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

[Festival]

1 hour ago, Harley said:

You hit my current nail on its head.  What asset portfolio model to go for?  I'm a fan of the Permanent Portfolio for wealth preservation but the 25% bond allocation is an issue.  As is just 25% precious metals and 25% cash.  A voice is telling me I need to be a bit imaginative about how I look at things and go back to the core principles behind the model to work that one through  I already see the precious metals allocation as more "hard assets" so that could include land (but not your house which is a chattel not an investment).  I also see the cash allocation as including Bitcoin and other currencies but need to think of others.  The equity allocation is fine as long as the right sectors (no indexing, although with this portfolio that eases somewhat).  But bonds?  A few would be OK given the other allocations and risk I'm wrong but surely not 25%.  I need to think some more.  Plus in all this I'm running a risk of remaining in the burning building with notions that one asset class will compensate for another - nothing is necessarily written regardless of the past!

I’ve been giving this a lot of thought recently and am going to opt for my own variant of the permanent portfolio. I am going to overweight the gold, cash (mainly USD) and reflation stocks to give me a decent weighting of commodities and underweight assets I consider to be already relatively highly valued mainly bonds. I will also have a small allocation to silver although I don’t like the volatility. 
 

I don’t want to bet the farm on one outcome for peace of mind really, but I do want to pick up assets cheap eg such as the recent oil stocks plunge. 
 

my intention once I have decided on the fixed percentage for each is to then rebalance every quarter or six months to avoid giving it too much attention. I think it will probably be 30, 30, 30, 10 gold, cash, stocks and bonds but given the deflationary risk hasn't quite gone away yet I might get to that allocation over a year or so. 
 

ive also split between multiple platforms to reduce risk.

Difficult stuff this - PP has a good record of achieving returns whilst reducing volatility and drawdowns back over 90 years but it did drawdown heavily in the 1930s (28% I think) so isn’t full proof. It did pretty well in the 1970s so if this thread is right an allocation like above should work and help me sleep at night. 

[Harley]

29 minutes ago, Festival said:

I’ve been giving this a lot of thought recently and am.....

Thanks for that.  I really appreciate the contributions to what is a tough but essential topic.

For me, I'm mostly in cash and PMs.  Indeed over in PMs due to their relative gains.  I'm currently changing the PM mix away from a few holdings and ETFs.  I hold gold:silver at quite a low ratio so may scale that back and trade silver instead.

I have NS&I stuff and reclassified that from bonds to cash but will move them back.  Ok not 100% bonds but close, indeed better, enough.  I will get as much cash I can out of my pension and find a safer home for it.  I am currently using cash to invest in things I need while they are available and cheap.  I need land but not the overpriced stuff for the townies.

I'm not fully out of traditional bonds.  I have a small traditional pension fund along the lifestyle ones DB mentioned.  TBF, it did it's job over the last few months but I agree with DB and don't expect that to continue.  I will always hold some bonds but that class will need to include other things to get to 25%.

That leaves equity.  I'm looking to invest in our target sectors overseas.  Only value plays and I have a comfortable selection approach for that.  One exception is I'm warming to add tech, robotics and AI as the onshoring will provide opportunities (rather than the jobs people think).  I'm still expecting/hoping for a downturn but as SP recently emphasised, this is a mixed basket with sector shifts, etc below the surface.  Another reason for me to largely stay away from index funds.

Then there's all that stuff I'm doing off the financial grid to get me where I want/will be in the coming years. That's been my primary focus to date.  Don't ask please as each to their own (requirements).  Then I'm going back to proper trading once all that's done.

 

[DurhamBorn]

23 minutes ago, Harley said:

That is more sane, clever, and robust that most appreciate.  Decomplex, at least in part, off the financial grid.  Even Jim Rogers said only invest in what you understand but that approach is even more robust.

I invested in a really good pair of 8m (4x2) extension ladders Harley last week.Im not a great lover of heights,but i hate even more paying for jobs i can do myself.They have paid for themselves already as iv fixed back on a loose gutter and cleaned them all out,plus a bit of pointing.Iv been getting my son all his furniture for his new house this last week on Facebook Marketplace and managed to kit his whole house out,with really nice stuff for less than £1000.The sofas alone were only two years old and got for £200 (£1500 new).

Since January outside of the direct debits for bills iv spend about £300.Im going to stock up though on tools and more tools 2nd hand while i can.

I got my car insurance last week as well,£177 for the year.Another joy of running an old diesel.I think thats the cheapest car insurance iv ever had in my life.

That £12.5k tax allowance will do me just fine.

[DurhamBorn]

Slowly slowly.

https://www.msn.com/en-gb/news/world/china-and-india-brawl-at-14000-feet-along-the-border/ar-BB14Pc1D?li=AAnZ9Ug&ocid=mailsignout

[Harley]

11 minutes ago, DurhamBorn said:

That £12.5k tax allowance will do me just fine.

