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

[sancho panza]

On 24/01/2020 at 12:45, Barnsey said:

Handmade Burger Co and Hawkin's Bazaar both in administration past couple days, the clearing out continues!

Wow...double wow.

https://www.thestar.co.uk/news/people/handmade-burger-co-shuts-meadowhall-restaurant-full-list-all-19-sites-set-close-1374478

Joint administrator David Griffiths said: "The casual dining market in the UK has experienced significant challenges over the last four years, largely as a result of overcapacity in the sector, which has resulted in a significant number of insolvencies.

"Sales at Handmade Burger Co restaurants have almost halved during this period, which has proved to be unsustainable.

[Bricks & Mortar]

4 hours ago, JMD said:

but not sure how he gets to that q3 pull back for gold/silver at a time when the stock market is also falling?

That is your deflationary collapse, or debt deflation, big kahuna... the main event.

It's caused by people/businesses/entities being forced to pay back their debts.   It starts with a contraction in the economy and markets.  Assets and business values go down.  Losses are made.  Lenders want their money back.  No new credit is available.  It's a forced sale of whatever you have thats got value, for whatever price you can get.   It comes at a time when there are fewer buyers.
Everything heads South at once.

PS - Don't bet the house on Q3.  Timing is the hardest thing to get right.

[sleepwello'nights]

4 hours ago, JMD said:

Apparently David Hunter predicted the recent consolidation/pull back in gold/silver which he said would be followed by big gains, but then (in q3 I believe) one last pull back in gold/silver that may sort-off coincide with US stock market falling to 3000, but quickly followed by the big 'melt-up' beginning late this year. Interesting, but not sure how he gets to that q3 pull back for gold/silver at a time when the stock market is also falling?

 

 

I think the rationale is that in a sell off many investors have to sell liquid assets to cover margin calls and other exposures. Gold and silver are amongst the liquid assets being sold so their price drops.

[sancho panza]

On 24/01/2020 at 22:51, Cattle Prod said:

Entirely possible. Are you modelling Brent or WTI, and when roughly do uou see the cycle low in?

My interpretation is that the current retracement is paper oil, sentiment driven. The discounting of the 3 recent geopolitical risk events is evidence of that, its completely nuts on a fundamental level. There is still a mass perception of supply, and only US shale decline will shake it. Well if they want to give us a discount, fine!

There is mounting evidence that the physical market is tight, despite the falling price. Most obviously, its still backwardated. Why not in contango? People are still paying a premium for available rather than stored physical. And sometimes quite a premium. In three of my companies markets we are getting $4 (in the UK), $6 and $10 above Brent prices per barrel. There is low sulphur oil in Australia going for c. $100 a bbl! Maybe 90 now.

$43 sounds like a nice discount, I expect it would be short lived. I've already started buying some deep otm call options. I can't resist the leverage and they are getting cheaper. Dyodd 

One last point DB, demand falls are rare and tend to only happen in major economic crises. The EIA is constantly revising upwards last years/quarters demand projection. It's been a linear trend for decades.

Good you noted the danger before the turn. The paper oil market is huge and can slap the price around very easily (as we are seeing now). Its also now being priced in CNH and I don't fully understand the implications of this. Price is set at the margin, and a CNH rise against the dollar could be lowering dollar oil prices when they buy it (as the largest importer).

I'm not a futures trader so not sure the significance pf back/cont but as below.

I'd have thought that most hard commodities would see backwardation more ususally than in softs due to the nature of the underlying ie oil doesn't go off/storage costs etc.WHereas softs eg apples go off.

 

ref the out of the moneys ,I'm sorely tempted to have a punt on natural gas prices.........

[sancho panza]

On 24/01/2020 at 23:52, DurhamBorn said:

Its a very choppy road map because the market is so big ,but i think the bottom could be in within 3 months.Remember as well we mean demand falls against expected production.Demand can still be going up,but it slows while production rises.If that makes sense.Im happy to be buying into the sector now,though i do have ladders set in case my target hits.We always use WTI.

If the printing happens as expected the road map looks incredible 7 years out.Over $200 is almost certain and even $300 in reach.

I did an interesting sketch of where price pushes the speed of green investment,and once oil goes over $110 its actually hydrogen that comes into play.I see a situation where big oil uses the massive cash flows at $100+ oil to fund hydrogen and kill electric.Thats a very interesting thought and im wondering is big oil already thinking it?.I think they are.That wasted wind power at night might not be charging batteries,but making hydrogen.Makes you wonder who is pushing SSE shares up,they are nearly 50% up from my bottom ladder now.I also think Drax might convert to hydrogen at some point and is an interesting play on the above,without stab in the dark risk.

thought provoking DB>Never thought of this or really considederd it.

