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


spunko

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DurhamBorn

Direct into the economy,direct printing to government to spend,deflation so can continue printing,no prospect of inflation so all hands to the pump.

Just wait until a recovery cycle kicks in with all this extra liquidity sloshing around.That no prospect of inflation will be 12% to 22% inflation by 2028/20

https://www.dailymail.co.uk/money/markets/article-8303899/The-UK-printing-money-says-former-Bank-rate-setter.html

Reports that emerged last month suggest that when the stock market crashed in mid-March, the Debt Management Office, which organises the sale of gilts for the Treasury, was on the cusp of failing to complete a bond auction for the lockdown rescue package.

So the Bank of England stepped in to buy £200billion of gilts via its quantitative easing programme – a process that amounts to printing more money. 

The Bank of England will keep buying gilts until the market calls its bluff, but we are nowhere near that stage. 

'That might happen if there is inflation, but at the moment there is no prospect of that. So it's all hands to the pump.'

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1 hour ago, jamtomorrow said:

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.

Nice to see talk about the bigger picture, very much in the context of the above great comment.  We need to stretch our minds.  There will, at a minimum, be increased financial repression, including the overt via tax and regulation.  The only question is how much and, as we have seen with CV, things can move quickly.  You focus only on the financials in isolation at your peril.

More sinister, scapegoats are already being lined up just as was the case in Germany, Bosnia, Rwanda....The road to the mass slaughters all started with such minor steps.  But a bit too big a picture for this thread.

Regarding BTL, it "works" for most because of the leverage it can bring, like spread betting, but that's a two edged sword.  Your choice.  And if an all cash purchase, not much of a risk reward IMO.

And as for tax, how many stories would you like of evaders' lives being destroyed?  HRMC have a mandate which also provides some justice to the honest amongst us.  They are no kittens when needed.  They have no choice, nor should they. 

Always the same.  Some smart jack the lad giving it some thinking he's so effing clever passing you by in his range rover only to get nabbed.  Yet still playing it, only making it a million times worse.  The end of that road can be as devastating as the financial loss.  The last one in denial spent a fortune on advisors to front his half truths, until even they backed off and down he went, hard.  Balance those years of riding the hog with what came next, at an older and more vulnerable age, a mugs game.  I've had family in front of me bleating how surely HRMC can't do this and how unfair it is.  No fecks to give, you make your own bed.

Meanwhile, the old money, the tortoises, plod on doing things like they always have, using their smarts and not being greedy.  Your choice.

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2 hours ago, Majorpain said:

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.

student-screenshot_replace.png.rendition

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.....

Just to tidy my rant up, the critical point i didnt make was thats £37633 the government is spending that is near enough malinvestment in the vast majority of cases.  Engineering or Medical is fair enough, but Forensics from Lincon Uni then working at Rentokill?  It will pump up GDP and make it look better in the short term, but its empty economic activity adding no real long term value to the economy.

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Talking Monkey
1 hour ago, Loki said:

That video is quite a watch. Wow

 

I reckon a fair few countries will be seeing this type of collapse this decade

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Don Coglione
1 hour ago, Loki said:

That video is quite a watch. Wow

 

I have only just started watching this.

Are they banging their pans in support of their health workers?

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8 minutes ago, Talking Monkey said:

I reckon a fair few countries will be seeing this type of collapse this decade

I agree

Just now, Harley said:

The banging of pots and pans.  I didn't know whether to laugh or cry.

Yes the comparison between that and our virtue signalling wankers did raise an eyebrow for me

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Moominpapa
5 hours ago, DurhamBorn said:

Direct into the economy,direct printing to government to spend,deflation so can continue printing,no prospect of inflation so all hands to the pump.

Just wait until a recovery cycle kicks in with all this extra liquidity sloshing around.That no prospect of inflation will be 12% to 22% inflation by 2028/20

https://www.dailymail.co.uk/money/markets/article-8303899/The-UK-printing-money-says-former-Bank-rate-setter.html

Reports that emerged last month suggest that when the stock market crashed in mid-March, the Debt Management Office, which organises the sale of gilts for the Treasury, was on the cusp of failing to complete a bond auction for the lockdown rescue package.

