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

[ThoughtCriminal]

5 minutes ago, sancho panza said:

has written extensively about the HMRC's new computer system and how they're mapping transactions for fraud..My experience of watching the HMRC work is that they wait until you've built up enough of a debt then they pursue it.I've seen people build BTL empires on tax dodging only to find that the bill when it comes is ruinous.And then you're selling potentially into a market where everyone knows you're a distressed seller.

With BTL you need to play with a straight bat imho.

 

 

Whilst I don’t doubt for one minute that Spygirl is correct about HMRC and their shiny new computer system, I have to set that against the fact that they’re a government bureaucracy. The same people who spent years and billions of pounds on an nhs records database, then had to abandon it because it was dog turd. 

 

Then there’s personal experience: over a dozen houses stretching back nearly twenty years and not ONE person I know has had a knock on the door. They must owe over a quarter of a million by now between them. 
 

Theory and reality don’t always match.

[sancho panza]

4 hours ago, Sasquatch said:

To add, our plan is potentially to buy 3 or 4 houses. Very likely to be 2 bed terrace or maybe a small bungalow. Either bought via auction and requiring refurbishment or something in good order maybe just needing freshening up.

The purchases would be 100% cash so no mortgage.

Something like this would be an interesting buy (but hopefully for a little less). In top condition. Modern. Likely rent ppm would be about £550.

https://www.rightmove.co.uk/property-for-sale/property-76168216.html

My concern would be that one area govts ccould save huge amounts going forward is the HB bill meaning downward pressures on rents.Also,the rents of the last 30 years have run alongside disinflation so if we get an uplift in oil/food prices,the rent bill-which is third in line-gets squeezed.

I also wonder if a decent size recession will see a lot of more marginally attached EU workers head home.

4 hours ago, JMD said:

DB, great to see you have an open mind (joking of course), given what you have said about property prices etc, previously. Not being sarcastic btw, as I think this is crucial in identifying all sorts of opportunities in next cycle. Also if I may say it shows a certain fortitude of character to state this 'openly', ie. I expect you'll get some blowback from some here.                                                                                                                                                                                                                     Others have already commented about problem tennants, my advice here would be to only have female tennants, after all that would remove 90%+ of the type of 'characters' mentioned here by other landlords. I had a neighbour who successfully let his 5 flats on this basis. In fact for full disclosure I have been thinking of ways to deploy some of my own capitol (as I don't want to put all in the stock market), and have previously posted about this subject in regard to potentially buying a larger residential property in order to utilise part of it for letting, storage business, etc. 

@stokiescum has a good idea which is to rent part of your house out to a Lodgeer.which is treated differently to rental income I believe and then eviction is not a problem either.

[sancho panza]

3 hours ago, Hardhat said:

Here's a question on laddering up

One of my best performing stocks is CWR (Ceres Power Holdings), a manufacturer of fuel cells (for hydrogen etc.). My holding is currently up 40%.

I'd quite like to increase this holding even more, as I see a lot of potential upside still ahead in the hydrogen sector. However, the share is now at a 40% premium to the last time I bought ... and I'm hovering over the buy button as it now seems expensive.

We've often discussed laddering down on here, but does anyone have any strategies for laddering up? Is this even a technique?

I ladder up as well if the bottom is in and I'm bullish on the sector.I lie having a buying plan at the start.Whne I have no plan,things genereally go worng.

 

I alos ladder in mechanically over months belwo certain prices.dyor nathc

[sancho panza]

3 hours ago, ThoughtCriminal said:

Have to say SG, I know half a dozen people who rent out multiple houses and have done for years, not one of them has ever paid tax on the income. 
 

By what method would HMRC be alerted to the fact one is gaining income for a house? I can’t see where in the chain the information would be transmitted. 

This may sound cynical,but HMRC often seem to go after BTLers in their 50's,with a lot of equity in their main house and possibly also their BTL's.I don't know if it's a coincidence but they often seem to leave more marginally profitable LL's alone.

