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


spunko

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1 hour ago, MrXxxx said:

Interesting, I had the same thought on Friday whilst doing a First Aid refresher. The instructor was talking about asthma pumps and how the same drug had been used for fifty years...I then thought, "What actions have we taken in the last fifty years to resolve the issue of asthma?"

Salbutamol? (ventolin).I used to make that.Changed the way you take it a bit,delivery system,but thats all.We never looked for a cure for anything.Odd ones came along of course,but mostly they were looking for drugs to keep on top of things.I started there on Zantac and that was a fantastic money spinner.I remember the old technician training me telling me those 5 rooms making the tablets (mix it all,granulate,compress into tablets,film coat,sort) would produce more profit than the whole UK car industry.

 

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On 31/01/2020 at 20:48, DurhamBorn said:

My prediction against Cramer.A ladder buy in BP from today with 2 more ladders at 7% drops will outperform Tesla by 1000% by 2028 including dividends.At least.

Alerts set for 423.38 and 393.74!

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24 minutes ago, DurhamBorn said:

I remember the old technician training me telling me those 5 rooms making the tablets (mix it all,granulate,compress into tablets,film coat,sort) would produce more profit than the whole UK car industry.

Was that about the time of British Leyland? xD

If so that figures:Old:

4 minutes ago, Loki said:
On 31/01/2020 at 20:48, DurhamBorn said:

My prediction against Cramer.A ladder buy in BP from today with 2 more ladders at 7% drops will outperform Tesla by 1000% by 2028 including dividends.At least.

Alerts set for 423.38 and 393.74!

https://www.thisismoney.co.uk/money/news/article-7955659/BP-told-ditch-Russian-stake-save-dividend-Experts-say-15bn-sale-crucial.html

Quote

BP tried to expand into renewables in the early 2000s with its Beyond Petroleum strategy under Lord Browne, but suffered heavy losses.

Areeba Hamid, from Greenpeace UK, said: 'Bernard Looney joins BP just as the oil industry is becoming as toxic as the tobacco industry.'

 

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3 hours ago, Barnsey said:

Looks like the Chinese are getting ready for HUGE stimulus very soon, so our deflationary shock could already be here (I’ll say it again, look at Oil, Dr Copper and Baltic Dry Index), and our reflation may kick off sooner than expected too if China go really big.

Am I right in thinking that China as a creditor nation holds significant US dollar denominated debt in the form of US t-bills? So that could be used as the stimulus flooding the worlds markets with US Dollars = inflation.

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19 minutes ago, NogintheNog said:

Bernard Looney joins BP just as the oil industry is becoming as toxic as the tobacco industry

What did she mean by this? (If anything)

About him joining BP I mean.  She doesn't explain why that's notable in any way.

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26 minutes ago, NogintheNog said:

Not quite,im not that old xD.It used to make us laugh though when they used to roll out the old "we dont make anything anymore" mantra.I think we had some figures where the 21 of us working on Zantac (making the tablets themselves,not the rest of the support,packing,primary manufacture etc) and we made more profit in a day than a clothing factory in Asia made in a year with 1000 employees.Its a bit like today i noticed 3M are wanting process ops on £14+ an hour in Aycliffe,they make the dust masks there.I worked there for a while years ago.They will be knocking out a few million masks a day at the moment for this new virus thing.

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21 minutes ago, Loki said:

What did she mean by this? (If anything)

About him joining BP I mean.  She doesn't explain why that's notable in any way.

It means she is an idiot.I notice the article doesnt mention the massive area the likes of BP will control in the future.Hydrogen.

What happened to tobacco was telling.Once everyone said they were finished nobody invested,no new tobacco companies were formed.The industry then simply consolidated,cut costs and with no competition and no need to invest simply increased prices 6%+ a year on a falling cost base.Return all that to shareholders.

Big oil might end up doing the same.There will come a point where there is no point investing,so all that capital instead goes to shareholders.

Of course the macro situation points to maybe $43 oil and we are well on the way there now,ladders being filled and hopefully we get there.If it turns early fine.

The best investments can be those in areas where nobody wants to invest as there is "no future",but at the same time demand for the product is rising,steady ,or falling,but slower than prices will rise on it.

I honestly think big oil will get hydrogen competitive and maybe even crush electric vehicles.Electric will be used of course to make the hydrogen.I expect we will start to see some moves in the area soon.Dont rule out the likes of Shell or BP buying Drax etc and converting to Hydrogen.Sounds a long shot,and it is,but might happen.The sector will be red hot in 5 to 8 years.