So the Bank of England stepped in to buy £200billion of gilts via its quantitative easing programme – a process that amounts to printing more money. 

The Bank of England will keep buying gilts until the market calls its bluff, but we are nowhere near that stage. 

'That might happen if there is inflation, but at the moment there is no prospect of that. So it's all hands to the pump.'

I saw this first hand in my portfolio. I have a mixture of 10 to 20 year gilts. They were behaving as expected, the longer dated gilts up about 18% for several months. Imagine my surprise when upon checking my account all gilts were down 20%. That's not supposed to happen and it did not compute, other than there was a loss of faith in the gilt market, the gbp/usd fell to 1.13 too. I held off selling until I was back in profit and sold half of all gilts. I will be selling the remaining as they have all recovered their previous profits. I dont like the idea of buying gold at these prices, but don't see the alternative, will also start buying commodity stock again as not convinced its going g back down.

 

P.s. my commodity futures etf was down 95% for 2 days. I didnt have much in it, but waited for that to return to some semblance of normality before selling. If we have another bout of volatility and the fed does not get a handle on it, some peoples wealth is just going to vanish over night.

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DurhamBorn
5 minutes ago, Moominpapa said:

I saw this first hand in my portfolio. I have a mixture of 10 to 20 year gilts. They were behaving as expected, the longer dated gilts up about 18% for several months. Imagine my surprise when upon checking my account all gilts were down 20%. That's not supposed to happen and it did not compute, other than there was a loss of faith in the gilt market, the gbp/usd fell to 1.13 too. I held off selling until I was back in profit and sold half of all gilts. I will be selling the remaining as they have all recovered their previous profits. I dont like the idea of buying gold at these prices, but don't see the alternative, will also start buying commodity stock again as not convinced its going g back down.

 

P.s. my commodity futures etf was down 95% for 2 days. I didnt have much in it, but waited for that to return to some semblance of normality before selling. If we have another bout of volatility and the fed does not get a handle on it, some peoples wealth is just going to vanish over night.

Im trying to think about the road map from here.There is still a very real risk of another big leg down,but the virus has brought forward the start of the printing.I think its highly likely now that one of the themes @sancho panza brought to the thread and expanded on around looking at de-complexity will prove very apt.I think its obvious the economic damage being done with the demand destruction is going to clear out a lot of areas.A massive amount of liquidity over this long cycle has gone into houses and consumption of services.This time its pretty clear now governments will be looking to get an industrial style recovery.I think the big profits will be in the areas that can leverage the inflation.Silver miners are a prime example.Others will be potash,oil,pretty much all commods in different measure.

Its going to be a really difficult time for individuals and companies right along the inflation chain.Where dis-inflation has worked for the consumer and the people closest to them,it should now be the opposite.For my own portfolio im trying to keep around 50% direct in the commods and producers,oil,silver,potash etc,and then the rest in areas that have expensive assets where prices should rise quicker than depreciation like telcos,some utilities,and some in areas that are probably more dis-inflation leaning,but have big barriers to entry like tobacco,and then areas that should gain from higher political tensions like arms companies.

I think the biggest risk for ordinary people is that bonds get decimated over the cycle as does housing equity in large parts of the country.I still think a typical pension scheme with 40/60 or 20/80 might see -4% a year -2% fees -5% drawdown.It could mean pensions in drawdown lose all their capital over 9 ot 10 years.

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6 hours 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?

Hi Festival,

this came up not so long ago and I pointed out the `insurance` (broker fees) you pay by spreading it across several brokers. From memory as a % it was very small (based on the FSCS limits) especially if you have it in a capped fee account such as an ISA.

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9 hours ago, Majorpain said:

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.

student-screenshot_replace.png.rendition

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.....

whenever the first lot of recipients start turning 50 I guess will be a turning point and by then may well be acknowledged that quite a lot has gone sour. 

