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


spunko

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Some cheer for me!  This chart is one of utter beauty!  As I said many months ago, a very long term cup and handle chart pattern on the monthlies with a monthly buy signal in Oct 18 and a subsequent 42% rise to date.  If you were looking in USD though you might have missed it!  Perfect ballast for a balanced portfolio allocation.  Of course, that was then and this is now

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54 minutes ago, Harley said:

Some cheer for me!  This chart is one of utter beauty!  As I said many months ago, a very long term cup and handle chart pattern on the monthlies with a monthly buy signal in Oct 18 and a subsequent 42% rise to date.  If you were looking in USD though you might have missed it!  Perfect ballast for a balanced portfolio allocation.  Of course, that was then and this is now

.Capture.thumb.JPG.0be594655036226c52ea7140e06b97d5.JPG

 

I was and I did!:-[

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11 minutes ago, MrXxxx said:

I was and I did!:-[

A weak buy in USD at the same time which turned out to be the real thing.  I need to analyse some more as I'm seeing the same today on some stocks and indicies.  A strong (but not guaranteed) buy signal for me is three out of three indicators.  The problem is when I get a weak two out of three - could go either way.   

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PaulParanoia
34 minutes ago, Harley said:

A strong (but not guaranteed) buy signal for me is three out of three indicators.

Would you mind sharing what your indicators are ... or linking to an old post if you've done so before?

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@Cattle Prod really good info thankyou.I really like the fact you mention that they have an open door on South America for historic reasons.They also seem to be interesting in Asia in places.They should have plenty of options to buy up some reserves as you would think a lot of E+P companies will be rolling over.Although its a waste of capital in many ways i also like the way the have started to invest in all sorts of areas like car share ,hydro assets etc.It means as cash explodes in the cycle they will at least have options.They do seem to have a lot of gas,but thats a good thing.They also seem to have low debts and a nice downstream business.I notice they are expanding that as well in Latam .I didnt notice they were looking in Russia,but thats interesting.

Another big plus is the Spanish government has put in legislation to stop people outside the EU taking more than a 10% stake in certain companies.Repsol and Telefonica are two.Most people would see that as bad as it stops takeovers,but im glad because it means all the value can out over the cycle for longer term shareholders.

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10 minutes ago, Democorruptcy said:

Why is India going to do so well?

Everyone is moving their factories there as they tell China to do one.;)

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In regards to Repsol @DurhamBorn you mentioned that they offer dividends as cash or shares and the shares option is a way of avoiding tax but how does this work does HL contact you asking with option you want or?

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10 minutes ago, DoINeedOne said:

In regards to Repsol @DurhamBorn you mentioned that they offer dividends as cash or shares and the shares option is a way of avoiding tax but how does this work does HL contact you asking with option you want or?

Im not sure as i havent had a divi yet.I would expect something along the lines of you get a corporate action highlight on your holding to take action.If you do nothing you get the shares,if you opt to sell you get the cash.Im going to simply take the shares for now though in future id simply take the shares and then sell them.You have the dealing charge of course,but nothing compared to the divi.Im not 100% certain you dont pay tax on the divi even as shares,but it looks like a way to get around,i guess we will find out.

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sancho panza
23 hours ago, Majorpain said:

The interesting thing with the panic buying is that its actually made the population much more resistant to shocks than previously, there cant be many people not trying to get two weeks of food in the house.  Goes to show how quickly things can change if the population wills it, all it takes is a big enough shock.  The unemployment rates from the US indicate that people are in line for a good dose of financial reality, where loading up on debt and you lose your job is not a good situation to be in.

Funnily enough,jsut got off the phone to an old mate I havent spoken to in two years.Resdiential surveyor,switched on guy,been aware of this coming for a while.He was saying how he thinks the resi market is going to be tied up with few transactions for months because quite simply noone knows where to put valautions after a hiatus like this.Who's going to be selling/buying?

AS you say MP,this has happened in a month.which is nothing in the scheme of thingsl

23 hours ago, sancho panza said:

Posted this before.We aren't even at stage one yet but the signs of the credit bubble are there,it's jsut looking for that pinprick.I genuinely do wonder if we're finally gettinghere.