 

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54 minutes ago, DurhamBorn said:

Not quite,im not that old xD.It used to make us laugh though when they used to roll out the old "we dont make anything anymore" mantra.I think we had some figures where the 21 of us working on Zantac (making the tablets themselves,not the rest of the support,packing,primary manufacture etc) and we made more profit in a day than a clothing factory in Asia made in a year with 1000 employees.Its a bit like today i noticed 3M are wanting process ops on £14+ an hour in Aycliffe,they make the dust masks there.I worked there for a while years ago.They will be knocking out a few million masks a day at the moment for this new virus thing.

I’m looking to buy bulk. Do they sell any yet?

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Democorruptcy
5 hours ago, Barnsey said:

I’d like EVERYONE on this thread to give this serious thought, this isn’t just another Flu, this is big, with lots of distorted lags and cover ups in data. I know we’ve seen plenty of potential triggers and have become completely numb to them, but this really is a different realm of risk.

Looks like the Chinese are getting ready for HUGE stimulus very soon, so our deflationary shock could already be here (I’ll say it again, look at Oil, Dr Copper and Baltic Dry Index), and our reflation may kick off sooner than expected too if China go really big.

Might just be the right time to really sharpen up your focus and manage risk

 

Said on the news this morning China were going to bung a trillion at it.

One of the knock on effects is Chinese workers being unable to go back to work outside China after the CNY.

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Democorruptcy
8 hours ago, Barnsey said:

I’d like EVERYONE on this thread to give this serious thought, this isn’t just another Flu, this is big, with lots of distorted lags and cover ups in data. I know we’ve seen plenty of potential triggers and have become completely numb to them, but this really is a different realm of risk.

Looks like the Chinese are getting ready for HUGE stimulus very soon, so our deflationary shock could already be here (I’ll say it again, look at Oil, Dr Copper and Baltic Dry Index), and our reflation may kick off sooner than expected too if China go really big.

Might just be the right time to really sharpen up your focus and manage risk.

 

I don't want to turn this into another Pandemic thread because we have one in off topic. However now Barnsey has suggested we take it seriously and I agree now, here's some background videos I found interesting. 

This is how the disease evolves

https://www.youtube.com/watch?v=xotNiLJDT-c

 

This is today and includes forecast numbers, peak date (20th April for Wuhan, other places after) 

https://www.youtube.com/watch?v=z05ZrMfKUDc

 

This is precautions you can take

https://www.youtube.com/watch?v=RECcmQQQOj8

Draw your own conclusions about how much it affects markets that might be stimulated etc but good luck everybody!

 

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9 hours ago, Barnsey said:

I’d like EVERYONE on this thread to give this serious thought, this isn’t just another Flu, this is big, with lots of distorted lags and cover ups in data. I know we’ve seen plenty of potential triggers and have become completely numb to them, but this really is a different realm of risk

Agree...I've decided to go long on Lemsips! :-)

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On 31/01/2020 at 19:53, Democorruptcy said:

Latest Hussman downdate:

 

 

Some real pearls in there.

Inflation isn't your friend(first casualty of inflation is market valuations)/Fed eased through 2001-2 and 2008/9 etc etc

https://www.hussmanfunds.com/comment/mc200130/

'Two weeks ago, the S&P 500 price/revenue ratio clawed its way to the steepest extreme in U.S. history. Having done so, investors now require market valuations to maintain a “permanently high plateau” at this level in order for continued growth in GDP, revenues, and dividends to collectively produce S&P 500 total returns of even 5.6% annually.

The chart below shows the current price/revenue extreme for the S&P 500.

 

S&P 500 price/revenue multiple

Amidst an “everything bubble” that has touched every asset class, I don’t believe that investors should imagine that there is some broadly appropriate investment that promises a satisfactory return despite such broad extremes. Even international stocks tend to lose significant value when U.S. stocks decline, regardless of their valuations. Yes, there may be niches that could be useful for diversification, but the primary “alternative” that investors have here, in my view, is cash, patience, and hedged investment exposure.

 

Investors should not imagine that inflation would improve the situation. Historically, the first casualty of inflation is market valuations. With the most reliable measures of market valuation presently between 2.7 and 3.2 times their historical norms, the CPI would have to roughly triple before the beneficial effects of inflation on nominal growth would outweigh the negative effects of inflation on market valuations. Until that happens, higher inflation will only make matters worse for investors.

