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


spunko

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15 hours ago, Noallegiance said:

have no idea what any of that means!

I find myself googling all the terms I don't understand (which is quite a lot) and I'm slowly starting to understand........

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RMG is looking a lot like CNAO.o except CNA looks as if it's started to turn.

RMG still seem to be stuck in the 70s with their union problems but all the old trouble-makers should be retiring some time soon so maybe they'll be able to push ahead with their plans.  They sound really frustrated in their press release!

My brother-in-law is a postie coming up to retirement and had to fight to get a 3-day rather than a 5-day working arrangement so as to wind down gradually.  His son is also a postie but employed through an agency so rarely works as many as 5 days.  He works when he's needed which suits him fine while he's still living with his parents.  You'd think the company would prefer more flexible working.  I'm not sure whether it was the company or the union which my brother-in-law had the fight with.

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5 hours ago, DoINeedOne said:

How Low Can It Go

ROYAL MAIL RMG 

174.55-14.80 (-7.82%)

 

I guess to go from it's PE of 12 to a bargain 8 would required another third off. I'm almost fully allocated in RMG but will add a few more ladders in case it goes lower still.

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3 hours ago, JMD said:

SP, thanks i'm still researching and learning about this. Why would the DXY be significant when trading the g/s ratio? 

It's the Dollar index.

 

Kaplan back>promising a deeper dig next week.Timely advice as ever.

https://truecontrarian-sjk.blogspot.com/2020/02/men-it-has-been-well-said-think-in.html

Sunday, February 2, 2020

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.” --Charles Mackay (1841)

 

How will the bear market end? Tune in next week to find out--same contrarian time, same contrarian channel.

 

If we're in a true bear market for U.S. equities then we'll continue to enjoy numerous sharp short-term rallies. Don't be fooled: within a few years the S&P 500 will eventually trade 70% or more below its recent zenith which means below one thousand. Along the way commodity-related assets currently mostly sporting single-digit price-earnings ratios will likely be among the few outperformers while technology favorites with triple-digit price-earnings multiples will be among the biggest losers. Bear markets usually consist of numerous corrections interrupted by powerful rebound attempts, so intermediate-term buying opportunities may occur at various points in 2020-2021 for unknown sectors.

 

Investing Tip #2: when you are opening any position, gradually accumulate risk using ladders of good-until-canceled orders, not with lump-sum lucky strikes.

 

There is no way to know in advance how extreme any given asset will get when it is completing a topping or a bottoming process, nor is it possible to determine when the ultimate zenith or nadir will occur. Therefore you must avoid dangerously accumulating risk with lump-sum opening positions. Occasionally you will get lucky, but if you buy too much at once and underpriced assets become even more absurdly undervalued--as they usually do--then you won't have enough cash to keep steadily buying. In addition, once any security completes a major bottom it usually forms several higher lows before it rallies strongly. These higher lows should be used as opportunities to keep adding to your position. Think of investing as adding one grain of sand at a time to each pile, not a whole bag at once, and to keep gradually adding until prices become too expensive.

 

Perhaps the simplest way to accomplish this objective is to place a ladder of small orders, with each rung in the ladder consisting of roughly 1/1000 (one-thousandth) of your total liquid net worth. Each order can be placed roughly 1% apart from each other order. If an asset worth buying keeps dropping in price, you will buy more of it each time it falls another 1%. If the security rebounds, then you can replace orders which were already filled with identical orders at the same prices and quantities, so that if there is another pullback then you will gradually buy more of it into weakness. This is how many top corporate insiders and market makers accumulate their positions.

 

The basic idea is that a topping or bottoming pattern is usually a process, not an event. Instead of trying to use magic market timing or mystically guessing when a top or bottom is occurring, gradually scale into any position in which you are increasing your risk.

 

Summary: a surprising number of assets are either far below or far above fair value.

 

Today we have numerous energy and related commodity securities trading at less than half fair value while many other assets including U.S. equity indices and coastal real estate remain at roughly double fair value. Mean regressions are often unexpected and especially disruptive events because too many investors are anticipating that the trends of recent years will continue even though they have already been reversing.

 

The bottom line: keep buying commodity-related securities into extended weakness and keep selling overpriced assets into strength.

 

The next two or three years will likely be accompanied by a massive shift away from the biggest winners of recent years into the most notable losers. This process is barely underway so there is plenty of time to double or triple your money by capitalizing upon it.