Also no knowledge of how this works and could just be being cynical but wouldn't surprise me if these loans had been subsequently diced and sliced out to "spread the risk" and sold on or derivitaved up.

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sancho panza
20 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.

 

I broadly agree.The amount of people on  min wage has gone from about 500,000 in 2000 to about 2 million now.Admittedly that's against the background of a real rise in the NMW over that timeframe.

But your point remains.Working class people have already been shafted.Wages are down and rents are up.No real chance of owning a home.

Middle class people have had the illusion of growth but a lot of it has been on the back of expanding pay in the public sector whilst running 5%++ fiscal deficits.I think a lot of those middle class jobs that paid well in the private sector have disappeared.I reference @spygirl again but his comments over time about the decline of well paid back office jobs in South Eastern towns like Reading are bang on.

Leicester's biggest 6 employers are 3 hospitals,one council,two universities.All three face cuts in budgets(maybe not the NHS) but the other three are all facing financial constraints

https://researchbriefings.files.parliament.uk/documents/CBP-7735/CBP-7735.pdf

 

 

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sancho panza

 

9 hours ago, Hardhat said:

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. 

 

Very much as per what @Castlevania said about people having little spare.

For my sins I went to boarding school when I was 16.Before then I attended my local comp in Leicester(which is now in special measures).When I was there some of the lads Mums were working at Sainsburys/office work to help with the fees which were circa £7k back in the late 80's iirc.SUpervisor at Sainsburys would earn that back then.Those fees are now circa £35k but if they hadn't run ahead of inflation the £7k from back then would be £18k according to the BoE inflation calc.

When I was there some of the kids thought I was foreign at first because of my accent.90% were from the South East.Few from the Midlands and North.When I was there we were beginning to get the first of the rich foreign nationals,mainly HK but others too.

Sounds like that process has speeded up some.Even day fees are now £15k,way beyond the ability of average middle class people with a mortgage.

I was driving past some soon to be new builds today and did wonder who'll be buying them now.Middle class people about tog et hollowed out big time.

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sancho panza
10 hours ago, Majorpain said:

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.

student-screenshot_replace.png.rendition

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.....

Breath taking.Thanks for posting MP,those figures are almost surreal.

 

With a bit of luck Unis will be forced to get real,getting taxpayers to subsisdise £27,000 history degrees plus £25,000 living expenses makes no sense at all.

9 hours ago, Harley said:

Nice to see talk about the bigger picture, very much in the context of the above great comment.  We need to stretch our minds.  There will, at a minimum, be increased financial repression, including the overt via tax and regulation.  The only question is how much and, as we have seen with CV, things can move quickly.  You focus only on the financials in isolation at your peril.

More sinister, scapegoats are already being lined up just as was the case in Germany, Bosnia, Rwanda....The road to the mass slaughters all started with such minor steps.  But a bit too big a picture for this thread.

 

AS Steve Keen said back in 2009,last time we had a debt deflation like this it ended after ten years later with WW2.

These times of financial stress end in what you're alluding to if socities aren't careful.Dare I suggest it but the wave of compliance with peoples freedoms being taken away over covid was something to behold.I think things could get very nasty in the future.

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21 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.

 

It's totally arse about face now.

When I was a kid, the (few) middle class were comfortable - solvent, low debt. It was the plebs scratching around for expensive credit.

Now the middle class of today are scratching, hiding behind the sofa when the door bell rings.

I think a large element is that it's really plebs trying to be middle class - cars, holidays, etc, without realising they are just plebs with access to ruinous levels of debt.

I remember the doom news in the early 90s. Youd get sob stories on the news, with people who had 3k on credit cards - that's 3 months earnings theyd sob!

Today the same sort of people have 3 years debt on CCs n other unsecured credit, never mind the mortgage.

 

 

 

 

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Talking Monkey
19 minutes ago, spygirl said:

It's totally arse about face now.

When I was a kid, the (few) middle class were comfortable - solvent, low debt. It was the plebs scratching around for expensive credit.

Now the middle class of today are scratching, hiding behind the sofa when the door bell rings.