The fact is that cash – short-term interest-bearing liquidity – has clearly outperformed the stock market during periods of rising inflation. Indeed, when the rate of inflation is rising, higher rates of inflation are typically associated with poorer stock market performance until market valuations are driven to historically depressed levels (after which the effect of inflation on nominal growth finally dominates).

 

 

Our Margin-Adjusted P/E (MAPE) is nearly as reliable as MarketCap/GVA and spans a much longer history to the early-1900’s. Notably, this measure has moved to extremes that eclipse both peaks observed in 1929 and 2000.

Hussman Margin-Adjusted P/E (MAPE)

That’s because shifts in internals are very discrete, and one doesn’t want to respond to market behavior at the exact moment everyone else does.

 

In hindsight, amid the novelty of quantitative easing and zero-interest rate policy, our pre-emptive bearish response to those syndromes turned out to be detrimental. In late-2017, we abandoned the notion that it was still possible to define any “limit” to speculation. The main headwind since then has been internal dispersion, with speculators favoring richly valued glamour stocks and the largest components of passive indices, rather than broad value-conscious stock selection. Still, that tends to be a regular feature of late-stage advances, followed by losses over the completion of the cycle.

 

Notably, the Fed eased relentlessly throughout both the 2000-2002 and 2007-2009 market collapses. But when investors are inclined toward risk-aversion, safe liquidity is a desirable asset, not an inferior one, so creating more of the stuff doesn’t encourage speculation. That’s a lesson that I suspect investors are going to re-learn the hard way over the completion of this cycle.

 

On 31/01/2020 at 20:48, DurhamBorn said:

Love the way Cramer says oil is tobacco.Lets hope so.£5k in BAT made me more than my house cost.

Heres the thing.Oil has no future long term.Between now and that date BP will probably make £400 billion+ in free cash flow.Its likely half of that will go on building hydrogen plants and other green energy.Towards the end of oils life the companies will stop investment and return the cash instead to shareholders.

My prediction against Cramer.A ladder buy in BP from today with 2 more ladders at 7% drops will outperform Tesla by 1000% by 2028 including dividends.At least.

 

The more I think about Cramer's 'buy Tesla',the more I think it's a sign to short.

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On 01/02/2020 at 15:17, Castlevania said:

Yeah. I remember looking at the share prices in the newspaper during the late 90’s and specifically looking at the stocks with the lowest PEs and asking my Dad why he didn’t buy tobacco stocks. They seemed cheap to my untrained eye. His rationale was similar to the above. That tobacco was finished. He was wrong. On the flip side he bought heavily into Anglo American and what were then Billiton and Rio Tinto Zinc around that time.

If you don't mind me asking CV,did your Dad get you into stocks?

I've often wondered how people on here got into stocks.WIth me it was my Grandad.DB that bloke at his work etc.Takes a lot of time to educate people on markets.

 

On 01/02/2020 at 15:41, JMD said:

SP, very interesting comments - especially the silver/gold ratio.

I would really like to take advantage (arbitrage?) the s/g ratio as it tightens, and so your further posts on this topic would be very welcome. I was initially only looking to do this maybe once and move say half my silver over to gold when it falls to say 1/40 ratio - but if I could gain more understanding about this ratio, I would definitely change tack and use the swings in the next cycle more. However, I do know my limitations and 'trading' these swings monthly/weekly would be beyond me - both in terms of skill and temperament.     

With the GS ratio you have to be careful.

The 1980 gold peak saw a 15 on the GS in Jan,market peaked in Feb.

Peak of 100 Feb 91 saw silver bottom,gold stayed in mild downtrend for a few years but silver bottomed following year.

Bottom of 41 Feb 98 saw silver top.Gold in a mild downtrend.

Feb 03 top of 82 preceded period when G+S rose heavily.

Dec 06 bottom 47 and then lower high of 48 March 08 ,Marh 08 hih saem time as both G+S peaked.

Mar 09 peak was 73 and March 09 ws march 09 but gold bull was running

27 April 2011 G/S bottomed at 31,Gold peaked in the sept,BUT crucially silver topped April 11...........................and then it was downhill from there.

 

I'd be careful using any levels as defintive trading pioints.whats clear is that historically bottoms and tops coinicde with big moves.But hard to discern them in real time.