Problem is that when they come for you,you may get a 6 figure bill for the last ten or twenty years.The key question they can ask ifs for you to explain where your funds come from.SOunds innocent but let me tell you,you need a paper trail.With banking records being held for 6 years,they can go after the other years for which you've owned the property.

Brutal.Only word for it.Seen people lose the lot.

 

.

[Sasquatch]

9 minutes ago, sancho panza said:

My concern would be that one area govts ccould save huge amounts going forward is the HB bill meaning downward pressures on rents.Also,the rents of the last 30 years have run alongside disinflation so if we get an uplift in oil/food prices,the rent bill-which is third in line-gets squeezed.

Absolutely, the current conventions are likely to change. Ultimately a rent has to have some reasonable relationship to earnings. Other than our nightmare tenant, all of our other tenants were couples. They were happy with a two bed place with a small garden. Easy to look after and a spare bedroom for visitors or use an a study. 

We haven't made our minds up yet, but we do need to formulate a plan for retirement. My wife has no pension and my SIPP is only approx £125,000. Our accumulated business monies will be the primary income generator. We might have inheritance down the line but foolish to rely on this IMO. My biggest current worry is cash sat in business bank accounts and the strength of banks.....

[Hardhat]

2 hours ago, MrXxxx said:

Trying to understand the logic in this approach (no offense meant)...unless you have bought the share right at the bottom, future gains are alreeady limited...are there not other shares that would potentially offer a better return for your capital?

Fair question, and no offence taken !

Basically it's because as part of an overall portfolio I want to increase allocation in the hydrogen sector. A better example might have been something like RDSB - they were an incredible buy sub-£10, but if the overall portfolio allocation is not reached when adding more funds and needing to rebalance, are they still a good buy to top up at £12? Just looking for opinions on this really, as we have often discussed buying on the way down (which admittedly makes more sense).

I think "£ / time averaging", i.e. buying the same £ value of stock over a few months, may be what I stick with for laddering up. Thanks for the insight @sancho panza

[sancho panza]

5 minutes ago, Hardhat said:

Fair question, and no offence taken !

Basically it's because as part of an overall portfolio I want to increase allocation in the hydrogen sector. A better example might have been something like RDSB - they were an incredible buy sub-£10, but if the overall portfolio allocation is not reached when adding more funds and needing to rebalance, are they still a good buy to top up at £12? Just looking for opinions on this really, as we have often discussed buying on the way down (which admittedly makes more sense).

I think "£ / time averaging", i.e. buying the same £ value of stock over a few months, may be what I stick with for laddering up. Thanks for the insight @sancho panza

Must say I'd be tempted to ladder in to BP on the way back up,say £3.25,£3.50,£3.75 etc.But we're full up on oilies.I'd probably stop buying BP at £4.50 myself.You can also shrink the ladders so as it goes higher,you put in less and less.Some people might think it mad to wait for confirmation of trend but there's a logic to it.

The buying plan keeps you from pummelling money in at the same price.It's worth noting I'm incredibly bullish on oil stocks tho.

[Hardhat]

Anyone watching / holding Halfords?

They've almost completely recovered from the covid dip... cycling has done very well here. 

Plus:

https://www.gov.uk/government/news/2-billion-package-to-create-new-era-for-cycling-and-walking

[sancho panza]

Is Fisher's paradox inbound?

https://wolfstreet.com/2020/05/09/the-state-of-the-american-debt-slaves-q1-2020/

Most of the first quarter was still the Good Times, but in later February and early March it hit the fan, as markets were crashing. In mid-March lockdowns started to roll across the country, and the layoffs by the tens of millions commenced. So how were consumers positioned going into this crisis? Many of them, up to their eyeballs in debt.

 

But these are aggregate numbers. Credit problems arise at the margin.