 

Disclosure of current holdings:

 

From my largest to my smallest position I currently am long GDXJ, 4-week U.S. Treasuries yielding 1.573%, the TIAA-CREF Traditional Annuity Fund, SIL, XES (some new), ELD, FCG (some new), OIH (some new), PSCE (some new), bank CDs, money-market funds, GDX, I-Bonds, SCIF, MTDR (some new), URA (some new), PAK, EPOL, ECH, COPX, REMX, HDGE, LIT (most sold), EZA (most sold), GXG (most sold), ASHS (most sold), ASHR (most sold), SEA (most sold), VNM (most sold), TUR (most sold), FXF, EGPT, GOEX, BGEIX, NGE, FXB, EWM, RGLD, WPM, SAND, SILJ, AA (brand new), SLX (most sold), FM (most sold), ARGT (most sold), EWW (most sold), RSXJ (most sold), GREK (most sold), and CHK. I am completely sold out of EWU, EWG, EWI, EWD, EWQ, EWK, EWN, WOOD, EPHE, JOF, AFK, and IDX.

 

I have a significant short position in XLI, a slightly larger short position in SMH, and a moderate short position in CLOU. As always, my short positions are notably smaller than my more meaningful long positions. My cash and cash equivalents including bank CDs and stable-value funds (fixed principal, variable interest) comprise 33.5% of my total liquid net worth, continuing to retreat from a two-year high as I have been persistently purchasing energy shares especially into early morning weakness.

 

"Those who cannot remember the past are condemned to repeat it" (George Santayana). "Those who can remember the past but insist that it's different this time deserve to repeat it" (Steven Jon Kaplan).

 

I expect the S&P 500 to eventually lose more than 70% of its value from its all-time top, whether that level has or hasn't already been reached, with its next bottoming pattern occurring with frequent sharp downward spikes perhaps during the second half of 2022. During the 2007-2009 bear market, most investors by Labor Day of 2008 still didn't realize that we were in a crushing collapse, and I expect that by early 2022 many Boglehead investors will stubbornly persist in believing that the U.S. equity bull market is alive and well. After reaching its all-time zenith on August 31, 2018, the Russell 2000 Index and most other small- and mid-cap U.S. equity funds have persistently underperformed their large-cap counterparts except before sharp rebounds and have never surpassed their zeniths from that day; similar behavior had ushered in the major bear markets of 1929-1932, 1973-1974, 2000-2002, and 2007-2009. The Nasdaq has completed a historic double top with its March 10, 2000 zenith in inflation-adjusted terms. A 70% loss from its recent zenith would put the S&P 500 near one thousand and I expect it to go even lower than that by some unknowable percentage. Eventual widespread fear over how much further prices will drop is likely to be accompanied by all-time record investor outflows from most U.S. equity index funds and U.S. high-yield corporate bond funds before we eventually and energetically begin the next bull market. Far too many conservative investors took their money out of safe time deposits in recent years; the incredibly long bull market has left them completely unprepared for a bear market. The behavior of the global financial markets since August 31, 2018 has been incredibly similar to the behavior in the early stages of nearly all major U.S. equity bear markets going back to the 1790s. In general, U.S. equity bear markets are far more alike than U.S. equity bull markets. Die-hard Bogleheads will probably resist selling until we are approaching the next historic bottom, but when they are perceived to be blockheads and become disillusioned by their method they will become some of the biggest net sellers of passive equity funds. Because so much money exists today in exchange-traded and open-end funds, as they decline in value their fund managers will be forced to destroy shares which will compel them to sell their components, thus depressing prices further and creating more share destruction in a dangerous domino effect. The Boglehead foolishness is especially ironic since Jack Bogle himself aggressively sold U.S. equities in 2000 and again in 2018 shortly before his passing.

 

Here is the rationale between my timing guess of the next bear-market bottom for U.S. equity indices: the two previous longest bull markets in U.S. history occurred in 1921-1929 which was followed by a bear market of over 34 months from September 1929 through July 1932. The other long bull market was from October 1990 through March 2000 which was followed by a bear market of 30-31 months in duration (exactly 31 for the Nasdaq). The current lengthy bull market which began for the S&P 500 on March 6, 2009 and which may have ended for that index on January 22, 2020 might therefore last for 30-36 months, implying a bottom around the second half of 2022.

 
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26 minutes ago, Barnsey said:

Something is starting to crack in the Repo drama, Fed trying to withdraw but market highly oversubscribed, something to watch closely!

