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


spunko

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Democorruptcy
12 hours ago, UnconventionalWisdom said:

There is no way you get all the central bankers to act so quickly without prior discussion. I'm not so tin-foil that I think it was all planned but they dug out their black swan file.

Pandemic response moved up to section 3 from section 7 in the Bilderberg manual last year. 

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If anyone was wondering how some of the more financially dubious contruction companies were doing:

https://www.constructionenquirer.com/2020/03/26/turn-up-on-site-or-else-majors-turn-screw-on-subcontractors/

The majority have shut their sites so we are clearing our NHS work and then shutting down for two weeks, i pity the subbies who are being given a choice of turn up and risk your staff's welfare or see you in court....

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10 hours ago, Simon said:

Does the hive mind think that actual physical silver will do as well as big oil shares over the next decade? And also what will happen when it all goes tits up say in 2028? How will a good profit help. Or will it be reset time so only hard asset will help then?

I think silver will be the best performing asset of all from roughly $10 to $300,2.5x the rise in oil.However its better to spread across the sectors.Oil wont do as well,but it should still be the biggest % of assets.Im looking for silver to be around the same allocation as the potash sector.One or both should 10 bag and there is an outside chance they 25 bag.As always its vital a spread is kept as we cant be sure on the outcome,only the likely direction of travel.

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Agent ZigZag
14 minutes ago, Majorpain said:

If anyone was wondering how some of the more financially dubious contruction companies were doing:

https://www.constructionenquirer.com/2020/03/26/turn-up-on-site-or-else-majors-turn-screw-on-subcontractors/

The majority have shut their sites so we are clearing our NHS work and then shutting down for two weeks, i pity the subbies who are being given a choice of turn up and risk your staff's welfare or see you in court....

Maybe they should apply for an extension of time under the contract citing the reason why, which I would suggest is not unreasonable. It is a common to use such an mechanism under a contract to reflect say inclement weather

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5 minutes ago, Agent ZigZag said:

Maybe they should apply for an extension of time under the contract citing the reason why, which I would suggest is not unreasonable. It is a common to use such an mechanism under a contract to reflect say inclement weather

Force majeure

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Agent ZigZag
6 minutes ago, DurhamBorn said:

I think silver will be the best performing asset of all from roughly $10 to $300,2.5x the rise in oil.However its better to spread across the sectors.Oil wont do as well,but it should still be the biggest % of assets.Im looking for silver to be around the same allocation as the potash sector.One or both should 10 bag and there is an outside chance they 25 bag.As always its vital a spread is kept as we cant be sure on the outcome,only the likely direction of travel.

Mosaic, Yara, Nutrien, K &S I have owned for a while now and have a reasonable sum allocated to all in both ISA and SIPP. They seem to be the runt of my portfolio down 30-50%. I didnt have the chance to add in the recent sell off, but will add later on down the road. Food is vital to all and in an inflationary arena it is a good bet to at least hold. If we take a step back and see were they lie in price today compared to yesteryear you could be well right that they are a sleeping beauty that will explode when the time is right

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sancho panza

Life post covid is going to be very different.Particualrly for the under 40's.

Besides the obvious drop in economic acitivty,I do wonder whether there will be a very different attitude to debt.I was saying to Mrs P last night that many people her age in the UK -under 40-have never really known a period of high unemployment and chronic job insecurity that were comonplace in the 70's,80's and early 90's.All of a sudden a few of her friends hubbies have been furloughed,large scale construction industry main culprit,and people are starting to look at their bills and are realsing they may not be able to pay them

Wolf has a psot regarding early indications in housing market and it's not looking good for people who've bought the top of the market.

https://wolfstreet.com/2020/03/25/how-will-coronavirus-lockdowns-impact-the-us-housing-market-first-data-points-are-out-theyre-ugly/

How Will Coronavirus Lockdowns Impact the US Housing Market? First Data Points Are Out. They’re Ugly

by Wolf Richter • Mar 25, 2020 • 77 Comments

And it’s just the first inkling of what’s in store for home sales.