Many Americans have no debt burden. Over one-third of homeowners own their homes without a mortgage. Many other homeowners have substantially paid down their mortgage and have a large portion of equity in their homes. Many Americans have no outstanding credit card balances because they pay them off monthly. They have no student loans and no auto loans, and they’re awash in savings and investments.

Then across much of the rest of the spectrum are Americans who have more or less debt. In this group are the people that have maxed-out credit cards that cost them 25% in interest a year, and they have subprime auto loans that cost them 19% in interest, and they have student loans from years ago, and no savings. In this group are also people with fairly high incomes that have taken on too much debt, including credit card debt, and they need every last penny of their high incomes to make ends meet.

For lower-paid workers in less expensive areas, the unemployment package with the weekly $600 from the federal government may turn out to be a big raise, but that weekly $600, even if it’s extended, will eventually run out.

And for people with higher incomes in more expensive areas, this math doesn’t work, and it won’t cover their bills. A highly indebted dentist at a dental practice that shut down needs a lot of income to pay for the home in an expensive city, the nice cars, and student loans out the wazoo. This dentist isn’t going to make it on the unemployment package.

And so in Q1, student loans rose 5.2% from a year ago, to $1.68 trillion and are up 70% since 2012, despite an 11% drop in student enrollment over the same period.

[DurhamBorn]

@sancho panza that article is really thought provoking and something i havent really thought about.The lower working class have been screwed over for a few decades so are mostly used to lower earnings,getting by etc.Benefits arent far under wages .Lots of the middle class though have lifted their spending to huge levels,sustained on debt.Multi holidays,multi family expensive cars,mortgage never still far too high for age etc.

Could it be where the 80s recession routed the working class,higher waged factory workers,this one routes the middle class.?

In the UK we have massive amounts of people on high public sector wages.Will they be sustained?,or will it be budgets get squeezed and while they dont mention huge cuts they happen anyway.

 

[Talking Monkey]

6 minutes ago, DurhamBorn said:

@sancho panza that article is really thought provoking and something i havent really thought about.The lower working class have been screwed over for a few decades so are mostly used to lower earnings,getting by etc.Benefits arent far under wages .Lots of the middle class though have lifted their spending to huge levels,sustained on debt.Multi holidays,multi family expensive cars,mortgage never still far too high for age etc.

Could it be where the 80s recession routed the working class,higher waged factory workers,this one routes the middle class.?

In the UK we have massive amounts of people on high public sector wages.Will they be sustained?,or will it be budgets get squeezed and while they dont mention huge cuts they happen anyway.

 

I think it will rout the middle class, lots of CC debt, car debt, huge mortgages, at the upper end big private school fees too. 

[Castlevania]

1 hour ago, DurhamBorn said:

@sancho panza that article is really thought provoking and something i havent really thought about.The lower working class have been screwed over for a few decades so are mostly used to lower earnings,getting by etc.Benefits arent far under wages .Lots of the middle class though have lifted their spending to huge levels,sustained on debt.Multi holidays,multi family expensive cars,mortgage never still far too high for age etc.

Could it be where the 80s recession routed the working class,higher waged factory workers,this one routes the middle class.?

In the UK we have massive amounts of people on high public sector wages.Will they be sustained?,or will it be budgets get squeezed and while they dont mention huge cuts they happen anyway.

 

What I struggle to comprehend are the number of seemingly well paid people who can’t go more than a month or two without a pay check.

The bat flu has been eye opening to me on how rubbish many people’s personal finances are.

[MrXxxx]

10 hours ago, Sasquatch said:

haven't made our minds up yet, but we do need to formulate a plan for retirement. My wife has no pension and my SIPP is only approx £125,000. Our accumulated business monies will be the primary income generato

But ask yourself, do you really want all of the hassle ( even with a good tenant let alone a bad one) and worry, and how long after retirement do you think you would be able to cope with it?...70,75?...with other assets you can probably cope for another ten years after that assuming you don't `lose your marbles`...

