed plays around a lot with the shorter dated stuff.

The UK had 5.2% CPI in 2011 so I'm assuming you mean USA inflation and expect The Fed to raise their interest rates unlike the BoE who left ours at 0.5%? Then if The Fed did raise, you expect the BoE to follow, even though they ignored several Fed rises until they started cutting themselves. The problem is that couldn't 6% inflation just be seen as 'blip minor' it's temporary, let's look through it? 

Re Halfords if anyone needs any car parts don't go there, unless you want to pay inflated prices to try boost any shareholding in them! I was quoted £47 for 3 wipers for a Suzuki Swift. Eurocarparts were £31 with 50% off the first order!

[DurhamBorn]

1 hour ago, Democorruptcy said:

The UK had 5.2% CPI in 2011 so I'm assuming you mean USA inflation and expect The Fed to raise their interest rates unlike the BoE who left ours at 0.5%? Then if The Fed did raise, you expect the BoE to follow, even though they ignored several Fed rises until they started cutting themselves. The problem is that couldn't 6% inflation just be seen as 'blip minor' it's temporary, let's look through it? 

Re Halfords if anyone needs any car parts don't go there, unless you want to pay inflated prices to try boost any shareholding in them! I was quoted £47 for 3 wipers for a Suzuki Swift. Eurocarparts were £31 with 50% off the first order!

US inflation yes.I think they will think its a blip and be way behind the curve until the end of the cycle.As ever though it will build slowly,i wouldnt expect the big jumps above say 8% until the last year or two,so out into 2026 area.

[BadAlchemy]

Hi. Good (?) article about Chesapeake I thought might be worth sharing as they were mentioned here a few times recently...

https://investorplace.com/2020/01/chesapeake-energy-is-drowning-in-debt-without-a-life-raft-in-sight

"In 2016 Chesapeake paid $286 million to service its loans, on revenue of nearly $7.9 billion. Last year it paid about $518 million. In 2020 it will pay nearly $700 million. Revenue is expected to remain under $10 billion."

[Democorruptcy]

34 minutes ago, DurhamBorn said:

US inflation yes.I think they will think its a blip and be way behind the curve until the end of the cycle.As ever though it will build slowly,i wouldnt expect the big jumps above say 8% until the last year or two,so out into 2026 area.

If inflation is rising but they are way behind the curve, then cash and savings are losing value in real terms, so doesn't that drive even more money into assets like shares and housing? Or a gradual rise in inflation is accompanied by a gradual rise in rates that turns the screw on debtors? I suppose a lot depends on whether wages rise with inflation? 

[TheCountOfNowhere]

4 hours ago, DurhamBorn said:

£62million debt ,probably about 1.2x free cashflow or 0.7 EBITDA.

That's good right.

 

In answer to the question why would anyone use Halfords... If rates shoot up...pcp deals will be unaffordable... Its ll be bangers all round and Hayes manuals for Christmas 

[Loki]

14 minutes ago, TheCountOfNowhere said:

That's good right.

 

In answer to the question why would anyone use Halfords... If rates shoot up...pcp deals will be unaffordable... Its ll be bangers all round and Hayes manuals for Christmas 

I think Durhamborn is more on point with Stagecoach to be fair.  Steering and suspension components are one thing, but the array of sensors, CANBUS etc on modern vehicles means you're better off with something other than a leasemobile if you want to do your own spannering.  I can see most of the current German wankermobiles being beancans before they're bangers, to stick to your fry-up analogy...

[MrXxxx]

6 hours ago, DurhamBorn said:

Halfords is a retailer,and its got a lot of online competition.It might  carry on down to nothing.BUT,the next cycle is on its side.If you look the management have cut the divi,but are investing in the service area.Buying up garage chains (supply their own garages parts) and also just bought the rest of TyresontheDrive for almost nothing.Its likely that business is losing money and why the other owners sold out,but Halfords will be able get it to profit i expect and maybe even expand to fitting batteries etc.

This got me thinking...what they need to do is add another two niche (roadside assistance/hire) alongside the other two (parts/servicing)...