I think a large element is that it's really plebs trying to be middle class - cars, holidays, etc, without realising they are just plebs with access to ruinous levels of debt.

I remember the doom news in the early 90s. Youd get sob stories on the news, with people who had 3k on credit cards - that's 3 months earnings theyd sob!

Today the same sort of people have 3 years debt on CCs n other unsecured credit, never mind the mortgage.

 

 

 

 

I suppose it depends on what you define as middle class. Growing up in a working class background we saw teachers, 'managers' in offices, doctors, dentists etc as middle class, these people would live in nice houses, semis or detached, new car every 3 years, foreign holidays, all things that seemed a million miles away for us. It was in the North so I don't know what the equivalent lifestyle for them was in London

In London today a lot of teachers have no chance getting on the property ladder, same for a fair few doctors until well into their careers. To me it definitely looks like a hollowing out of the middle classes has taken place and is accelerating

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sancho panza
2 hours ago, DurhamBorn said:

 the demand destruction is going to clear out a lot of areas.A massive amount of liquidity over this long cycle has gone into houses and consumption of services.This time its pretty clear now governments will be looking to get an industrial style recovery.I think the big profits will be in the areas that can leverage the inflation.Silver miners are a prime example.Others will be potash,oil,pretty much all commods in different measure.

Its going to be a really difficult time for individuals and companies right along the inflation chain.Where dis-inflation has worked for the consumer and the people closest to them,it should now be the opposite.For my own portfolio im trying to keep around 50% direct in the commods and producers,oil,silver,potash etc,and then the rest in areas that have expensive assets where prices should rise quicker than depreciation like telcos,some utilities,and some in areas that are probably more dis-inflation leaning,but have big barriers to entry like tobacco,and then areas that should gain from higher political tensions like arms companies.

I think the biggest risk for ordinary people is that bonds get decimated over the cycle as does housing equity in large parts of the country.I still think a typical pension scheme with 40/60 or 20/80 might see -4% a year -2% fees -5% drawdown.It could mean pensions in drawdown lose all their capital over 9 ot 10 years.

There are a few things here that are becoming harder to argue with.

1) in terms of housing,msot western govts have just plain run out of road to stimulate it any further particularly in light of middle class consumers facing job/financial insecurity.In January it was highly likely they'd try and stimulate industry but not a given.Now I'd say it's odds on.We're going to see that once in an 80 year event as consumer attitudes to debt enjoy a 180 degree turn.

2) In terms of trying to ride that industrial wave,I think it's very hard to predict exactly  how and where the profits and ensuing financial security will flow.It does seem a lot easier to just try and ride the sectors that will fuel the industry either metals or fuel.

3) this whole notion of distribution cycles is something I've finally begun to get my head around(it's taken some time).The consumer has had the best of the last 30 years and it's someone elses turn. Whetehr that means Labour or Industry or both, but the one think we can reason out logically,is that it will likely mean price inflation as long as don't go Japanese.Again though,I find it hard to pick which of Labour or industry will get the upper hand(or indeed that there may be another player)

4) which brings us back to the decomplex trade.It makes a lot of sense for where we are for people who aren't necessarily sure where were going

5)You're right on the biggest risk to joe public which sort of almost means it'll almost be guaranteed to happen.Rates are headed higher or at the very least credit will get more scarce-possibly both.I don't really understand the maths of pensuions the way a lot of people here do,but I'll take it for granted you're right DB.9 years to empty is pretty damn quick

 

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Talking Monkey
4 minutes ago, sancho panza said:

There are a few things here that are becoming harder to argue with.

1) in terms of housing,msot western govts have just plain run out of road to stimulate it any further particularly in light of middle class consumers facing job/financial insecurity.In January it was highly likely they'd try and stimulate industry but not a given.Now I'd say it's odds on.We're going to see that once in an 80 year event as consumer attitudes to debt enjoy a 180 degree turn.

2) In terms of trying to ride that industrial wave,I think it's very hard to predict exactly  how and where the profits and ensuing financial security will flow.It does seem a lot easier to just try and ride the sectors that will fuel the industry either metals or fuel.