 

DYOR natch

 

33 for 2011

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10 minutes ago, sancho panza said:

I've often wondered how people on here got into stocks.WIth me it was my Grandad.DB that bloke at his work etc.Takes a lot of time to educate people on markets.

I went to work for the UK subsidiary of a US multinational and they had an employee stock purchase scheme that I joined. That was in ‘96. They did well in the tech bubble and that got me started. 

A bit of a rollercoaster ride since then of course!

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I think Cramer’s angle is based on sentiment- he thinks the most important thing is that nowadays money-managers don’t want to annoy their sensitive customers so they will have to avoid non-pc investments.

Based on DB’s experience I would say Ciggies.

Cramer then wouldn’t understand my Irish accent.

 

 

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10 hours ago, DurhamBorn said:

It means she is an idiot.I notice the article doesnt mention the massive area the likes of BP will control in the future.Hydrogen.

What happened to tobacco was telling.Once everyone said they were finished nobody invested,no new tobacco companies were formed.The industry then simply consolidated,cut costs and with no competition and no need to invest simply increased prices 6%+ a year on a falling cost base.Return all that to shareholders.

Big oil might end up doing the same.There will come a point where there is no point investing,so all that capital instead goes to shareholders.

Of course the macro situation points to maybe $43 oil and we are well on the way there now,ladders being filled and hopefully we get there.If it turns early fine.

The best investments can be those in areas where nobody wants to invest as there is "no future",but at the same time demand for the product is rising,steady ,or falling,but slower than prices will rise on it.

I honestly think big oil will get hydrogen competitive and maybe even crush electric vehicles.Electric will be used of course to make the hydrogen.I expect we will start to see some moves in the area soon.Dont rule out the likes of Shell or BP buying Drax etc and converting to Hydrogen.Sounds a long shot,and it is,but might happen.The sector will be red hot in 5 to 8 years.

 

This is the drill isn't it?Oil price goes down,marginal proiducers go under, big oil cuts back exploration,drill rigs get decommissioned,then price moves up due to scarcity ,big boys who stayed in play move up, small leveraged palys rocket.

I've said before nice call on dropping oil,as per @Loki quote,you have to ask if this is a back the truck up moment.Having been scarred by my CNA trade from 2018 when I got value trapped in,I'm wary....but the more I look the more I feel like it's deja vu all over again

AS the S&P and NDX dropped from March 00 to Sep/Oct 02,BHP went from 230 to 300........

image.png.2f5c060e132c6eb2322824b812c5de20.png

image.png.bee03c09c45ad22fe20164a994c29381.png

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I actually got into investing at 14.My dad did very well on shares over the years.Not mega amounts,but nice enough.I understood the basics,but it was learning macro strategy that really opened my eyes.It really taught me that where we end up is what matters.Dont put the energy into timing too much.Yes,try to start buying when you think a sector is cheap,but dont wait and wait too long.

The other huge thing was leads and lags.Its so crucial,yet hardly anyone does much work on it.It takes a lot of time and effort to work backwards on things,but the more you do it,the more you trust it.GDP started to slow 6 months ago compared to oil output for instance and that lag meant oil should of started falling when it did.Of course now we might have a speed up due to this virus thing,but that isnt driving the falls.

I think we have reached the point in the cycle now where almost everyone thinks all old style value stocks are worthless investments and the glamour tech stocks are where to be.

For that to be right Amazon needs to make $100billion free cash each year for 2 decades.

Tesla needs to make $10 billion a year free cash for 2 decades,

Apple $150billion free cash a year for 2 decades etc.

Thats to justify the prices now,in 20 years.

As for bonds.Two years high inflation could wipe out 10 years return.Before any capital loss.

 

 

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Chinese stock markets getting pounded. They’ve been closed for Chinese New Year. Will be interesting to see if there’s any knock on effect on Western markets. There shouldn’t be, but you never know.

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8 hours ago, sancho panza said:

've often wondered how people on here got into stocks.WIth me it was my Grandad.DB that bloke at his work etc.Takes a lot of time to educate people on markets

With me it was this forum (and its predecessor)...seriously!...before coming here for a reasonably educated person I was clueless financially...still way below the majority on here, but now able to understand cycles in a basic way and make a critical judgement on any opinions (not advice! :-)) posted....

....best result so far?...BP?..PM?..CNA?....no, understanding my pension and planning for the future...just wish I had started earlier now!