By Wolf Richter for WOLF STREET:

Most of the housing market data that we’re going to see over the next month or two – such as median price indices and sales volume indices — or four-plus months for the Case-Shiller Index – will reflect the era before the Covid-19 fallout. But on Tuesday last week, March 19, the real-estate world changed brutally. The five-county San Francisco Bay Area went into lockdown, followed in some form or other by the states of California, New York, New Jersey, Illinois, Indiana, Florida, Louisiana, and many others, each in its own way, more or less stringent.

Today, about one-third of the US population is under some kind of lockdown directive. And even in places where there are no official lockdowns, more and more people have started to practice some sort of “social distancing.”

For many workers, employment has already ended, and for gig workers, the hours have plunged or disappeared, at least temporarily. Commissions and tips have evaporated from one day to the next. There has been such a sudden surge in unemployment applications that state unemployment offices have fallen way behind in processing them; and official data won’t reflect the true numbers until state unemployment offices catch up. Household finances face huge question marks.

Mortgage applications to purchase a home plunged in states where lockdowns went into effect, the Mortgage Bankers Association reported today. And those lockdowns aren’t even fully reflected yet as they went into effect during the last part of that reporting week, ended March 20, or just after the reporting week, and what you see here is the prelude. This is the drop from the prior week, seasonally adjusted:
  • California: -23%
  • State of New York: -35%
  • State of Washington: -17%.

Across the US, purchase mortgage applications dropped 15% in the week ended March 20, from the prior week, the MBA reported. And this is just the first few days into the lockdowns:

US-mortgage-applications-purchase-2020-0

During the same week, ended March 20, the average 30-year fixed mortgage rate was 3.82%, according to the MBA. This was up sharply from the record low two weeks earlier due to the turmoil in the mortgage-backed securities market that caused four mortgage REITs to collapse this week. But it was still much lower than the 5% mortgage rates in late 2018.

Mortgage applications to refinance existing mortgages (refis) went through spectacular gyrations. As mortgage rates plunged to historic lows a few weeks ago, refis spiked to the highest level since 2003, having multiplied sixfold from a year earlier.

Then two things happened: Mortgage rates snapped back as all heck broke loose in the MBS market, and the coronavirus threw uncertainty over everything. Refis in the reporting week, ended March 20, plunged 34% from the prior week and 41% from the phenomenal spike two weeks ago:

US-mortgage-applications-refi-2020-03-25

This data is based on a weekly survey by the MBA that covers over 75% of all US retail residential mortgage applications at nonbanks, banks, and thrifts.

Purchase mortgage applications are not a great indicator of home sales because a portion of buyers, including investors, buy homes without obtaining a mortgage. Large investors pay cash and borrow at the institutional level. Foreign nonresident investors often pay cash as a way to get money out of the country. If foreign buyers borrow, they may do so offshore. Also, some people who’re tired of earning nothing on their money while paying interest on a mortgage are paying cash.

But purchase mortgage applications are a gauge of local demand by regular folks. That demand had been strong, and is now collapsing under the lockdowns.

Over the next few weeks, more states and cities will impose lockdowns. And demand for purchase mortgages will hit horridly low levels: It is difficult to shop for a home in areas under lockdown, and home sellers are reluctant to show homes to people who are potentially infected. There will be some activity, sure, including via online platforms, such as open-house videos. But much of the activity will come to a halt. And mortgage applications will be early data points that document this trend.'

 

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6 minutes ago, Agent ZigZag said:

Maybe they should apply for an extension of time under the contract citing the reason why, which I would suggest is not unreasonable. It is a common to use such an mechanism under a contract to reflect say inclement weather

That's not the issue, the problem is they are leveraged up with debt they need to pay the interest on, and if sites are shut and things are not progressing they get no cash flow and go out of business.

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2 minutes ago, Agent ZigZag said:

Mosaic, Yara, Nutrien, K &S I have owned for a while now and have a reasonable sum allocated to all in both ISA and SIPP. They seem to be the runt of my portfolio down 30-50%. I didnt have the chance to add in the recent sell off, but will add later on down the road. Food is vital to all and in an inflationary arena it is a good bet to at least hold. If we take a step back and see were they lie in price today compared to yesteryear you could be well right that they are a sleeping beauty that will explode when the time is right

A few have big debts but should be able to service them ok.They are a huge rubber band really.Mosaic has $1 billion of cash on the balance sheet ,not net cash,they have debts,but have that liquidity.Another i picked up in the sell off was OCI NV.Im going to try to allocate a bit more to the sector.I think its a sector that was at the bottom of its long cycle before it then got whacked down in this sell off.So it could be instead of x6 from here they might x12 at the end of the cycle as things go parabolic.