Bingo!  Metoo.  I will print that out on a banner and put it above my trading screen!  A perfect summary which implies one hell of a lot.  Indeed x2 if I want to be greedy but I don't so "That £12.5k allowance will do us just fine".

PS:  Ahead of you on the tools, etc (and all the service parts!).  Otherwise spent naff all too other than food and have no desire or intention to change.  Maybe I should just buy that JCB or Bobcat!

[Castlevania]

1 hour ago, DurhamBorn said:

Its pretty much a 40/60 lifestyle type fund.Only difference is they seem to hold a decent wedge of cash and a few other assets.I worry that these funds will struggle in an inflation cycle.They might manage to stay level,but with fees and a draw down amount of 4% they will still empty quite quickly.Most people hold them through IFAs and they tend to charge between 1.5% and 2.2% fees on top.2.2% fees on a fund holding over half in bonds yielding less than that doesnt look a good idea to me.

I’ve seen worse. A lot of the “low risk” lifestyle funds have a fairly large chunk in commercial property and they don’t which is something. 

[ashestoashes]

..

[DurhamBorn]

1 hour ago, Castlevania said:

I’ve seen worse. A lot of the “low risk” lifestyle funds have a fairly large chunk in commercial property and they don’t which is something. 

Yes,and charges seem fair enough.If someone wants that kind of fund then it looks fine.My worry is people who have those type of funds under an IFA.2% fees and a 4% draw down wont look pretty if they stand still at best over the cycle.

[DurhamBorn]

https://www.lightreading.com/services/o2-three-uk-merger-probably-should-have-been-allowed/d/d-id/761350

This has big implications for telcos going forward.The fact they have over turned that merger blocking means the sector can now consolidate.The EU made a massive mess of things.It meant European telcos were held back while US and others could expand.I doubt Telefonica will back out of the Virgin merger now,but it shows that we can expect 3 big players a market instead of 4.

I continue to think big telcos will do a big tobacco.Once the sector settles down they will all increase prices and pretend to compete hard.As capital investment falls (some like Vodafone and Telefonica already past peak investment) free cash should grow very nicely.Google is taking a 5% stake in Vodafone India and its obvious the big tech companies need deals with the telcos for edge of network services going forward.

The key for them is to continue to de-leverage over the cycle.

[Castlevania]

16 minutes ago, DurhamBorn said:

Yes,and charges seem fair enough.If someone wants that kind of fund then it looks fine.My worry is people who have those type of funds under an IFA.2% fees and a 4% draw down wont look pretty if they stand still at best over the cycle.

The problem with most such funds is that they’re usually the default for defined contribution schemes. Something like that is in my opinion wholly unsuitable for someone in their twenties or thirties that have plenty of time to ride out any short term volatility in equities. From my experience no one actually bothers to check what their pension is invested in.

[sancho panza]

15 hours ago, Harley said:

They will go fiscal mad.  They started with the £50k loans (to be written off), etc and do not care about fairness, winners, losers or the principles on which a lasting currency is based (store of value, etc).  They just want to pump money into the system, increase velocity, and have inflation.  They will continue their new regulatory zeal to make people spend until almost Weimar like, people need no encouragement.  Cash, Sterling particularly, is trash.  Has been particularly since 2008 but this is an escalation.  They will have inflation and yes, soon.  But liquidity is not solvency and this money printing virus will rip through the economy destroying good and bad.  I last felt like this in 2009 and with QE.  I said then cash was trash and I was right but stupid not to act enough.  I face this same danger again.  It's hard to act but at least, having already suffered this last decade, I'm totally clear.  This is the end of "money".

It's amazing how long cable has held above $1.20 really.THe CB/Govt efforts to stimulate inflation/GDP growth (I knwo they're not the saem but I genuinely think that a lot of neo classical CBers think that the former begets the latter) show that

1) they have no real understanding of how capitalist  economies really work-Japan being a case in point

2) they have no real udnerstanding of how inflation works and that's reflected in the fact that their multiple measures CPIH/CPI/RPI reflect changes in the cost of living so badly.

They will attain moentary infaltion at some point but it won't deliver anythign like the GDP growth they want and need and will undermine their efforts to stimulate employment gorwth.

[sancho panza]

15 hours ago, Harley said:

Per Napier, we need to be looking at corporate debt too.  Indeed arguably instead of the others.  That's ground zero this time.  Borrowed money, inflated stock prices through buy backs, inflated asset values, inflated dividend payouts, inflated executive compensation, and zombification.  That folding deck of cards could be epic.

? bit in bold. COme on Harley,spread the love and educate me some please.

Still revelling in your behavioural economics/velocity lessons from a 400 pages back.