The psychology of using income to clear debt rather than borrow more is what initates Fisher's paradox which dictates that as people pay down debt then their ability to earn income(ie as GDP reduces) will decrease,effectively meaning that the very act of reducing debt may well mean that they reduce their chances of clearing any more.

https://en.wikipedia.org/wiki/Debt_deflation

Fisher's formulation (1933)

In Fisher's formulation of debt deflation, when the debt bubble bursts the following sequence of events occurs:

Assuming, accordingly, that, at some point in time, a state of over-indebtedness exists, this will tend to lead to liquidation, through the alarm either of debtors or creditors or both. Then we may deduce the following chain of consequences in nine links:

  1. Debt liquidation leads to distress selling and to
  2. Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes
  3. A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be
  4. A still greater fall in the net worths of business, precipitating bankruptcies and
  5. A like fall in profits, which in a "capitalistic," that is, a private-profit society, leads the concerns which are running at a loss to make
  6. A reduction in output, in trade and in employment of labor. These losses, bankruptcies and unemployment, lead to
  7. pessimism and loss of confidence, which in turn lead to
  8. Hoarding and slowing down still more the velocity of circulation.
    The above eight changes cause
  9. Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.
— (Fisher 1933)

On rethinking thsi above,it's worth noting we've already has 3, 4 looks inbound,5 likely and 6 too.Distress selling can't be far away

 

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sancho panza

https://www.icis.com/chemicals-and-the-economy/2020/04/world-risks-moving-from-denial-into-anger-as-the-paradigm-of-loss-moves-forward/

World risks moving from Denial into Anger as the Paradigm of Loss moves forward

Economic growth

SHARE THIS STORY
 

Kubler-ross.png

The head of the IMF has warned again on the likely scale of the economic depression ahead:

“Global growth will turn sharply negative in 2020. In fact, we anticipate the worst economic fallout since the Great Depression.”

None of us have ever seen a health crisis on the scale of Covid-19 . Nor have we seen an economic crisis on this scale before.  The best guide to what may happen is therefore likely to be the  ‘Paradigm of Loss’ model developed by Elisabeth Kübler-Ross, to help explain how people react to a devastating change in their lives.

As the chart shows, the Paradigm suggests that Denial is the first reaction to a disaster, and we have certainly seen this occur since the pandemic began, as discussed here many times in recent weeks.  Unfortunately, most commentators have added to this Denial by arguing that ’the world will see a quick, V-shaped recovery’.

This is clearly impossible, given the scale of the pandemic and the economic damage it has already caused. Unsurprisingly, the media are already starting to focus on the failure of governments to (a) prepare properly for the pandemic and (b) deliver the vital equipment needed to support front line workers and desperately ill patients.

It therefore seems likely that Anger will soon start to dominate as people begin to recognise that government incompetence has played a large part in this disaster. The trigger could come when the reality of job losses and the economic consequences start to become apparent, especially as the frustrations of a lockdown in the typical small apartment start to tell on home life.

It is too early to speculate in great detail on the Bargaining and Depression stages. But we can potentially start to identify a number of profound behavioural changes:

PEOPLE

  • We could see an extended period of civil instability in many countries
  • Lockdowns will lead people to focus on the home, rather than luxuries and travel
  • Mass international/internal travel opportunities will reduce

BUSINESS

  • Auto, consumer goods, electronics demand will focus on durability/sustainability
  • Supply chains will be localised and reshoring accelerated in the western world
  • Speed of response will be key, with inventory eliminated wherever possible

FINANCE

  • Lower incomes/spending concerns will further encourage second-hand markets
  • The bursting of financial/housing market bubbles will impact personal wealth
  • Deflation will encourage saving instead of borrowing

Sustainability.png

In reality, it therefore seems likely that we are moving rapidly into a New Normal world, where global supply chains prove fragile, and sustainability on a local basis becomes key. Similarly, the increasing volatility in financial markets suggests investors need to abandon their wishful thinking over central banks’ ability to solve the crisis.

The definition of Sustainability will also likely be expanded to include recognition of the valuable role played by lower-paid workers in keeping the wheels of the economy moving – hospital workers, carers, truckers, shop assistants etc.

Future Winners in this New Normal world will therefore be those with offerings focused on Sustainability and Affordability.  In turn, the key drivers for revenue and profit will be based on a Value Proposition that helps people do more with less.

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sancho panza
20 hours ago, JMD said:

Police are too political these days (although to be fair this 'political virus' has infected all areas of modern life, where people are shuned for voicing opposite opinions or even lose jobs for holding incorrect beleifs) and police have distanced themselves from average public norms of fairness, letalone law... I'll feel safer when they change back to wearing blue uniforms, for me 'our boys in black' just doesnt fit with them being a civilian force - which is what their meant to be.                                                                                                                                                                                  Anyway for me we have witnessed the hive mind at work with the recent mass acceptance of the shutdown of our economies, and I have hinted at my fears over this recently. Then again I admit to being somewhat conflicted here, mainly because I have longstanding doughts over the value of Western liberal democracy (ie continually voting for ever higher spending programs) - for me rule of law and property rights provide better safeguards for securing our individual rights... Anyway so much happening at the moment and I suppose mostly not strictly discussion for this thread.