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sancho panza

Looks like the triple lock is gone.

https://www.dailymail.co.uk/debate/article-8153515/STEPHEN-GLOVER-fear-young-set-pay-heavy-price-cost-fighting-coronavirus.html

STEPHEN GLOVER: The old may be most at risk from coronavirus, but I fear the young are set to pay a heavy price for the financial cost of fighting it

Both Boris Johnson and the Chancellor Rishi Sunak have said they will spend ‘whatever it takes’ to beat coronavirus. Neither of them has the faintest idea what the final cost will be.

By offering vast loans of hundreds of billions of pounds to companies (some of which may never be paid back), and by paying 80 per cent of the salaries of workers who can’t work up to £2,500 a month, the Government has written a blank cheque. This cheque has been signed by the British taxpayer.

No one knows how long the crisis will last, or what the damage to the economy will be when it is over. But it seems probable that government borrowing will soon dwarf the £150 billion annual deficit racked up by Labour following the 2008-2009 financial crisis.

Remember that the mind-boggling sums being thrown around by the Treasury at the scourge of coronavirus have to be borrowed — and so paid back. Remember, too, that the current yearly debt repayment is already larger than the entire defence budget.

It’s likely that, when the disease has finally been beaten, unemployment will have soared and the economy will have contracted by anything from five to an unprecedented 20 per cent.

Doubtless there will be a fairly rapid bounce back, but the Government’s tax receipts will be sharply reduced, making debt repayment even more arduous.

Let’s be in no doubt that our country faces years of austerity that will almost certainly make the past decade look like a minor irritant. Baby-boomers have the recompense of having enjoyed the good times. But the lives of our children are likely to be blighted for years to come.

As a father of two young men, this grieves me. When I am not worrying about their health, I am fretting about their long-term future. I’ve no doubt there are thousands, if not millions, of parents thinking similar thoughts.

We have to ask ourselves a rather shocking question. Is it right that, in order to save the lives of mostly elderly people (I accept that some younger people are at risk, but they constitute a comparatively small minority), the future lives of millions should be devastated?

I imagine some among the young think it’s not right — which may be why a few of them are flouting the Government’s rules. I suspect a greater number are silently resentful. Such people have been the chief victims of austerity, and they are being asked to carry the can again.

Be assured I don’t share this view. But we should examine it. In a spirit of fairness I will bring forward three witnesses who suggest that draconian anti-coronavirus measures could create bigger problems than they solve.

One is Bryan Turner, an emeritus professor of experimental genetics. In a recent letter to The Times, he suggested there might come a time when the Government’s medicine caused unacceptable economic harm. ‘As a 72-year-old,’ he wrote, ‘I would rather take my chances with Covid-19 than see further damage inflicted on my children’s future.’

A second witness is Philip Thomas, professor of risk management at Bristol University. He has just published a paper arguing that if the economy shrinks by more than 6.5 per cent, the ill effects in terms of lower life expectancy and other health problems will outweigh the benefits of saving lives from the ravages of the contagion.

I introduce my third witness with some embarrassment since he is President Trump, who has had a wretched few weeks, swerving from one extreme position to another. Nevertheless, many sane people will have agreed with his statement that ‘we cannot let the cure be worse than the problem’.

What are we to make of such responses? The two professors appear essentially utilitarian, and believe the right moral choice is the one which produces the greatest good for the greatest number. One snag with this approach is that it is impossible in practice to compare two unknown dangers. Professor Thomas may be the best risk management expert in the world, but he can’t really know how many lives will be lost by coronavirus or the effects of a smaller economy.

As for Professor Turner, note that he says he would rather put his life at risk than see more damage done to his children — not that he would rather die. And while one respects his personal preferences, he can’t expect all those over 70 to share them.

I don’t know whether Donald Trump could be described as a utilitarian but there is a lot of common sense in his remark. The difficulty lies in determining at what point the cure might become ‘worse than the problem’.

What these three men say shouldn’t be summarily dismissed, and I don’t doubt many will instinctively agree with them. The main objection, it seems to me, is that they don’t take full account of human realities.