Do you really think coproate debt is ground zero.Dimartino has given some good lectures on the junk bond markets that peoe have psoted here.I didn't omit it on purpose.

[DurhamBorn]

Just now, Castlevania said:

The problem with most such funds is that they’re usually the default for defined contribution schemes. Something like that is in my opinion wholly unsuitable for someone in their twenties or thirties that have plenty of time to ride out any short term volatility in equities. From my experience no one actually bothers to check what their pension is invested in.

Its incredible how bad the choices are in pension schemes for most people.People feasting on them every step of the way.

[sancho panza]

14 hours ago, JMD said:

Yes SP, the macro environment, it's causes, the policy response, and it's effects are all baked in. And as you comment it's the political margins for movement that are interesting to gauge. So yes it is not about left/right politics, nor is it the mere counting of angels on the head of a pin...                                                                                                                                                                Instead I'm reminded of the first Russian Revolution in March 1917 (bear with me!,), where If Kerensky had pulled Russia out of the 1stWW, would the 2nd Revolution in October when Lenin took charge, have happened? After all Lenin was only allowed out of German exile because the Germans hoped his policy to get Russia to sue for peace with Germany would succeed. I guess Russia would have still gone communist even without the psycho Lenin in charge (not to mention Lenin's henchman, the even bigger psycho Stalin) but perhaps Russia might not have gone completely rogue - so maybe no cold war, and so maybe this allowed scope for the US to neutralise the China threat by using it's 'Central America infiltration tricks' within China to stoke division and collapse. Perhaps ultimately if Kerensky had used his own 1% political margin, the world today would be a lot safer? A lot of ifs and maybes, but I believe history turns on these type of small margins... isn't this called the butterfly effect?

Thats the movement at the margins we're looking at.Russia had structural issues that lent themselves to revolution.Their 1% didn't see it coming.

It's amazing how much of the 20th centruy might have been differnet if at key poitns more adept people had been in place.

History shows us though that the type of soldiers that run armies during peacetime aren't often the right sort to lead armies through wars(Norman Dixon-Psychology of Military Incompetence 1994).

Pointing out the obvious here but working/middle class savers got wiped out in 1920 Russia.

I think we're approaching a similar inflaection point where big geo political changes are going to happen-CHina/US cold war looks baked in.Chinese revioltuion?????

[Loki]

43 minutes ago, DurhamBorn said:

Yes,and charges seem fair enough.If someone wants that kind of fund then it looks fine.My worry is people who have those type of funds under an IFA.2% fees and a 4% draw down wont look pretty if they stand still at best over the cycle.

 

10 minutes ago, sancho panza said:

? bit in bold. COme on Harley,spread the love and educate me some please.

Still revelling in your behavioural economics/velocity lessons from a 400 pages back.

Do you really think coproate debt is ground zero.Dimartino has given some good lectures on the junk bond markets that peoe have psoted here.I didn't omit it on purpose.

It's my Dad's pension, he humoured me in the end and told me what it was 

[Majorpain]

2 hours ago, Harley said:

Aka their house!  And it takes a Liquidator/Administrator to tell you what your house and other assets are not worth!

But that assumes HMG wants the money back.  I doubt they care as they just want to spunk money right now.  Maybe they'll just roll the debt forward until it's not worth enough to chase.  It certainly won't be worth much in a few years time, even in sterling terms. 

Same with student debt and all the other schemes to come.

HMRC doesn't give up easily, especially when its low hanging fruit and they can get praised for taking money off greedy people!  See the "forgetful" landlords campaign...

I wouldn't be surprised if the government taking a % stake in the debtors house is the way to go, doesn't let inflation get them off the hook and keeps the banks out of it.

[sancho panza]

3 hours ago, DurhamBorn said:

Doesnt matter.This isnt a consumer driven cycle coming,its an industrial one.Government will seed the spending then velocity will do the rest.Its like the people calling for the death of oil/energy because we will see less car use.That is tiny compared to the amount of energy going into the industrial side of the economy.

Worldwide we are going to see countries doing the same.China has started already,iron ore is moving and the stocks are going down.They are allowing local government to issue massive amounts of bonds,those tend to be for infrastructure.

Here government is borrowing for consumption at the minute,and thats why i expect we have only seen half the printing coming.

This comment has set a seed off in my mind in terms of the previous discussion ref debt deflations being predicated on a drop in demand for credit from consumers.

What you're saying here makes sense in that context DB,as the govt will be unable to stimulate consumer demand post covid.................they'll have no choice but to push stimulus through other channels.

There's a decent chance the govt will print here,give to the consumer and then a chunk of the consumers will save it or pay down debt a la Fisher's paradox.