 

Some of the finer nuances picked up by the likes of Dimartino Booth

image.png.d72a06028de598e8d29c2c36069b15b2.png

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4 hours ago, Yellow_Reduced_Sticker said:

@DoINeedOne How Low Can It Go

 

Well RM have broken there 1 year chart support line, so its anyones guess!

maybe its time: "to be greedy when others are fearful" ?
 
wish i checked RM when there next results were due could of bought that bundle at a 20% reduction!:Old:
 
if they went to under a quid i say they are bust, OR if they get any lower (as of posting they hit £1.70 :o)...maybe DHL will snap them up, want do you reckon @DurhamBorn
 

I have no idea,my ladders go down to £1.44 so i just buy when levels are hit and see where they are around 2027.The new chief exec will be playing hard ball with the union.The union members are crazy and they have a choice.Work at Hermes or accept change and still have a good job.If i was him i would launch redundancies and start to eliminate 15% at each depot.RM future is to deliver in 24 hrs especially items bought later in the evening.If they can do that,as they will if they build the new hubs etc,then they will be way ahead of any other courier.

Its actually amazing how volatile things are.Iv some iv been buying up 50%+,others down from first ladder 50% (luckily only a couple).I actually sold out of a ladder in SSE today as it was up nearly 50% including divis and sold a few BAT that had gone up 37% including divi.The market pricing a company like BAT a difference of 37% when nothing has changed within 12 months shows how crazy end of cycles can be.

We are at the end of a long cycle,that is obvious.Margins and profits are under big pressure,and they will be for some time in many areas,but thats when people price profits instead of pricing assets.I said 2 years ago i expected PE ratios to come down to 6 to 8 area in cyclicals,and thats exactly where a lot are sitting.

Prices will start to increase right across the economy after one last deflation kick down,and when that happens most of the companies way out of favour will respond and highly rated growth will be whacked.Crucial to keep a good spread of companies and sectors and be clinical,not emotional.

If you notice we are getting masses of companies struggling,yet the market thinks its each company at fault,when really the main culprit is the cycle and where we are in it.Iv seen two other occasions in my life when this happened,and although hard to hold your nerve,it ended up providing massive profits in the years ahead.I think this is the third time.

 

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Democorruptcy
1 hour ago, Barnsey said:

Something is starting to crack in the Repo drama, Fed trying to withdraw but market highly oversubscribed, something to watch closely!

 

Not sure that means the Fed are trying to withdraw. If they were withdrawing wouldn't there be $0 on offer instead of $30bn? I just see that as near 2:1 cover, demand outstrips supply. Isn't like when our Debt Management Office sells governbankment debt and details the cover? It's only news when the cover is less than 1 i.e. they cannot sell it.

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Central banks are residing in glass tower la la land. There is no trust, no transparency, no accountability. Only denial.

source https://northmantrader.com/2020/02/06/state-of-denial/

this guy has been around for a long time...

Let's see if the CBs can keep the bubble pumped or if nCoV will give them a 'dose of reality'.....interesting times....

 

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ill gladly buy all that MBS for a dollar, what could possibly go wrong with American Mortgage backed securities eh? safe as houses

(no major balls ups since 2007 - its me pension init).

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21 hours ago, Loki said:

Are any of you still topping up your silver physical stash?

Always. Like gold, it's just something you should be buying regularly.

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Just now, Errol said:

Always. Like gold, it's just something you should be buying regularly.

Too true, Errol - I just mentioned silver as it's been mentioned as being under-valued, but gold is far more discreet.

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id forgotten about the gold/silver buying, but i see my smallish auto monthly buy hasnt its getting quite large now, not a huge profit on it but its been stable and green for at least 4-5 months now.

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7 hours ago, Alifelessbinary said:

With regards to house building shares, I’m waiting until after March before shorting any stock (obviously DYOR ect...) I’ve heard that the government is gearing up to creat a £100 billion fund for infrastructure projects and  as part of the package is changing HIF (housing infrastructure fund) funding to become SHIFT. This will likely de-risk a lot of the enabling works for house builders and protect profits, as all parties are hell bent on delivering housing. The only difference is the Tories want private and Labour want social.

But can they deliver? Eg. If one Tory says we need to build roads another says no more roads! Typically see this manifested as a battle between government levels eg. Between central and Local Government. Yeah house building is different as suddenly that random field that’s been empty for decades on your drive to work becomes a housing development.