Our Government — just like those in France, Germany, Italy, Spain and even the United States, despite Trump’s shilly-shallying — is in the position of a firefighter confronted with a conflagration which must be put out, however much water is needed.

To continue the analogy: if all the water is used, and there isn’t enough left to irrigate the crops next year, that is a great pity, but the thought can’t be allowed to interfere with the process of trying to extinguish the fire.

The practical impulse to save human life is so central to our moral traditions that it cannot be attenuated by fine calculations about whether it would be wiser to hold back greater resources for the future.

But what if the Government is wrong and has exaggerated the extent of the threat? That is a real worry. According to Sunetra Gupta, a professor of theoretical epidemiology at Oxford University, as much as half the British population might have already been affected by a mild form of coronavirus, and have built up immunity.

If that were the case, the outbreak would be both shorter and much less severe than No 10 fears, and so necessitate far less extreme measures. The only way to find out, as Professor Gupta argues, is by widespread testing. I do wish the Government would get on with it.

Incidentally, the divergence between the Oxford study and the guidance the Government has been receiving shows that experts don’t always agree. Boris Johnson takes refuge in the mantra that he is ‘following the science’. Yet it is folly to assume that scientific advice is uniform concerning so unfamiliar a phenomenon as coronavirus.

That said, if the danger is truly as grave as No 10 believes, the Government is right to throw the kitchen sink at the problem. When death rates begin to decline in a few weeks or months, it will be time for minds to turn to rescuing the economy.

And when that gigantic work of reconstruction begins, I hope the political class won’t repeat the mistakes made after the last recession, and allow the burden of austerity to fall most on younger people.

God knows, it will be heavy enough as it is. But the Government must do everything it can in the coming years to convince the young that they do have a future.

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sancho panza
30 minutes ago, DurhamBorn said:

I think silver will be the best performing asset of all from roughly $10 to $300,2.5x the rise in oil.However its better to spread across the sectors.Oil wont do as well,but it should still be the biggest % of assets.Im looking for silver to be around the same allocation as the potash sector.One or both should 10 bag and there is an outside chance they 25 bag.As always its vital a spread is kept as we cant be sure on the outcome,only the likely direction of travel.

I know you've been through this before but can you explain again why you see silver outperforming gold.Is it industrial use?is it because it's already low.?

Worth noting IKN saying silver a crap investment which (going by his covid call which ran alongside mine)must mean it's due some time in the sun

19 minutes ago, Agent ZigZag said:

Mosaic, Yara, Nutrien, K &S I have owned for a while now and have a reasonable sum allocated to all in both ISA and SIPP. They seem to be the runt of my portfolio down 30-50%. I didnt have the chance to add in the recent sell off, but will add later on down the road. Food is vital to all and in an inflationary arena it is a good bet to at least hold. If we take a step back and see were they lie in price today compared to yesteryear you could be well right that they are a sleeping beauty that will explode when the time is right

Have you looked at Israel Chemical or Intcitec Pivot?

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sancho panza
13 minutes ago, Majorpain said:

That's not the issue, the problem is they are leveraged up with debt they need to pay the interest on, and if sites are shut and things are not progressing they get no cash flow and go out of business.

You're an insider MP.Ref my earlier post,Mrs P has acquaintances getting furloughed which means 80% salary covered but what are the likelihoods of large job losses from the big resi buidling firms/subbies?

How bad do you see it getting psot covid as the industry reorgnaizes?

Also what proportion of staff on a building site would you estimate are subbies(clearly they'll have a lot less legal rights)

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Agent ZigZag
8 minutes ago, sancho panza said:

 

Have you looked at Israel Chemical or Intcitec Pivot?

Never heard of them. Will look into it. Thanks for the heads up

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12 hours ago, UnconventionalWisdom said:

Rent and plan your exit. If you put down roots you will increase the likelihood that you wont move to where you want to be. You'll get a promotion or something and coupling that with the hassle of selling, you'll prob convince yourself it's not worth going. 

