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


spunko

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29 minutes ago, dgul said:

The saying is that silver is always late to the party.  

My own analysis doesn't prove it. In 2011 Gold was late not Silver, and last year's highs were on the same day (4th September).

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Is it me or have the markets underestimated how much cash that a lot of the gold miners have been churning out over the second half of last year? Lots of Companies releasing their annual financial statements over the next few weeks. I think quite a few could jump. Then again I could be wrong. Will be interesting to see.

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58 minutes ago, Castlevania said:

Is it me or have the markets underestimated how much cash that a lot of the gold miners have been churning out over the second half of last year? Lots of Companies releasing their annual financial statements over the next few weeks. I think quite a few could jump. Then again I could be wrong. Will be interesting to see.

Hoc went vertical last week on their results so you could be right, however with the "you cant loose" US stock markets at the minute it will take a hit to them before money starts flooding into safe havens imo.

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1 hour ago, Castlevania said:

Is it me or have the markets underestimated how much cash that a lot of the gold miners have been churning out over the second half of last year? Lots of Companies releasing their annual financial statements over the next few weeks. I think quite a few could jump. Then again I could be wrong. Will be interesting to see.

 

2 minutes ago, Majorpain said:

Hoc went vertical last week on their results so you could be right, however with the "you cant loose" US stock markets at the minute it will take a hit to them before money starts flooding into safe havens imo.

Do you have any specific miners with the results coming up in mind? Presumably there will be a second wave of this once these, very recent, prices also work their way in? 

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Bricks & Mortar

Endeavour Silver have their results tomorrow...  *fingers crossed*

Silver did better than gold last week, in % terms.  Not at previous highs yet, but to me, that just means it's yet to get that boost when it does.  Couple more weeks like last one, and we'll be there.  (decl -  heavy on silver miners)

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3 hours ago, dgul said:

The saying is that silver is always late to the party.  

I'm not currently putting money on that being right this time.

I think gold is a deflation and inflation hedge in that it does well against different kinds of fear.Silver is almost a full on inflation hedge.Thats why when is see inflation ahead i like silver.I still think in the next cycle silver and natural gas will be the two best performing assets.

I still think we might get a sell off in the PMs.I dont do much on them now,but i see gold at $1750 then down to maybe $1050 and silver up to $22 then down to $9.

 

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19 minutes ago, DurhamBorn said:

 

I still think we might get a sell off in the PMs.I dont do much on them now,but i see gold at $1750 then down to maybe $1050 and silver up to $22 then down to $9.

 

Rationale?

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Bricks & Mortar
8 minutes ago, Noallegiance said:

Rationale?

It's the basic premise of the thread.  Credit deflation.  A sudden curtailment of credit causes everyone to sell what they have of value, to cover their debts elsewhere.

EDIT TO ADD.  I was skeptical when I came to the thread, but I've been a believer since just after I arrived.  I now think the Coronavirus, and the possible response of governments, banks and individuals, casts considerable doubt on what lies in our future.

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10 minutes ago, Bricks & Mortar said:

It's the basic premise of the thread.  Credit deflation.  A sudden curtailment of credit causes everyone to sell what they have of value, to cover their debts elsewhere.
 

I needed reminding!

Even the price being cut by that much in such a situation means other stuff is going down by more, I think.

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1 hour ago, Noallegiance said:

Rationale?

Liquidity crunch.I own PMs,but have capital set back if those falls do happen.Not a given of course.

1 hour ago, Noallegiance said:

I needed reminding!

Even the price being cut by that much in such a situation means other stuff is going down by more, I think.

Yes,apart from treasuries probably and maybe some defensive sectors.

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7 hours ago, DurhamBorn said:

I think gold is a deflation and inflation hedge in that it does well against different kinds of fear.Silver is almost a full on inflation hedge.Thats why when is see inflation ahead i like silver.I still think in the next cycle silver and natural gas will be the two best performing assets.

I still think we might get a sell off in the PMs.I dont do much on them now,but i see gold at $1750 then down to maybe $1050 and silver up to $22 then down to $9.