...always amazes me these people that buy a B&B in The Lakes to fulfil their dreams of an easy life in a beautiful landscape only to find that they spend all their day looking after guests, and only enjoy the landscape out of season I.e when the weather is so bloody awful nobody else wants to visit...

...don't get me wrong, I have considered this myself, and have experienced `both sides of the coin` but came to the conclusion there are better/easier ways to earn a profit.

[MrXxxx]

10 hours ago, Hardhat said:

A better example might have been something like RDSB - they were an incredible buy sub-£10, but if the overall portfolio allocation is not reached when adding more funds and needing to rebalance, are they still a good buy to top up at £12?

I know what you mean `The one that got away` scenario, or `Sh@t, why didn't I buy twice as much?!`

[MrXxxx]

7 hours ago, Castlevania said:

What I struggle to comprehend are the number of seemingly well paid people who can’t go more than a month or two without a pay check.

The bat flu has been eye opening to me on how rubbish many people’s personal finances are.

Common (financial) sense can't be taught or bought, it has to be nurtured...best (free) education (from my Dad) I ever had!

[Harley]

On 08/05/2020 at 23:29, sancho panza said:

Whilst 90% of me is thinking price inflation/credit deflation in the line of DB's thesis and David Rosenberg's thesis,,there's still 10% poitning out that Japan has had a sustained deflation for 30 years.I'm thinking about thsi a lot at the mo when I'm strolling around the place marshalling the kids on their bikes.

I'll do some research and post more when I've reasoned it through some more.

 

Inter alia, Japan had first mover "advantage" for a developed country.

[Harley]

17 hours ago, sleepwello'nights said:

Woodland might be a better bet for you. You'll also have a source of firewood. 

CGT rollover relief, etc too?

[spygirl]

13 hours ago, ThoughtCriminal said:

Whilst I don’t doubt for one minute that Spygirl is correct about HMRC and their shiny new computer system, I have to set that against the fact that they’re a government bureaucracy. The same people who spent years and billions of pounds on an nhs records database, then had to abandon it because it was dog turd. 

 

Then there’s personal experience: over a dozen houses stretching back nearly twenty years and not ONE person I know has had a knock on the door. They must owe over a quarter of a million by now between them. 
 

Theory and reality don’t always match.

If you think HMRC are like Paula at the DSS and other public sector wimmin with clipboards then go ahead, fill your boots.

I'd recommend you speak to a lawyer and proper accountant rather than Dave from the pub.

You also have to grasp that neither banks or HMRC will not treat you like a little old lady who's not filled in her tax return. Going down the LL route means you'll be classed as a commercial customer and the onus was on you to seek professional  advice.

 

[DurhamBorn]

6 minutes ago, spygirl said:

If you think HMRC are like Paula at the DSS and other public sector wimmin with clipboards then go ahead, fill your boots.

I'd recommend you speak to a lawyer and proper accountant rather than Dave from the pub.

You also have to grasp that neither banks or HMRC will not treat you like a little old lady who's not filled in her tax return. Going down the LL route means you'll be classed as a commercial customer and the onus was on you to seek professional  advice.

 

I have a good friend who has 4 BTL all bought cash and they never declared for a few years.Its incredible,but they didnt know how to do it.The problem is while its very hard to set a business up,so most people who do understand they need to report tax,buying a house to rent was very very easy and didnt know what came with it.My friend is 100% compliant now after i explained to him it was certain hed get caught,just when,and he now uses an accountant.Making "mistakes" for ordinary people HMRC expect,but not even putting in a self asses is crazy.My mam was a tax inspector,she worked on trusts mostly though "old" money as she called it.She said for ordinary people if they flag something they look at your lifestyle first before deciding if to investigate.They suspect underpayment of a few grand,but you live a simply life they wont bother.5 houses,no tax form,100% certain.