...picture this, your car fails, Halford assistance with plugin unit arrives and a) can repair/replace part on the spot; you swipe your credit card to pay, or b) cannot fix on roadside so takes you and car to service depo where you hire car. Once repaired car delivery driver brings your car and takes away hire vehicle...

....a complete, hassle free solution for you with a company you can trust, a complete market for Halfords.

[MrXxxx]

6 hours ago, DurhamBorn said:

£62million debt ,probably about 1.2x free cashflow or 0.7 EBITDA.

Can anyone give me a fix/range on good/bad values for free cashflow and EBITDA?

[MrXxxx]

2 hours ago, TheCountOfNowhere said:

That's good right.

 

In answer to the question why would anyone use Halfords... If rates shoot up...pcp deals will be unaffordable... Its ll be bangers all round and Hayes manuals for Christmas 

Well they had better go back to producing them (Haynes) the way they did thirty years ago, as the last time I look at one they were just glorified owners manuals!

[Harley]

39 minutes ago, MrXxxx said:

Well they had better go back to producing them (Haynes) the way they did thirty years ago, as the last time I look at one they were just glorified owners manuals!

As everything, get the service manuals off the web!

[sancho panza]

14 minutes ago, sancho panza said:

some old news thats becoming new news.

 

The last bit I've put in bold is particualrly worrisome.

https://wolfstreet.com/2020/01/18/brick-and-mortar-melts-down-in-the-uk-worst-decline-since-2009-as-big-retailers-collapse/

Brick-and-Mortar Melts Down in the UK, Worst Decline Since 2009, as Big Retailers Collapsed, 14,500 Stores Closed

by Wolf Richter • Jan 18, 2020 • 119 Comments

But even red-hot online sales cooled off late in the year as consumers turned sour.

By Wolf Richter and Nick Corbishley, for WOLF STREET.

Consumers in the UK, generally a hardy bunch when it comes to borrowing and shopping, were not in a shopping mood before the holidays. Retail sales in December at non-food brick-and-mortar stores – ranging from specialty stores to department stores – fell 1.6% compared to December last year, seasonally adjusted, according to the UK’s Office for National Statistics (ONS). The less volatile three-month moving average fell 1.1% year-over-year, the biggest decline since September 2009, when consumers were trying to clamber out of the Financial Crisis:

The decline in December caused the non-food brick-and-mortar index to drop to its lowest level since June 2018. And it’s down 3.2% since its peak in July 2019, an indication of just how fast retail sales have deteriorated in the second half of the year:

Even sales at food stores fell 1.7% year-over-year in December. But gasoline sales rose 4.7%, on higher fuel prices.

Even red-hot online sales cooled off in the second half.

Online sales – including sales by the online divisions of brick-and-mortar retailers – had skyrocketed 18.4% in the seven months from December 2018 through July 2019, to a huge all-time record, but have since fallen off, in another sign of retail weakness in the second half, reducing the 12-month growth from December 2018 through December 2019 to “just” 13.3%:

Online sales in the UK now account for 19% of total retail sales. The biggest gains were in the household goods sector whose online sales surged 23% year-over-year in December. This rapid shift to online retail poses a major threat to the viability of many brick-and-mortar stores that have failed in building a vibrant and large online business.

All combined, including online sales, fuel sales, and grocery sales, total retail sales have fallen 1.6% from the peak in July 2019 – due to the weakness in the second half – but eked out a year-over-year gain of 1.5%.

Why this sudden slow-down in retail sales in the second half?

The British Retail Consortium — which focuses on brick-and-mortar stores and doesn’t cover big online retailers, such as Amazon — hammered the uncertainty surrounding Brexit:

“2019 was the worst year on record and the first year to show an overall decline in [brick-and-mortar] retail sales. This was also reflected in the CVAs, shop closures and job losses that the industry suffered in 2019. Twice the UK faced the prospect of a no deal Brexit, as well as political instability that concluded in a December General Election – further weakening demand for the festive period.”

“We’ve had the perfect storm in recent years,” says Martin Newman, a former multichannel operator for Ted Baker, Harrods and Burberry. “The political uncertainty has fueled a fall in consumer confidence and a subsequent tightening of belts.”