 

without commenting on the price pointzs the ups and downs ,a decent pull back on the monthlies would precede a prolonged exxponential phase.

clip of Luis twitter feed.worht noting these new currecny highs in gold occuring without a wek dollar phase as yet.

image.png.bfb834d373530b784ac33a94d1e8b01b.png

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Paul Hodges ticks both debt deflation/dollar crunch boxes and corona

https://www.icis.com/chemicals-and-the-economy/2020/02/coronavirus-epidemic-makes-global-debt-crisis-now-almost-certain/

'Beijing has a population of 21.5 million, but you wouldn’t know it from this BBC video from last Thursday.  Normally busy streets and transport systems are eerily empty, with food deliveries often the main traffic on the roads.

It’s the same picture in industry, with the Baidu Migration Index reporting only 26% of migrant workers had returned to work across 19 sample cities by 19 February, compared with 101% a year earlier.

The position is even worse in Hubei province, the most important industrial manufacturing province in the country, as this South China Morning Post video, also from last Thursday, confirms.

“Choked off from suppliers, workers, and logistics networks, China’s manufacturing base is facing a multitude of unprecedented challenges, as coronavirus containment efforts hamper factories’ efforts to reopen. 

“Many of those that have been granted permission to resume operations face critical shortages of staff, with huge swathes of China still under lockdown and some local workers afraid to leave their homes. Others cannot access the materials needed to make their products, and even if they could, the shutdown of shops and marketplaces around China means demand has been sapped. 

“Those who manage to assail the challenges, meanwhile, have found that trucking, shipping and freight services are thin on the ground, as China’s famed logistical machine also struggles to find workers and navigate provincial border checkpoints that have popped up across the country.”

Cash-flow is also drying up at thousands of companies, large and small.  It is now a month since the emergency began. Bloomberg reports, for example, that the Hainan provincial government is in talks to takeover HNA’s $143bn airline to property development business empire.

THE LOCKDOWN CONTINUES TO HAVE MAJOR IMPACT ON THE ECONOMY
It would be nice to believe that the epidemic will have no impact on China’s economy. But common sense tells us this can’t be true. We just have to ask ourselves 5 obvious questions.  What would happen to:

  1. Our own country’s economy, if our capital and a major manufacturing base shutdown for a month?
  2. Businesses, large and small, if orders stopped and transport was severely disrupted?
  3. Imports and exports, if critical shipping schedules and flights were cancelled?
  4. Cash-flow, if the above happened and we still had to pay interest bills on debt?
  5. Supply chains, if workers at one or more partners couldn’t get to work for a month?

South Korea’s president Moon-Jae has given the obvious answer as the Financial Times reports:

“We should take all possible measures we can think of” to support the economy, Mr Moon told a cabinet meeting on Tuesday. “The current situation is more serious than we thought . . . we need to take emergency steps in this time of emergency.”

Data.png

Of course, ‘this time may be different’. But common sense tells us that China’s economy is under enormous pressure today. The charts above highlight the range of areas that are affected:

  • Property sales are down 79%, with Evergrande offering 22% discounts through March
  • Construction is 25% of GDP, with Fitch identifying 6 developers with high risk of default
  • Ports are often at a standstill – and many shippers have simply stopped calling at Chinese ports
  • Car sales collapsed by 92% in the world’s largest auto market in the first two weeks of February

5 LIKELY IMPACTS FROM THE LOCKDOWN
1. Domestic sales.  Thousands of stores have been shut since the epidemic began, and people are understandably too scared to venture out – even if this was allowed. So we must assume most areas of domestic consumption are being hit.

2. Imports for manufacturing. Chemicals are an excellent guide to the overall position, as the charts show based on Trade Data Monitor data. Given the shipping problems, large volumes of cancelled imports must now be sitting in suppliers’ tanks and warehouses, waiting to find a new market

TDM.png

3. Exports as part of supply chains. Apple’s profit warning highlights how even major companies have been caught out, as they cannot obtain the component supplies on which their global sales depend. Car and electronics companies are probably most at risk, and we will no doubt see more profit warnings as companies realise inventory is running short

4. Domestic suppliers. There is little data available about the virus’ impact on smaller Chinese companies. But presumably many have already gone bust, especially if they were unlucky enough to be in the centre of the downturn, such as those in Hubei and Wuhan

5. Oil and currency markets.  Caixin reports that Chinese refinery runs are at just 10mbd, compared to an average 13mbd in 2019:

“The deepening run cuts belie optimism that the impact of the epidemic may have peaked, a sentiment that’s helped spur a recovery in oil prices over the last week and a half. Many people are still trapped in their homes and unable to go to work, while curbs on travel have pummeled demand for transport fuels.”