On 25/01/2020 at 11:51, Harley said:

I'm finding Max Keiser's vidoes/podcasts very relevant at the moment.  He just did one on the (Soros?) idea of Reflexivity.  Relevant to this systems discussion.

 

PS:  @sancho panza, one episode also covered a bit about the velocity of money.  The one above covers a hell of a lot more (like the potential issue with trackers/ETFs I and others have mentioned).  Oh, how rude of me, hello Max!

Just been told i've got to go to sleep.I'll be back to this in the week H.

[leonardratso]

7 hours ago, sancho panza said:

thought provoking DB>Never thought of this or really considederd it.

Just been told i've got to go to sleep.I'll be back to this in the week H.

wake up.

[Bobthebuilder]

I thought i would throw in, hydrogen is a big thing in the domestic boiler market as an alternative to methane/ natural gas. Lots about it in the gas trade magazines and manufactures working on it.

A small domestic gas combi boiler is 24kw / 230v = 104 amps, thats going to be a lot of electric usage in cities (bigger than the main fuse in your house and not currently possible without hot water storage), not a problem for hydrogen.

[MrXxxx]

9 hours ago, Democorruptcy said:

Might as well?

 

Did the same with ISAs recently...I worked out that the saving fee wise over  their competitors equated to staying with  them up to a maximum of three years, after that you started to pay more due to their higher fees.

[Barnsey]

About that huge Boris bounce in business sentiment reported a few days ago :

Almost 500,000 businesses under ‘significant financial distress’

https://www.eveningexpress.co.uk/news/business/almost-500000-businesses-under-significant-financial-distress/
 

The number of businesses in significant financial distress has hit almost half a million, the highest number on record, according to an influential report.

News first spotted in FT but didn’t link due to paywall. The problem with sentiment is that it takes time to feed through to economic reality, and let’s face it we still have a turbulent year ahead no matter what. Don’t be too surprised if the BoE do indeed cut, or at the very least the number of Doves increases significantly. Leads and lags are greatly misunderstood.

Tax returns deadline Friday, 3 million still not submitted. We’re just over 2 months away now from the full extent of BTL tax relief reduction too, along with CGT being payable within 30 days for sold residential property rather than current 10-22 months.

[spygirl]

15 minutes ago, Barnsey said:

About that huge Boris bounce in business sentiment reported a few days ago :

Almost 500,000 businesses under ‘significant financial distress’

https://www.eveningexpress.co.uk/news/business/almost-500000-businesses-under-significant-financial-distress/
 

The number of businesses in significant financial distress has hit almost half a million, the highest number on record, according to an influential report.

News first spotted in FT but didn’t link due to paywall. The problem with sentiment is that it takes time to feed through to economic reality, and let’s face it we still have a turbulent year ahead no matter what. Don’t be too surprised if the BoE do indeed cut, or at the very least the number of Doves increases significantly. Leads and lags are greatly misunderstood.

Tax returns deadline Friday, 3 million still not submitted. We’re just over 2 months away now from the full extent of BTL tax relief reduction too, along with CGT being payable within 30 days for sold residential property rather than current 10-22 months.

Im not keen on these xx business in distress.

Wed need a historical chart to see if it makes sense.

The UK has a *LOT* of tiny, pointless businesses due to self employment scams for benefits.

THE BTL tax return lacst chance saloon stuff is interesting. No way can they say 'We didnt know ...' Local radio is constant  accountant ads

 

[MrXxxx]

14 hours ago, MrXxxx said:

Though I would post this for those new to the financial game or like me, just a more visual learner...helped me contextualize what DB et al are talking about:

 

So thinking about the narrative in this video I have a couple of questions:

1. Why didn't we have a full on depression in 2008?...was it the rapid QE, and if so why didn't this result in hyper inflation?

2. To me it looks as thought we an on the inflection point of a depression...we are starting to see one of the three `repair` methods that causes deflation (personal austerity), and one that causes inflation (Government borrowing for infrastructure), but when and how are the other two (debt forgiveness, wealth distribution) going to appear?

3. Following from 2 above I assume the worst sectors to be invested in for the next two years would be Financials, Comm Real Estate and Consumer Discretionaries as they will hit rock bottom, but to then buy into these pre-Reflation?

[TheCountOfNowhere]

13 minutes ago, MrXxxx said:

So thinking about the narrative in this video I have a couple of questions:

1. Why didn't we have a full on depression in 2008?...was it the rapid QE, and if so why didn't this result in hyper inflation?

###tell that to the thousands living in tents and queuing at food banks 

13 minutes ago, MrXxxx said:

2. To me it looks as thought we an on the inflection point of a depression...we are starting to see one of the three `repair` methods that causes deflation (personal austerity), and one that causes inflation (Government borrowing for infrastructure), but when and how are the other two (debt forgiveness, wealth distribution) going to appear?