You can think clearer if you dont have roots

I hear you. I'd like some roots though; moved 7 times over the last 5 years and it gets old quickly. I do want to be here for now as I'm near very good climbing for the sort of climbing that I can currently do, and I'm accessible enough to get to the kinds I'd like to learn. IDK man, whatever you do there's a bunch of risk isn't there

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@sancho panza as you know i dont do much work on housing because it doesnt affect me,but that above is pretty much what i expect.The first big slam of demand destruction,then the long cycle long grind of rising rates.The big story of the next cycle is that it will be industrial,not consumer.That means capital will divert to industrial,not consumer.As always the ones who over paid the most will be hit the hardest,and in the UK that means people who have bought on HTB.

It was only last week a family friend mobile hairdresser and her hubby has a good job.Shes now lost all income,they are mid 40s,owned since 21 year sold,but upped to a 3 bed detached on a new estate 3 years ago.Shes spent the week trying to get through to the bank for a mortgage holiday as she said they are really struggling and cant manage on her hubbies wage "who can" she said.Her daughter has just bought a £180k house on the same estate,shes 20 years old.I reckon it will go to £90k and never get above what she paid for 30 years.

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On 23/03/2020 at 10:10, spygirl said:

What an absolute clusterfuck.

Rather than get the bags made in China, they import loads of Chinese from the infected area.

I mean, FFS, these people will be taking the templates and production info back home.

Why not have a production facility in North Africa/Med basic, where the EU has a trade/labour agreement in place?

Or invest in machinery and get the locals to do it?

Oh yes - Chinese are cheaper, easier to control.

https://www.newyorker.com/magazine/2018/04/16/the-chinese-workers-who-assemble-designer-bags-in-tuscany

The the gormless Pols kick in - Hug a Chinky

https://www.theblaze.com/news/italy_political_correctness_china_coronavirus

Spygirl, great story, where do you find them!

It reminds me of our very own Morecambe Bay Cockle Picker story. That was back in 2004, but remember at the time having a nagging feeling that there must be more to the story than the MSN line of so-called 'gangmasters' (who/what/where/when did that become a thing?) 'exploiting' vulnerable Chinese workers.

The migrants were repeatedly presented as 'undocumented immigrant labourers', but were in fact illegal immigrants.

Looking back the story was clear press manipulation of the facts and propaganda.    

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TheCountOfNowhere

If we are staring down the barrel of a depression and people are really struggling, will we see the economic migrants go home/elsewhere ?

 

Could be a double whammy for the UK GDP

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sancho panza
3 minutes ago, DurhamBorn said:

@sancho panza as you know i dont do much work on housing because it doesnt affect me,but that above is pretty much what i expect.The first big slam of demand destruction,then the long cycle long grind of rising rates.The big story of the next cycle is that it will be industrial,not consumer.That means capital will divert to industrial,not consumer.As always the ones who over paid the most will be hit the hardest,and in the UK that means people who have bought on HTB.

It was only last week a family friend mobile hairdresser and her hubby has a good job.Shes now lost all income,they are mid 40s,owned since 21 year sold,but upped to a 3 bed detached on a new estate 3 years ago.Shes spent the week trying to get through to the bank for a mortgage holiday as she said they are really struggling and cant manage on her hubbies wage "who can" she said.Her daughter has just bought a £180k house on the same estate,shes 20 years old.I reckon it will go to £90k and never get above what she paid for 30 years.

Me and Mrs P are long term renters now.She's a bright girl and understood the maths as soon as I explained it to her.My interest in the hosuing market is mainly because alongside CRE lossess,I think they will form the backbone of the debt deflation for large retail banks.

I think there are loans to companies like Intu that are efectively worthless because the assets that underpin them are decreasing in value at an exponential rate as footfall declines.I include their balnce sheet below.But even a layman considering teh costs of carry on retail operations can work out they're value is intrinscially linked to both footfall and credit demand.

This latter point is something we've discussed at length before ie demand destruction.As per the example you provide,are that couple going to be rushing out to get new credit cards or pay off the old ones?Debt deflations as per Irving Fisher theory and @Harley teachings on Behavioural economics are psychological phenomenons.

The 30 year sugar rush into debt has ended I think.A lot of people are going to be looking sideways.