[jamtomorrow]

11 hours ago, DurhamBorn said:

@sancho panza that article is really thought provoking and something i havent really thought about.The lower working class have been screwed over for a few decades so are mostly used to lower earnings,getting by etc.Benefits arent far under wages .Lots of the middle class though have lifted their spending to huge levels,sustained on debt.Multi holidays,multi family expensive cars,mortgage never still far too high for age etc.

Could it be where the 80s recession routed the working class,higher waged factory workers,this one routes the middle class.?

In the UK we have massive amounts of people on high public sector wages.Will they be sustained?,or will it be budgets get squeezed and while they dont mention huge cuts they happen anyway.

 

Brings to mind this account of what it was like to live through the late 90's collapse in Argentina: http://www.survival-spot.com/survival-blog/argentina-collapse/

(Apologies in advance if been posted previously)

Now I'm not the TFH type, but I do think that understanding the extremes opens the door to a greater understanding of the spectrum of possibilities in front of us. One important factor I see is the sclerotic political situation in US and UK, specifically technocrats and technocractic approaches falling out of favour *right* when that's exactly what the situation calls for. So I think it's important to have a "they fumble it, badly" component in your plans, cos if it goes bad it could go really bad.

My abiding takeaway from the Argentina account is how the collapse pretty much hollowed out the middle classes, the professions all but swept away. From part IV:

The teacher continued “You see, we have a middle class that suddenly turns to poor, creating a society of basically poor people, there is no more middle class to cushion tensions any more. Middle class suddenly discovers that they are overqualified for the jobs they can find and have to settle for anything they can obtain, there for unemployment sky rockets, too much to offer, too little demand. You see they prepare, study for a job they are not going to get. You kids, you are studying Architecture because you simply wish to do so. Only 3 or 4 percent of you will actually find a job related to architecture.”

Couldn't happen here?

[Hardhat]

I'm all honesty I think this has already been happening to the UK middle class since 2008 - glut of degree educated people doing entry level admin jobs, 200 applicants per position, finance sector shrinking, massive mortgages and lifestyles held together with cheap credit.

A friend of mine works at a private school - in ten years he says the intake has gone from 80% British middle class to 80% foreign ultra wealthy. Average upper middle class professional Brits just can't afford it any more.

It would only take a property bust to plunge hundreds of thousands of nice 4 bed houses into negative equity. 

 

[Majorpain]

21 minutes ago, jamtomorrow said:

The teacher continued “You see, we have a middle class that suddenly turns to poor, creating a society of basically poor people, there is no more middle class to cushion tensions any more. Middle class suddenly discovers that they are overqualified for the jobs they can find and have to settle for anything they can obtain, there for unemployment sky rockets, too much to offer, too little demand. You see they prepare, study for a job they are not going to get. You kids, you are studying Architecture because you simply wish to do so. Only 3 or 4 percent of you will actually find a job related to architecture.”

Couldn't happen here?

Its arguably already happening here, how many people are getting into £50k worth of university debt for a degree they wont use?  They then get money taken direct off the payslip for the next 30 years whilst accumulating interest at RPI rate (+ 3% if you high income) on the original debt.

But its ok, because it all gets wiped at 50 and its vitally important everyone goes to university and gets fleeced.

The government sold off the loan book so the interest actually goes to a private company now as an added bonus!  That may be savvy or not in the long run.....

[Festival]

Great blog everyone keep it up.

Anyone have a view how safe the online investment brokers like Interactive Investor, AJ Bell, Hargreaves and Lansdown etc are? 

I'm increasingly concerned about return of capital as opposed to return on capital as we approach this autumn. How likely is it that these brokers could lock up or worse if we get a second bigger leg down in the market in the late summer or autumn? In the March crash Interactive Investor queried my wife and my address details which effectively locked the accounts for 10 days during the worst of the market down and prevented any removal of capital. I thought this was out of order at the time and whilst I was looking to buy not sell or withdraw capital during that period I thought it was a breach of trust. Given I had above the FSCS protection limit across two accounts that made me nervous. Can anyone see a scenario where major brokers go under or limit cash access to accounts a bit like what has happened recently to some P2P lenders?