Still I guess a housing infrastructure fund might not actually get much built. Presumably it’s all backed in the share prices? 

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Alifelessbinary
1 hour ago, Ash4781b said:

But can they deliver? Eg. If one Tory says we need to build roads another says no more roads! Typically see this manifested as a battle between government levels eg. Between central and Local Government. Yeah house building is different as suddenly that random field that’s been empty for decades on your drive to work becomes a housing development.

Still I guess a housing infrastructure fund might not actually get much built. Presumably it’s all backed in the share prices? 

Most will be spent on pre-existing planning consents and will be used to value engineer the profits. The developers will bemoan viability issues are stopping delivery and use the funding to reduce costs and risk. Just as help to buy stops it’s another prop to skew the market. 

The funding isn’t formalised yet, but should be ready for the March budget. It will be interesting to see how the shares react, as it might explain why CRST and PSN have been on a run recently. While all housing stock will be smashed in a crash it’s a tough call when because of the government meddling. 

 

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6 hours ago, DurhamBorn said:

I have no idea,my ladders go down to £1.44 so i just buy when levels are hit and see where they are around 2027.The new chief exec will be playing hard ball with the union.The union members are crazy and they have a choice.Work at Hermes or accept change and still have a good job.If i was him i would launch redundancies and start to eliminate 15% at each depot.RM future is to deliver in 24 hrs especially items bought later in the evening.If they can do that,as they will if they build the new hubs etc,then they will be way ahead of any other courier.

Its actually amazing how volatile things are.Iv some iv been buying up 50%+,others down from first ladder 50% (luckily only a couple).I actually sold out of a ladder in SSE today as it was up nearly 50% including divis and sold a few BAT that had gone up 37% including divi.The market pricing a company like BAT a difference of 37% when nothing has changed within 12 months shows how crazy end of cycles can be.

We are at the end of a long cycle,that is obvious.Margins and profits are under big pressure,and they will be for some time in many areas,but thats when people price profits instead of pricing assets.I said 2 years ago i expected PE ratios to come down to 6 to 8 area in cyclicals,and thats exactly where a lot are sitting.

Prices will start to increase right across the economy after one last deflation kick down,and when that happens most of the companies way out of favour will respond and highly rated growth will be whacked.Crucial to keep a good spread of companies and sectors and be clinical,not emotional.

If you notice we are getting masses of companies struggling,yet the market thinks its each company at fault,when really the main culprit is the cycle and where we are in it.Iv seen two other occasions in my life when this happened,and although hard to hold your nerve,it ended up providing massive profits in the years ahead.I think this is the third time.

 

I have been amazed at how quickly items bought from amazon are delivered, order in the  morning and it arrives later that evening.

That is the space which RM need to fill. They have a huge competitive advantage but perhaps lack agility.

It reminds me of the Ford workers and the unions back in the 90s. The union looked after the workers ok in the short term, but long term their jobs went to Spain.

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6 hours ago, Democorruptcy said:

Not sure that means the Fed are trying to withdraw. If they were withdrawing wouldn't there be $0 on offer instead of $30bn? I just see that as near 2:1 cover, demand outstrips supply. Isn't like when our Debt Management Office sells governbankment debt and details the cover? It's only news when the cover is less than 1 i.e. they cannot sell it.

Apologies, meant pull back in extent of repo. Until recently they were able to match demand but have now had 2 days where they’ve been unable/unwilling to do this.

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44 minutes ago, Alifelessbinary said:

Most will be spent on pre-existing planning consents and will be used to value engineer the profits. The developers will bemoan viability issues are stopping delivery and use the funding to reduce costs and risk. Just as help to buy stops it’s another prop to skew the market. 

The funding isn’t formalised yet, but should be ready for the March budget. It will be interesting to see how the shares react, as it might explain why CRST and PSN have been on a run recently. While all housing stock will be smashed in a crash it’s a tough call when because of the government meddling. 

 

Make of that what you will...

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Sorry for going a little off topic, but wondering what the collective mind of this thread think about buying a house now in the states at this point in the cycle. Miami specifically.

Mortgages here are fixed for the term, 15 or 30 years and are around 3.25-3.5%. My landlord is selling and I really don’t like the idea of moving into another rental. My thinking is put down only 5%, and keep the rest of my savings invested. I could buy a modest house probably for cash but I don’t want to part with all those savings. If inflation rises over the next cycle that fixed rate mortgage should be good even if property values crash, right? I know it would be best to be in a fully paid off house but I don’t have that luxury.