[Errol]

Raoul Pal on twitter:

Just your periodic reminder that the Spanish banks are bust. They are all going to zero and will have to be nationalised.

https://twitter.com/RaoulGMI/status/1267077555082977283

 

[Festival]

2 hours ago, Harley said:

Thanks for that.  I really appreciate the contributions to what is a tough but essential topic.

For me, I'm mostly in cash and PMs.  Indeed over in PMs due to their relative gains.  I'm currently changing the PM mix away from a few holdings and ETFs.  I hold gold:silver at quite a low ratio so may scale that back and trade silver instead.

I have NS&I stuff and reclassified that from bonds to cash but will move them back.  Ok not 100% bonds but close, indeed better, enough.  I will get as much cash I can out of my pension and find a safer home for it.  I am currently using cash to invest in things I need while they are available and cheap.  I need land but not the overpriced stuff for the townies.

I'm not fully out of traditional bonds.  I have a small traditional pension fund along the lifestyle ones DB mentioned.  TBF, it did it's job over the last few months but I agree with DB and don't expect that to continue.  I will always hold some bonds but that class will need to include other things to get to 25%.

That leaves equity.  I'm looking to invest in our target sectors overseas.  Only value plays and I have a comfortable selection approach for that.  One exception is I'm warming to add tech, robotics and AI as the onshoring will provide opportunities (rather than the jobs people think).  I'm still expecting/hoping for a downturn but as SP recently emphasised, this is a mixed basket with sector shifts, etc below the surface.  Another reason for me to largely stay away from index funds.

Then there's all that stuff I'm doing off the financial grid to get me where I want/will be in the coming years. That's been my primary focus to date.  Don't ask please as each to their own (requirements).  Then I'm going back to proper trading once all that's done.

 

Good luck with the approach Harley i agree with what many points particularly regarding overpriced land. Now white collar workers can live further from work the land scarcity premium must reduce in many places.

I am 55 next year and will be taking 25% of the pension tax free - some will go back into ISAs the rest will be cash. I'm concerned about govt restricting access either by age or making access less tax efficient to take.  

[DurhamBorn]

5 minutes ago, sancho panza said:

This comment has set a seed off in my mind in terms of the previous discussion ref debt deflations being predicated on a drop in demand for credit from consumers.

What you're saying here makes sense in that context DB,as the govt will be unable to stimulate consumer demand post covid.................they'll have no choice but to push stimulus through other channels.

There's a decent chance the govt will print here,give to the consumer and then a chunk of the consumers will save it or pay down debt a la Fisher's paradox.

Exactly.Most people are macro tourists only.They are mistaking whats going on as the end of a business cycle when it is the end of a long dis-inflation cycle.That difference is critical.Last time the CBs kept the banks going.This time they are full on monetizing government debt.Right now its not really showing as inflationary because they are simply trying to hold up demand from collapsing.However this is only stage one.The next stage is the government creating the demand and paying for it with printed money.Yes it will show as debt/borrowed,but it will expand broad money by a lot.Iv said it before,but they are going to print back all the deflation of the past 40 years.All of it.There will be a dash for real assets soon enough.Could be more falls first,might not be,but quality assets that take a lot of capital to build out will fly higher.The MSM and almost every market analyst  are crowing that you want asset light companies,low assets,lots of tech.I think they are going to be proved hugely wrong.

Growth etc will get a huge shock when input costs rise much faster than they can pass on and margins start to fall.Tesla for instance is trading at 6x turnover at the end of the cycle.

 

[spunko]

Fuck sakes. I said back in April I was considering investing in Shopify. Now look:

 

 

[Majorpain]

38 minutes ago, Errol said:

Raoul Pal on twitter:

Just your periodic reminder that the Spanish banks are bust. They are all going to zero and will have to be nationalised.

https://twitter.com/RaoulGMI/status/1267077555082977283

 

Not a problem, they can print as many Peseta's as they need!

[MrXxxx]

5 hours ago, Harley said:

I seem to be on the upside of a U curve!  Or it could be that we are at a critical juncture where we need to step back and do some strategic thinking so all good views welcomed.  Sometimes "More money is made in the thinking than in the doing" is true.  For me, needs a dual and balanced approach, as with most things.   

Yes Harley, but it wasn't all mine, so the success so far has been down to a lot of people on here generously sharing their knowledge.

[Harley]

4 hours ago, sancho panza said:

COme on Harley,spread the love and educate me some please.

His Moneyweek interview I posted back.  But here I think:

https://moneyweek.com/the-moneyweek-podcast/600880/the-moneyweek-podcast-russell-napier-at-the-moneyweek-wealth-summit

If you like behavioural economics, you'll love what's currently unfolding.  How will people react to the lockdown, etc.  What new lessons to learn and old ones to unlearn.

 

[Harley]

4 hours ago, sancho panza said:

Still revelling in your behavioural economics/velocity lessons from a 400 pages back.

You're well past that me son!  I'm the student these days!