Years ago I studied the economy of Germany 1932-39 and concluded that it was on an unteanble vicious circle of ever increasing borrowing sustaining ever increasing GDP which sustained ever increasing borrowing.

WHo'd have thought it?

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sancho panza
6 hours ago, Cattle Prod said:

@DurhamBorn Sorry for taking a while to get back to you on the Repsol reserves question. I''ve been out figuring out how to winch out a tree stump (without decapitating myself), another life skill added to the list. Now that is a job that cannot be outsourced, I hope @Harley would approve!

So the first thing that jumps out at me is that almost half their production is Latin America. I had a suspicion, but I didn't realise it was that much. This is good, because there are reserves, and there are cheap reserves, and some of South America in particular have very good terms with low costs. I screened Colombia once, but the acreage was sown up. Repsol have a natural 'moat' in this area with culture, language and history, and each of those things matters. Same reason Iberia serves the continent from Europe. I think these cheap barrels are one of the reasons Repsol has such a low break even. I know anecdotally that their head office is bloated with staff, but they are probably cheaper than elsewhere too.

1472722749_repsolreserves.PNG.66ae6a08840203ae14b82a43a1cf16df.PNG

Net income a similar amount from LatAm:

 

Super piece of work CP.Thank you.

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The Second Mouse
54 minutes ago, DoINeedOne said:

In regards to Repsol @DurhamBorn you mentioned that they offer dividends as cash or shares and the shares option is a way of avoiding tax but how does this work does HL contact you asking with option you want or?

Yes, HL sends an email via your account. You can click a box on the email that tells Hl you want the dividend taken as cash, or do nothing and the dividend automatically gets converted to shares and added to your holding. Cant remember what happens to the remainder after the shares are added. I think it's converted from euros to pounds and paid into your cash on account, but can't recall for definite. 

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sancho panza
2 hours ago, Cattle Prod said:

I see it as the Etihad strategy - can't be arsed going out there and doing the work to diversify (because my home market/asset is sewn up/maxed out), so I'll just buy bits of companies. 

Not a chance they'll take out Equinor, I'm pretty sure the Norwegian govt still has a controlling stake in them. Even if they don't, Equionr is an intrinsic part of Norway, not going to happen. I worked for Statoil for a bit in Norway, and it's everywhere, from fishing clubs to schools, airports, they are very proud of it. They sing really, really bad songs about it :-)

Good luck with that, Saudis!

I don't think they'll take over smaller companies. They are excellent at what they do in their desert and their geology, but they have zero experience of the wider world, in all senses. The oil patch sharks will fleece them. Best to take small non controlling stakes and let international people run it.

Of concern is that Saudi money is the dumbest of dumb money, like financing that jackass in Softbank. I hipe this is not a contrarian signal!

It was funny you were talking earlier about repsol having access to parts of south america due to cultural/lignusitic commonalities and being a simpleton,I jsut look at the price of repsol and think the suaids could take them in an afternoon.

My worry as highlifhted by DB is that I want these shares for the logn term.I've been here before,huge merger /take over and then over a couple of years they destroy value to the point where they undo the logic of the deal in the first place.

I msut say that point about commonalities you made ref repsol applies to telefoncia and a host of toehr SPainish companies that appear to ahve unique access to the SA continent

It does make a liot more sense for sauid to keep the stakes as you say.

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sancho panza
2 hours ago, Cattle Prod said:

I've caught up with the last 5 pages. Top quality content and posters, this thread just gets better.

I think in 10-15 years someone will find this thread and be shocked with its prescience. They'll try and write a book about it. Said intrepid writer will try and track down the posters, but of course we'll all be in our compounds in the woods by then, bantering by morse code. The writer will no doubt get shot by one of us for trespass, a sad but somehow poetic end to this story 😅

Must say I've learned an awfull lot over the last year or two.

And with teh help of the  experienced traders here,we kept buying goldies/oil through the recent drops.Godlies coming good already,oilies will ahve their time.Takes guts to buy during capitaultion selling and a lot on here did.Fair play.

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sancho panza

The scale of the problems the UK faces.This is going to be a disaster.Price of a 3 bed semi in Walthamstow could be the least of our worries.

https://wolfstreet.com/2020/04/14/something-has-gone-wrong-uk-government-banks-screw-up-coronavirus-loans-small-firms-on-near-collapse-mixed-results-in-other-countries/

“Something Has Gone Wrong”: UK Government, Banks Screw Up Coronavirus Loans, Small Firms Near Collapse. Better Results in Other Countries

by Nick Corbishley • Apr 14, 2020 • 15 Comments

Part of the problem is cultural: big banks in the UK don’t like lending to small businesses, especially not at 1.5%.