###look at the newspaper headlines from the depression... They didn't tell people it was a depression till they thought it was over. 

13 minutes ago, MrXxxx said:

3. Following from 2 above I assume the worst sectors to be invested in for the next two years would be Financials, Comm Real Estate and Consumer Discretionaries as they will hit rock bottom, but to then buy into these pre-Reflation?

### I still don't get the... We're buying investments now ready for the stick market crash.. 

[BoSon]

If the world catches a cold when the USA sneezes, what happens when China is hospitalised? 

Say this snake-flu closes down China commercially for more than a few weeks (Chinese New Year apparently means factories close for a few weeks anyway, conveniently), what would the knock on effect be in terms of supplied to the rest of the world?

If we add in panic buying in the UK when the first cases are reported and the supermarket shelves are emptied and in the meantime international trade is suspended (non-urgent flights grounded) so the supermarkets can't get more produce in stock.

What will it take to crash the stock markets?

What opportunities are there for cashing in?

Buying shares in medical supply companies (face masks will be selling out already as people panic buy and the prices escalate due to supply/demand), drip into index trackers as they bottom out, fire sale of assets as zombie economies are brought to their knees if it goes pandemic and brings economies to a halt (debt still needs to be paid while the shops are empty and everyone sat at home waiting for the all clear)?

What should we be looking into buying now or keeping an eye on in preparation to pile in?

[NogintheNog]

53 minutes ago, TheCountOfNowhere said:

1 hour ago, MrXxxx said:

So thinking about the narrative in this video I have a couple of questions:

1. Why didn't we have a full on depression in 2008?...was it the rapid QE, and if so why didn't this result in hyper inflation?

###tell that to the thousands living in tents and queuing at food banks 

Yes, rapid QE (FED, BofE, BoJ, ECB) to support the financials and associated assets (stocks, housing, commods), all the things that would have fallen steeply in price before anything else. However it only flowed so far in counteracting the deflation that was fighting the other way, and didn't get to the real essentials like food. A substantial increase in the food price may have created a hyperinflation. Also had the desired effect of pushing interest rates down to virtually zero, where they've been ever since! But hey, give the central banks a chance, they've only just started! Where do they go from zero when the deflation rears up next time? It's plain to see they've not managed to 'normalize' rates during this cycle.

Massive QE, probably as much again and probably directly fed into the economy. Then we'll get some inflation.

 

1 hour ago, TheCountOfNowhere said:

Quote

2. To me it looks as thought we an on the inflection point of a depression...we are starting to see one of the three `repair` methods that causes deflation (personal austerity), and one that causes inflation (Government borrowing for infrastructure), but when and how are the other two (debt forgiveness, wealth distribution) going to appear?

###look at the newspaper headlines from the depression... They didn't tell people it was a depression till they thought it was over.

My view is we are still in a depression, real wealth has evaporated (good wages, savings) and 'on paper' wealth has replaced it (high house prices, stock prices).

A lot of paper has been applied over the cracks...

1 hour ago, TheCountOfNowhere said:

Quote

3. Following from 2 above I assume the worst sectors to be invested in for the next two years would be Financials, Comm Real Estate and Consumer Discretionaries as they will hit rock bottom, but to then buy into these pre-Reflation?

### I still don't get the... We're buying investments now ready for the stick market crash.. 

The party is still going, but I'm not drinking the punch anymore. I've got my coat and umbrella ready for the approaching thunderstorm as I'm walking home! As DB says, my priority is to just maintain +1% above inflation on my asset wealth.

[Democorruptcy]

11 hours ago, Noallegiance said:

Well I found out that the biggest one of the four is passive 50% in US stocks and the fund has gone up in line with the current bubble since circa 2005.

I figure if I don't move it I stand to lose a large portion, if I do move it I'll be responsible for losing any myself with the potential for not losing it!

I wasn't commenting on your decision to move, just that if you were, you might as well apply for the cashback.

[Democorruptcy]

10 minutes ago, NogintheNog said:

My view is we are still in a depression, real wealth has evaporated (good wages, savings) and 'on paper' wealth has replaced it (high house prices, stock prices).

Is it just paper wealth? Isn't it real for those who sell to those who buy? There's an awful lot of money generated from it that is real and looking for yield. Amerman has made that point.

His latest http://danielamerman.com/va/ccc/F3debt100Fund.html

[DurhamBorn]

The China affect will be zero.Nothing,a rounding error probably.

Liquidity drives things and the cost of money.If anything things like this create short term demand spikes.

What does happen though is people look for simple reasons in the markets.

Oil is now down to $52.Almost every big bank and broker said it was going up at $60.They need some excuse to say why they were wrong.It happens time and time and time again.

The lags in oil were there in full view.The only question i have now is if the swift fall means my $43 target is now too low as the velocity fall has been quicker than i expected and the road map might turn early.