 

image.thumb.png.5bced1becc876767211ebd8f153c2b18.png

image.thumb.png.c87a5e0c561881030bd63707f4805849.png

image.thumb.png.2b5a2d1d8142a1759c8e7088dddbf0c0.png

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sancho panza
20 minutes ago, DurhamBorn said:

@sancho panza as you know i dont do much work on housing because it doesnt affect me,but that above is pretty much what i expect.The first big slam of demand destruction,then the long cycle long grind of rising rates.The big story of the next cycle is that it will be industrial,not consumer.That means capital will divert to industrial,not consumer.As always the ones who over paid the most will be hit the hardest,and in the UK that means people who have bought on HTB.

It was only last week a family friend mobile hairdresser and her hubby has a good job.Shes now lost all income,they are mid 40s,owned since 21 year sold,but upped to a 3 bed detached on a new estate 3 years ago.Shes spent the week trying to get through to the bank for a mortgage holiday as she said they are really struggling and cant manage on her hubbies wage "who can" she said.Her daughter has just bought a £180k house on the same estate,shes 20 years old.I reckon it will go to £90k and never get above what she paid for 30 years.

Apologies for the double tap,but the bit in bold has just hit me.It's amazing how many people's finances are set up thus.A key feature of our home life is that we can manage on one salary if needed,whether that's down to my Grandad,or the low pay/unemployment I went through in the early 90's,I don't know..It's a sad indictment of what's happened to our society that so many people are unable to.

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TheCountOfNowhere
15 minutes ago, sancho panza said:

Apologies for the double tap,but the bit in bold has just hit me.It's amazing how many people's finances are set up thus.A key feature of our home life is that we can manage on one salary if needed,whether that's down to my Grandad,or the low pay/unemployment I went through in the early 90's,I don't know..It's a sad indictment of what's happened to our society that so many people are unable to.

The whole country is set up thus.

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1 hour ago, DurhamBorn said:

I think silver will be the best performing asset of all from roughly $10 to $300,2.5x the rise in oil.However its better to spread across the sectors.Oil wont do as well,but it should still be the biggest % of assets.Im looking for silver to be around the same allocation as the potash sector.One or both should 10 bag and there is an outside chance they 25 bag.As always its vital a spread is kept as we cant be sure on the outcome,only the likely direction of travel.

Many thanks, DB. Trying to work out a possible direction of travel for my life for the next few years! Great insights as always.

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leonardratso

im amazed at how many people run their lives on shit careers, for example, bar staff, barrista, hairdressers.

When things are good then they probably do well, but since they are demand led then they are fragile at best, as we can see now.

I can understand someone doing it as a time filler or for a bit of beer money, as a side line to the main wage earner, but seems a lot of people have that as a main wage earner/career. These arent students doing it for a doss during summer or to get some free beer/nights out of it, they are adults with commitments and maybe even kids.

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reformed nice guy

The US treasury bond yields for 1 month and 3 month are 0%. Zero. Zilch. Zip. 

Has that ever happened before?

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1 hour ago, sancho panza said:

I know you've been through this before but can you explain again why you see silver outperforming gold.Is it industrial use?is it because it's already low.?

Worth noting IKN saying silver a crap investment which (going by his covid call which ran alongside mine)must mean it's due some time in the sun

Have you looked at Israel Chemical or Intcitec Pivot?

Industrial use and the fact unlike gold most of it is in land fill and gone.Silver is an inflation hedge,gold a deflation/collapse hedge.At least thats how i see the two.

I havent really looked at those two companies.Need to do more work on the sector to be honest,and quickly.

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27 minutes ago, sancho panza said:

Apologies for the double tap,but the bit in bold has just hit me.It's amazing how many people's finances are set up thus.A key feature of our home life is that we can manage on one salary if needed,whether that's down to my Grandad,or the low pay/unemployment I went through in the early 90's,I don't know..It's a sad indictment of what's happened to our society that so many people are unable to.

We can manage on half of one salary and thats if i ignore all other assets.Like we have always said on this thread high debts mean massive risk,and almost certain failure.My brothers mortgage is £3 a month.Hes over the fields catching rabbits with his whippet,couldnt give a toss about whats going on,hes also got an allotment and doesnt pay for much grub,gets a £15 meat pack off the local butcher a week.The people above of course looked down their nose at my brother and his little terrace house.The fact escaped them he actually has far more wealth than them because theirs is debt,debt they now are struggling to service.

I think your right as well.The way this is paid for will be with housing weath.Expect pensions to get hit as well,40% tax back is sure to go,thats history,100% certain.

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