By Nick Corbishley, for WOLF STREET:

Thanks to its Brexit planning, the UK should have been better positioned to help its small businesses through the coronavirus crisis than most of its European peers. In early 2019, the UK treasury, together with the business department and the state-owned British Business Bank, laid the groundwork for a loan guarantee system for small businesses in the event of a chaotic Brexit. This meant that when the Covid-19 lockdown began, all the government needed to do was dust off those plans and put them into action. It should have been smooth sailing. Instead, it’s been an unmitigated disaster.

On March 19, the day the economy went into lockdown, the government unveiled £330 billion of emergency measures to help shuttered businesses weather the storm. Those measures included the Coronavirus Business Interruption Loan Scheme (CBILS), which the Chancellor of Exchequer Rishi Sunak said would be made available to “any good business in financial difficulty who needs access to cash to pay their rent, the salaries of their employees, pay suppliers, or purchase stock”. Yet almost four weeks later, just 4,000 of the 300,000 companies that have applied for the funds have actually received them.

“Something has gone wrong,” warned former Bank of England governor Mervyn King on Sunday. Due to a combination of voluminous government red tape, complex eligibility criteria, massive roadblocks erected by the participating banks and the temporary closure of a large number of bank branches, the amount of money so far lent out by UK lenders to small or mid-sized businesses is just £800 million pounds. That’s less than 0.25% of the total £330 billion pledged in loans for businesses, small and large.

In Switzerland, with a population roughly one eighth the size as the UK’s, 76,000 small businesses had received emergency loans worth more than CHF15 billion ($15 billion) as of April 6. Since then, the Swiss government has doubled the facility from CHF20 billion ($20.8 billion) to CHF40 billion ($41.6 billion). The much-lauded loan scheme’s success appears to rest on two basic pillars:

One, simplicity and speed. To qualify for a loan of up half a million francs, small business owners merely have to fill in a one-page form containing six basic questions, which they must answer honestly. Once the form is sent to the bank, the application is approved or rejected within no more than 24 hours. If approved, the loan is interest free, does not include penalties and is repayable in five years.

Two, zero risks for banks. All loans of up to CHF500,000 are 100% guaranteed by the state, meaning the banks have nothing to lose and are therefore less worried about the risk of providing financial lifelines to businesses whose future is far from certain, even with the loans.

In the UK, by contrast, 80% of each loan is guaranteed by the state, which means banks must assume 20% of the risk of non-payment. Even before this crisis began, large UK banks were already reticent about lending to small businesses. Worse still, many of the small firms they have lent to ended up being lumbered with dodgy financial products such as payment protection insurance (PPI) or interest rate swaps, which had an annoying tendency to harm or destroy the business’ financial health while making the bank bucket loads of money,

A large part of the problem is cultural: most big banks in the UK just don’t like lending to small businesses anymore, especially if the interest rate they stand to earn on the loan is as low as 1.5%. Yet in other European countries where emergency business loans are not fully backed by government and the interest on loans is also pretty low, large amounts of funding are already flowing to businesses.

Even in Spain, which is not exactly famed for the speed of its bureaucracy and where the government is also guaranteeing up to 80% of emergency loans and loan renewals, some €30 billion has been disbursed by the banks in the past month, many of them to SMEs. Just one lender, Caixabank, says it has so far granted €8 billion to businesses — ten times more than the whole of the UK banking sector. It’s not all wines and roses, of course. Some banks are breaking the spirit, if not the letter, of Spain’s emergency loan legislation by green-lighting loans only if a borrower agrees to take out another financial product such as life insurance.

Other countries have also had their share of problems. In Germany the emergency loans system got so overloaded at its launch that it bogged down, while in France many companies are buried under mountains of paperwork.

But nowhere has the approach been so poorly designed and implemented than in the UK. The system has already been through one major overhaul in which banks were banned from demanding personal guarantees from borrowers of loans of less than £250,000. The banks were also prevented from requiring small firms to apply for a commercial product before being considered for an emergency loan. Despite these changes, the system is still failing to get anywhere near enough money to the millions of businesses that need it.

Many business owners have said that without an emergency loan they will not be able to pay staff at the end of this month. A network of accountants serving more than 12,000 SMEs called the Corporate Finance Network recently warned that as many as a fifth of small businesses in the UK will go out of business in the next three weeks if they don’t receive the emergency cash.

“The economy will recover quickly only if we can keep the businesses that existed at the beginning of it still functioning and still able to pick up the reins when the epidemic is over,” Mervyn King said in his interview with Sky on Sunday. For that to happen, both the UK government and UK banks will have to get their act together and their priorities straight pretty quickly. By Nick Corbishley, for WOLF STREET.

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