And lots of bankrupt companies. The highest profile collapses in 2019 included Thomas Cook, the world’s oldest travel agent that collapsed in late September, leaving 600,000 travelers stranded abroad. It was placed into compulsory liquidation, resulting in an estimated 6,500 job losses in the UK alone.

The brick-and-mortar meltdown.

Some of the biggest retailers that collapsed include:

• Debenhams, the department store that has graced British high streets for over 200 years and which was put through a “pre-packaged” administration in April. Around 4,000 members of staff were laid off. The store continues to trade after its creditors took control of the business, but is struggling to reinvent itself and just revealed plans for 19 more store closures this month.
• Bonmarche, the woman’s fashion chain that called in administrators in October, resulting in 2,900 lost jobs. It also continues to trade in administration, but its future, like Debenhams’ (and so many other chains), remains uncertain.
• Mothercare, Clintons, Links of London, and many other retailers fell into administration in 2019.

A total of 117,000 retail jobs were lost and 14,500 stores were closed in 2019 as a result of brick-and-mortar retail companies hitting the wall or simply cutting costs in a desperate bid to stay afloat, according to a report published by the Centre for Retail Research. The report identifies four main causes of the malaise:

• The high costs of running retail outlets, including rents and high labor costs.
• Low profitability resulting from anemic sales growth, high costs, squeezed margins and ruthless price competition.
• The rapid growth of online competition, with most growth achieved at the expense of brick-and-mortar retailers.
• Lack of preparation: low investment in stores and inadequate forward planning to anticipate the challenges of the future.

British consumers and their cherished credit cards.

Credit card balances have multiplied by a factor of four in seven years, from the post-Financial Crisis low of £55 billion in 2012 to £225 billion in November 2019. UK households, among the most solvent a generation ago, are now among the most indebted. Retailers and economists cherish that.

But the appetite for fresh debt appears to be fading, partly due to weaker confidence and the weakening retail environment late last year, but also because many consumers have already reached the outer limits of their borrowing capacity. In November, credit card balances fell on a monthly basis for the first time since July 2013, according to the Bank of England. But due to the online spending-and-borrowing spree in early 2019, credit card balances in November were still up 5.6% year-over-year.'

 

On 18/01/2020 at 12:06, DurhamBorn said:

That is exactly what the market is saying.He is right and the right action is to take the cash now as long as its for investment not spending on welfare etc.He wont do enough at first of course as its likely they will print maybe a trillion.What he does alone in the UK isnt what will drive inflation,its the fact everyone else will follow.EU,US,China,everyone.The world is looking down the barrel of a deflation that guts the fabric of society.They need inflation,and they will get it,but as always they will over cook.

I'd second that.If we'd let the deflation occur in 08,it would have been done and usted 5 years back.The various decisions to solve that crisis, will ultmiately,imho, make sure the actual crisis is far worse than it otherwise would have been.

The Fed(and other CB's) have destroyed price discovery in more than jsut the credit markets.

Posted above is a cross post from the collapse thread.

Check out the stat on UK credit card debt...............up four times in 7 years to £225bn...........what could go worng running that up on the back of endless fiscal deficits.

4 hours ago, BadAlchemy said:

Hi. Good (?) article about Chesapeake I thought might be worth sharing as they were mentioned here a few times recently...

https://investorplace.com/2020/01/chesapeake-energy-is-drowning-in-debt-without-a-life-raft-in-sight

"In 2016 Chesapeake paid $286 million to service its loans, on revenue of nearly $7.9 billion. Last year it paid about $518 million. In 2020 it will pay nearly $700 million. Revenue is expected to remain under $10 billion."

I wouldn't go near them at the mo,but if they're still in business before the natural gas/oil tunrs they'll mulitbag.Personally,I'm not sure they'll make it.

49 minutes ago, MrXxxx said:

Can anyone give me a fix/range on good/bad values for free cashflow and EBITDA?

I'd work out a rough average for the industry as things can vary hugely from sector to sector.

[No One]

7 hours ago, Loki said:

https://www.zerohedge.com/economics/bank-englands-governor-fears-liquidity-trap

It is to laugh.

or cry

 

I found a good video, well produced, that explains the REPO market crisis in well put laymans terms.