Remember as well,oil falls like this are deflationary.In 6 months they will feed into the inflation indexes and the CBs will see outright deflation risk flashing and they will act accordingly.

Il give you an example of how this sort of thinking above though hits investors.

They buy a mask maker at a higher price because demand has gone up for 5 weeks out of the norm.

They sell companies to pay for it whos demand will go down for 5 weeks out of the norm.

 

 

[NogintheNog]

29 minutes ago, Democorruptcy said:

Is it just paper wealth? Isn't it real for those who sell to those who buy? There's an awful lot of money generated from it that is real and looking for yield. Amerman has made that point.

His latest http://danielamerman.com/va/ccc/F3debt100Fund.html

It's a fair point. To me wealth is also about liquidity, and houses don't seem very liquid to me! If you sell out into cash, yes you are liquid. But you are probably up-sizing or downsizing, so the liquid money goes back into property. There's a lot of people with housing and other debt, and very little liquidity!

[NogintheNog]

I thought Trumps interview with CNBC at Davos last week was pretty scary....

 

[Loki]

11 hours ago, sancho panza said:

otm call options

That feeling when you Google something, sit staring at the screen blankly for 10 seconds, sigh, and close the tab. 

 

[spygirl]

1 hour ago, BoSon said:

If the world catches a cold when the USA sneezes, what happens when China is hospitalised? 

Say this snake-flu closes down China commercially for more than a few weeks (Chinese New Year apparently means factories close for a few weeks anyway, conveniently), what would the knock on effect be in terms of supplied to the rest of the world?

If we add in panic buying in the UK when the first cases are reported and the supermarket shelves are emptied and in the meantime international trade is suspended (non-urgent flights grounded) so the supermarkets can't get more produce in stock.

What will it take to crash the stock markets?

What opportunities are there for cashing in?

Buying shares in medical supply companies (face masks will be selling out already as people panic buy and the prices escalate due to supply/demand), drip into index trackers as they bottom out, fire sale of assets as zombie economies are brought to their knees if it goes pandemic and brings economies to a halt (debt still needs to be paid while the shops are empty and everyone sat at home waiting for the all clear)?

What should we be looking into buying now or keeping an eye on in preparation to pile in?

Nothing.

Or rather China fcking up is a positive for the rest of the world in terms of business activity, employment.

 

[sleepwello'nights]

1 hour ago, NogintheNog said:

I thought Trumps interview with CNBC at Davos last week was pretty scary....

What did you find scary about it.

I did chuckle when he talked about American inventions. Edison with the light bulb. Puzzled though when he said an America invented the wheel.

[Castlevania]

3 hours ago, spygirl said:

Im not keen on these xx business in distress.

Wed need a historical chart to see if it makes sense.

The UK has a *LOT* of tiny, pointless businesses due to self employment scams for benefits.

THE BTL tax return lacst chance saloon stuff is interesting. No way can they say 'We didnt know ...' Local radio is constant  accountant ads

 

The data comes from analysis the insolvency practitioners Begbies Traynor do. The data should be available going back a good few years.

[JMD]

12 hours ago, Bricks & Mortar said:

That is your deflationary collapse, or debt deflation, big kahuna... the main event.

It's caused by people/businesses/entities being forced to pay back their debts.   It starts with a contraction in the economy and markets.  Assets and business values go down.  Losses are made.  Lenders want their money back.  No new credit is available.  It's a forced sale of whatever you have thats got value, for whatever price you can get.   It comes at a time when there are fewer buyers.
Everything heads South at once.

Don't bet the house on Q3.  Timing is the hardest thing to get right.

Thanks everyone for their replies, now this has been explained to me, I believe I recall that the possibility of a future liquidity PM 'fire-sale' (as the yanks say) event has been discussed here before.  

 

Bricks&Morter, good point but no I wouldn't/can't do that as i'm not a trader (no skills unfortunately). Instead, i'm here to learn and to position for the long term. My dilemma(?) is I am not yet at my desired PM allocation which for me is 20% of portfolio. For me I really need to justify going to that 20% level, and mostly that would be by taking advantage of any future sell off along with resulting cheaper prices in physical silver and silver miners.

...I guess its the same as setting ladders which DurhamBorn introduced me to.    

 

 

[JMD]

5 hours ago, Bobthebuilder said:

I thought i would throw in, hydrogen is a big thing in the domestic boiler market as an alternative to methane/ natural gas. Lots about it in the gas trade magazines and manufactures working on it.

A small domestic gas combi boiler is 24kw / 230v = 104 amps, thats going to be a lot of electric usage in cities (bigger than the main fuse in your house and not currently possible without hot water storage), not a problem for hydrogen.

Bobthebuilder, that's interesting - are there any small or big suppliers/manufacturers you know who are good in this area? 

I think WorcesterBosch was mentioned recently.