3) this whole notion of distribution cycles is something I've finally begun to get my head around(it's taken some time).The consumer has had the best of the last 30 years and it's someone elses turn. Whetehr that means Labour or Industry or both, but the one think we can reason out logically,is that it will likely mean price inflation as long as don't go Japanese.Again though,I find it hard to pick which of Labour or industry will get the upper hand(or indeed that there may be another player)

4) which brings us back to the decomplex trade.It makes a lot of sense for where we are for people who aren't necessarily sure where were going

5)You're right on the biggest risk to joe public which sort of almost means it'll almost be guaranteed to happen.Rates are headed higher or at the very least credit will get more scarce-possibly both.I don't really understand the maths of pensuions the way a lot of people here do,but I'll take it for granted you're right DB.9 years to empty is pretty damn quick

 

SP if you have a minute could you do a very quick recap on your definition of the decomplex trade

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14 minutes ago, Talking Monkey said:

I suppose it depends on what you define as middle class. Growing up in a working class background we saw teachers, 'managers' in offices, doctors, dentists etc as middle class, these people would live in nice houses, semis or detached, new car every 3 years, foreign holidays, all things that seemed a million miles away for us. It was in the North so I don't know what the equivalent lifestyle for them was in London

In London today a lot of teachers have no chance getting on the property ladder, same for a fair few doctors until well into their careers. To me it definitely looks like a hollowing out of the middle classes has taken place and is accelerating

When I was a kid, plebs got a wage - no worky, no money.

Middleclass had salaries, paid whatever. And a car.

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DurhamBorn
2 minutes ago, Talking Monkey said:

SP if you have a minute could you do a very quick recap on your definition of the decomplex trade

Il jump in,potash goes on cabbages to make them grow,no potash no cabbage yield.Prices go up farmer has no choice to pay,he passes on some/all of cost increase,Tesco pass on all/some of increase.Consumer shops around,we cant be sure where he will go for his cabbage,we cant know the farmer who wins,or the supermarket,or even if it will be cabbages,but we know the potash miner doesnt care.They are closest to the inflation and the others all have no choice but to pay.

They are the de-complex part of the market,the prime ,simple input,but vital.

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sancho panza
6 minutes ago, DurhamBorn said:

Il jump in,potash goes on cabbages to make them grow,no potash no cabbage yield.Prices go up farmer has no choice to pay,he passes on some/all of cost increase,Tesco pass on all/some of increase.Consumer shops around,we cant be sure where he will go for his cabbage,we cant know the farmer who wins,or the supermarket,or even if it will be cabbages,but we know the potash miner doesnt care.They are closest to the inflation and the others all have no choice but to pay.

They are the de-complex part of the market,the prime ,simple input,but vital.

Whileyou're still up.Can I ask a question about distribution cycles.

This last one from 82 saw consumers and govt benefit as labour lsot it's pricing power.Would that be a correct summation of how you see it DB?

In this next distribution,we go from consumer to labour/industry? Is that roughly what you're thinking?Am I missing anything particularly glaring?

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DurhamBorn
6 minutes ago, sancho panza said:

Whileyou're still up.Can I ask a question about distribution cycles.

This last one from 82 saw consumers and govt benefit as labour lsot it's pricing power.Would that be a correct summation of how you see it DB?

In this next distribution,we go from consumer to labour/industry? Is that roughly what you're thinking?Am I missing anything particularly glaring?

We go to industry yes,but that doesnt mean Labour regain much bargaining power,though wages should keep up with inflation.The main part of the distribution cycle is people having to sell assets for income rather than the assets creating the income.Only inflation loving assets will keep ahead.Most pension draw downs with IFAs for instance are 60% bonds or 80% bonds.They are likely to see 3%+pa falls over the cycle and create hardly any income.People will be selling assets to live and losing 3%+ and paying fees.

No IFA will transfer clients into inflation loving sectors until 2028 and by them their capital will be decimated.

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