Specifically I have a SIPP which is cerca double the £85k FSCS protection limit and I am looking into splitting and moving half to another SIPP provider. I'm 55 next year so  otherwise I'd put into drawdown to access the tax free amount. Do others worry about this and has anyone split a SIPP to protect against default risk?

I think what concerns me most is that in a bust default risk can be out of your control - you might be doing fine but if your counterparty isn't you can be dragged into the fire. One man's asset is another's liability unless you are holding the physical asset yourself after all.

Am I mad or are others protecting against this if the debt deflation really takes hold later this year?

[Yellow_Reduced_Sticker]

On 08/05/2020 at 12:24, DurhamBorn said:

@Yellow_Reduced_Sticker i havent had a reduction since this china flu kicked off.Luckily iv still found a way to spend even less.For safety reasons we take turns going to the shop,i go when we need bread milk etc but when my partner goes i give her a big list.I used to buy 90% of the shopping,now its reversed,she hasnt cottoned on yet ,iv lifted the % by 1% though on my SIPP that she gets if i peg before 75,cant say fairer than that.

Iv also fell lucky with the self employed furlough thing.I closed my business,but i was running the 3 years needed and should get £1k a month,so i listed a few items on Ebay to look like still going and will close down once the furlough stops,recession killed it off 

 

@DurhamBorn YOU Slacker!

 

But then again i expect you had a good run of 2 months worth of YRS food stock...as didn't you say you have 3 or 4 freezers with a pile of bricks holding down the doors cos they were so FULL of YRS grub?!

 

I did waitrose last Thursday, bloody joke worst queue so far in this BS, got a few YRS bargains, but its nought compared to pre-bat-flu days...

 

BTW, saw this video about making pizza in the back garden, many a time when i use to do the taplow boot sale, i saw these large old case-iron pots, bloody well kicking myself for not picking one up, as it would of only cost me a quid, the way i bargain the sellers down maybe even 50p!

 

This is right up ya street same for other folks here interested in TASTY Home/outdoor PIZZA making!

 

https://www.youtube.com/watch?v=ViAqIo2qdog

 

 

 

 

 

 

[DurhamBorn]

17 minutes ago, Festival said:

Great blog everyone keep it up.

Anyone have a view how safe the online investment brokers like Interactive Investor, AJ Bell, Hargreaves and Lansdown etc are? 

I'm increasingly concerned about return of capital as opposed to return on capital as we approach this autumn. How likely is it that these brokers could lock up or worse if we get a second bigger leg down in the market in the late summer or autumn? In the March crash Interactive Investor queried my wife and my address details which effectively locked the accounts for 10 days during the worst of the market down and prevented any removal of capital. I thought this was out of order at the time and whilst I was looking to buy not sell or withdraw capital during that period I thought it was a breach of trust. Given I had above the FSCS protection limit across two accounts that made me nervous. Can anyone see a scenario where major brokers go under or limit cash access to accounts a bit like what has happened recently to some P2P lenders?

Specifically I have a SIPP which is cerca double the £85k FSCS protection limit and I am looking into splitting and moving half to another SIPP provider. I'm 55 next year so  otherwise I'd put into drawdown to access the tax free amount. Do others worry about this and has anyone split a SIPP to protect against default risk?

I think what concerns me most is that in a bust default risk can be out of your control - you might be doing fine but if your counterparty isn't you can be dragged into the fire. One man's asset is another's liability unless you are holding the physical asset yourself after all.

Am I mad or are others protecting against this if the debt deflation really takes hold later this year?

In theory the big ones should be fine as they dont trade themselves so shouldnt have any outside liability.The only real risk with a big one would be fraud.Its about time though all shareholders were again registered as owners instead of this nominees rubbish.