My savings (including pensions) are currently roughly 15% us stock trackers, 10% international stock trackers,  10% “speculative”, meaning things learned here, miners, now averaging into oil, 10% gold/silver, 15% bitcoin, 40% cash/bonds (will sell bonds in any deflationary crash as I know bad for next cycle, and will buy up equities with the cash)

Any thoughts appreciated. To keep it more on topic, what would the advice be for the average uk renter going into this deflationary crash and reflation?

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4 hours ago, Sound Money said:

Sorry for going a little off topic, but wondering what the collective mind of this thread think about buying a house now in the states at this point in the cycle. Miami specifically.

Mortgages here are fixed for the term, 15 or 30 years and are around 3.25-3.5%. My landlord is selling and I really don’t like the idea of moving into another rental. My thinking is put down only 5%, and keep the rest of my savings invested. I could buy a modest house probably for cash but I don’t want to part with all those savings. If inflation rises over the next cycle that fixed rate mortgage should be good even if property values crash, right? I know it would be best to be in a fully paid off house but I don’t have that luxury.

My savings (including pensions) are currently roughly 15% us stock trackers, 10% international stock trackers,  10% “speculative”, meaning things learned here, miners, now averaging into oil, 10% gold/silver, 15% bitcoin, 40% cash/bonds (will sell bonds in any deflationary crash as I know bad for next cycle, and will buy up equities with the cash)

Any thoughts appreciated. To keep it more on topic, what would the advice be for the average uk renter going into this deflationary crash and reflation?

I thought property taxes in Miami were insane? 

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5 hours ago, Sound Money said:

Sorry for going a little off topic, but wondering what the collective mind of this thread think about buying a house now in the states at this point in the cycle. Miami specifically.

Mortgages here are fixed for the term, 15 or 30 years and are around 3.25-3.5%. My landlord is selling and I really don’t like the idea of moving into another rental. My thinking is put down only 5%, and keep the rest of my savings invested. I could buy a modest house probably for cash but I don’t want to part with all those savings. If inflation rises over the next cycle that fixed rate mortgage should be good even if property values crash, right? I know it would be best to be in a fully paid off house but I don’t have that luxury.

My savings (including pensions) are currently roughly 15% us stock trackers, 10% international stock trackers,  10% “speculative”, meaning things learned here, miners, now averaging into oil, 10% gold/silver, 15% bitcoin, 40% cash/bonds (will sell bonds in any deflationary crash as I know bad for next cycle, and will buy up equities with the cash)

Any thoughts appreciated. To keep it more on topic, what would the advice be for the average uk renter going into this deflationary crash and reflation?

Don't know anything about Miami but according to George Gammon bank can never make any money on 30y mortgage. If you like the house go for it :) 

 

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Democorruptcy
9 hours ago, Barnsey said:

Apologies, meant pull back in extent of repo. Until recently they were able to match demand but have now had 2 days where they’ve been unable/unwilling to do this.

No need to apologise, if I've got it wrong! If they have just been matching any amount of demand but now can't or won't, then something has changed.  

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S&P lowers China's 2020 GDP growth forecast to 5% amid coronavirus threat

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/s-p-lowers-china-s-2020-gdp-growth-forecast-to-5-amid-coronavirus-threat-56999701

Quote

"China accounts for one-third of global growth so a 1-percentage-point slowdown in the country's growth rate is likely to have a material effect on global growth," the rating agency said in a report.

Most of the outbreak's impact on the Chinese economy will be felt in the first quarter, said Shaun Roache, Asia-Pacific chief economist for S&P Global Ratings. A firm recovery may only take hold in the third quarter.

S&P Global Ratings expects the outbreak to be contained by March. If the number of reported cases peaks in February, the country's economy could grow by 5.5%, but if it peaks in April, GDP growth could come up to 4.4% only.

"If the virus cannot be contained, a material risk, the economic impact could develop exponentially with significant credit implications," the agency said.

But, crucial point to be aware of (massive stimulus):

Quote

The rating agency expects the Chinese economy to grow by 6.4% in 2021, compared to its previous forecast of 5.6%.

"This growth path would bring GDP almost back to the same level it would have reached in the absence of the virus by the end of 2021," S&P Global Ratings said.

 

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