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ive always done it, cant remember how i got started maybe 30 years ago, wasnt my dad or anyone else.

Ive made a lot and lost a lot, thats the way the cookie crumbles. I like a gamble, get rich never was always going to be the norm. Get lucky once the bonus.

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UnconventionalWisdom
1 hour ago, MrXxxx said:

With me it was this forum (and its predecessor)...seriously!...before coming here for a reasonably educated person I was clueless financially...still way below the majority on here, but now able to understand cycles in a basic way and make a critical judgement on any opinions (not advice! :-)) posted....

....best result so far?...BP?..PM?..CNA?....no, understanding my pension and planning for the future...just wish I had started earlier now!

Same with me. They want to keep the general population clueless. This thread has been an eye-opener and fascinating throughout .

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16 hours ago, sancho panza said:

I've often wondered how people on here got into stocks.WIth me it was my Grandad.DB that bloke at his work etc.Takes a lot of time to educate people on markets.

I worked in an insurance company for a few years and they gave employees shares plus there were one or two in the office who used to buy and sell shares.  I used to read the financial pages in the papers and started to buy the odd share here and there but with no real understanding of the macro situation or what I was doing but it was fun to come home from work and look at the share prices on Ceefax!  That was until I made the dire mistake of buying Marconi because of a tipster and because my late father had worked at Plessey (which was taken over by Marconi).  Basically they were bust and the shares were worthless.  I held on thinking they would recover which they didn't and I lost a months wages as they sank to zero.

That put me off for more than 10 years until I came across @DurhamBorn on ToS and have taken the plunge again with a little more understanding this time although I'm still a complete novice. 

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14 hours ago, sancho panza said:

With the GS ratio you have to be careful.

The 1980 gold peak saw a 15 on the GS in Jan,market peaked in Feb.

Peak of 100 Feb 91 saw silver bottom,gold stayed in mild downtrend for a few years but silver bottomed following year.

Bottom of 41 Feb 98 saw silver top. Gold in a mild downtrend.

Feb 03 top of 82 preceded period when G+S rose heavily.

Dec 06 bottom 47 and then lower high of 48 March 08, March 08 hih saem time as both G+S peaked.

Mar 09 peak was 73 and March 09 ws march 09 but gold bull was running

27 April 2011 G/S bottomed at 31,Gold peaked in the sept, BUT crucially silver topped April 11...........................and then it was downhill from there.

I'd be careful using any levels as definitive trading pioints. whats clear is that historically bottoms and tops coincide with big moves. But hard to discern them in real time.

DYOR natch

SP, thanks for the info. its much appreciated. I will do more research. I have set out my thoughts below, as doing this helps me, and perhaps may inspire others to do same. As always, I welcome criticism, good or bad! 

Re. the gold/silver ratio: The I way I see it is that most on this blog intend holding their PM's until near the end of the reflation cycle/coming financial collapse, before which point they will personally judge when to sell all/most of their PM's. I will also do this, but this does inevitably involve correctly timing when to sell.

Given that timing aspect, I just think that attempting to benefit from the g/s ratio and its swings - from highs to lows, during the next cycle - but before say the 2028(?) date seems too good an opportunity to miss, especially as it involves remaining fully invested still in the PM market. I think it is one of those small downside/big potential upside plays.

I seek to make my strategy fairly simple. Basically If PM prices fall later this year, I intend using the opportunity to buy a lot more silver (so initially I will be overweight silver). This silver will be my 'trading stash', but I only foresee executing max. of 3 silver-for-gold swops as/when g/s ratio has dramatically tightened compared to what the ratio was when I purchased the silver. At each 'trade' I would probably swop approx. half my remaining silver - allowing me to take advantage of a potential lower-low at next trade - and meaning that over time I would move to a higher portfolio % in gold. The objective arbitrage/gain is that the gold eventually held is obtained at half the price, or even less, compared to directly purchasing it at the outset.

(things to decide along the way, such as the actual g/s ratio to trade at, and how much silver each time to trade; i'm hoping/expecting to exploit only the big swings in the g/s ratio, but perhaps and depending on the g/s ratio volatility, I may trade small amounts of gold back to silver as/when the g/s ratio widens greatly; and of course the big risk is calling the g/s ratio trend/direction wrong, as then would be 'caught' at a unfavourable ratio)

 

 

PS. if others are doing/planning similar in other markets/assets, I would be interested to hear.   

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