Currency markets are also realising the worst may yet be to come.  Companies such as HNA have been major borrowers in the offshore dollar market – hoping to take advantage of low US interest rates. But as we have seen many times before, when the currency starts to fall, those debts quickly become impossible to service.

A GLOBAL DEBT CRISIS SEEMS ALMOST INEVITABLE
Observers such as myself have warned about this problem for years.  Earlier this month, an international G20 task force of currency experts warned:

“Central banks have lost control of global liquidity. The dollarised international financial system has become treacherously unstable and vulnerable to a sudden reversal in capital flows.  A decade of ultra-low interest rates and quantitative easing has flooded the globe with highly unstable forms of funding denominated in dollars, with no guarantor standing behind them. Glaring currency and maturity mismatches have accumulated.

“This structure is prone to an abrupt “dollar crunch” should borrowers in China, east Asia, emerging markets, or even parts of Europe suddenly start scrambling for scarce US currency to repay bonds and loans in a crisis.”

Central banks and governments either didn’t realise the risks or, more likely, simply hoped the problem would only hit once they had left the job.  But today, this “dollar crunch” may well be about to arrive:

  • After a brief rally, the Rmb has gone back below Rmb 7: US$ 1
  • This will make it even more impossible for many companies to repay their dollar loans

Many western pension funds felt forced to rush into the offshore dollar market in a ‘search for yield’. Zero rate interest policies meant they couldn’t get the level of yield they needed to fund future pensions in ‘safer’ markets at home. And employers weren’t willing to fill the gap, as this would have hit their earnings and share prices.

Unfortunately, as I noted 18 months ago, Ernest Hemingway’s The Sun also Rises probably describes the end-game we have entered:

“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”

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10 hours ago, Bear Hug said:

 

Do you have any specific miners with the results coming up in mind? Presumably there will be a second wave of this once these, very recent, prices also work their way in? 

No sorry, i hold my stocks on a long term basis and dont trade, so any boost from results is a nice to have.  There is nothing to stop a good stock having a shocker and you lose a load of money very quickly!

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Democorruptcy
8 minutes ago, sancho panza said:

eye watering losses on some ftse 100 today.worth noting as per @Cattle Prod prediction last week,oil stocks have got cheaper yet.

image.png.2e0ee9371fd6074598c9a95077f43306.png

only green of note

image.png.bfe6560e45b8c70707690c6b4759c73d.png

Travel badly hit, the coronavirus in Italy is too close. 

Fasten your seat belts and assume the position.

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Remember its not a virus causing the falls,its where we are in the cycle.Something is always blamed,but it comes down to debt being too high.If you owe nothing and have cash in the bank you get through,if you have debts (and remember most have dollar debts and falling currency) you dont.These are the times when you focus on where the next cycle is going.Its crucial to stick to ladders,Oil companies are hitting second ladders today mostly, so after today il be getting close to 40% of what i want so hopefully they can keep falling)

At some point the money taps are going to get turned on full speed.When that happens we should see the start of a big sector rotation as reflation stocks start to turn and consumer/growth stocks stay down or continue down.

We should see credit lines start to be cut now as well.If you havent sorted out your balance sheet by now to more long dated maturity then it will be a real struggle for finance.

It will be interesting to see if the Fed pump to help Asia and Europe,or instead decide to just wait a little while until the damage knocks countries like China back 20 years.

 

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sleepwello'nights

Isn't this perverse. I'm watching the headline falls in stock markets round the world and thinking goody.

I've been waiting to deploy some cash into more equities and some of those I'm considering are dropping. The fact that existing holdings are falling with them is of secondary importance. 

I'm now wondering whether to wait, which I think I will, even though I suspect the markets will rebound after the initial reaction subsides. Then will it be business as normal or will the reality of lower demand cause a further drop before governments react. 

Timings such a bitch.

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11 minutes ago, sleepwello'nights said:

Isn't this perverse. I'm watching the headline falls in stock markets round the world and thinking goody.

I've been waiting to deploy some cash into more equities and some of those I'm considering are dropping. The fact that existing holdings are falling with them is of secondary importance. 

I'm now wondering whether to wait, which I think I will, even though I suspect the markets will rebound after the initial reaction subsides. Then will it be business as normal or will the reality of lower demand cause a further drop before governments react. 

Timings such a bitch.

It's a bind. It's impossible to time the markets and so laddering in makes most sense.

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