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

[Loki]

Does anyone have any thoughts on COVID over-reaction affecting things like potash?  For example, agriculture in the states has taken a hit to productivity.  Crops left in fields, orchards ripped up. I'm just thinking there could be all the potash in the world but if legislation or events effectively mandate a maximum productivity that is 70% of normal, supply will exceed demand.

https://finance.yahoo.com/news/every-single-worker-covid-one-100000688.html

https://www.foodsafetynews.com/2020/05/from-meat-to-fruits-and-vegetables-the-fight-to-prevent-food-shortages-moves-on/

 

[reformed nice guy]

3 hours ago, MrXxxx said:

This is prompted by @Harley post above and one I hear this many times from goldbugs I.e. ""PMs are only PMs when you have them in hand" but 

a) if the PM etf is allocated whats the issue?, 

b) PM etf have lower costs and are easier to trade, and

c) holding a worthwhile quantity of PMs at home is not feasible security wise, vaulting is required...as a `small` holder getting it out although theoretically possible isn't really realistic.

So is this `solid` mantra a dogma spread by the bullion boys that people are just regurgitating without much real evidence?

 

In addition, by spreading across several etf`s you are lessening your risk than keeping it all vaulted with one; usually the temptation due to a minimum vaulting fee NOTE I believe I am correct in the belief that PMs don't have the FSCS protection at all?

 

To finish a Q. PM Etfs is it better to keep them in an ISA...my rationale would be yes for PM miners as they have the potential to make a gain on investment, no for gold/silver paper as these are less likely/are an inflation hedge...better to leave the tax-free ISA space for something else.

As always comments/thoughts welcome, DYOR/not financial advice etc.

 

Good questions (which I dont have the background to answer) but can I add in an extra question for whoever does:

if a PM etf had problems due to synthetic holdings, would that result in an increase in the price of those that hold their PMs direct? A dash for safety sort of event?

[Festival]

3 hours ago, MrXxxx said:

Mmmm, interesting...until recently although concerned about pension reforms and the government `moving the goalposts` I reassured myself with the fact that legislation takes time, and so we would all have ample warning Having seen how they have operated recently (I.e post-Brexit/Coronavirus) with legislation I am no longer so confident.

Someone has to pay for the loss of tax revenue, if not in full, in part and to me the two favoured candidates will be property and pensions. 

[jamtomorrow]

1 hour ago, DurhamBorn said:

The main point is because if it doesnt happen western democratic economies collapse.Consumers are mostly hugely wealthy at the moment.I can buy a large chicken in Aldi for £3.09 for instance.Thats insane compared to all of known history.BUT the backbone of the economy is failing and isnt producing enough wealth.It cant support the demands on it.The consumer will have to accept a distribution cycle.

Hugely useful to see it explained in those terms.

Thinking about the UK, this might be the only way we were ever going to rebuild any kind of industrial base - there was just no way the sclerotic mess we had on our hands in the early 80's was capable of being evolved into something modern and efficient. Tearing it down (by offshoring) and rebuilding almost from scratch maybe gets us to a better place, ultimately?

The part I still don't see is how the consumer (i.e. general population) gets back in on the act. The 'W' flow is shutting down - for good - and the only participant I see capable of laundering future industrial wealth back out to the consumer is Government. And the politics of that isn't exactly uncontentious.

The politics that *will* work in this situation is the politics of national struggle ("ask not" etc). Recent talk here about escalating international tension and cold/hot conflict is the logical conclusion of that process, and bang on the money.

[geordie_lurch]

An interesting article from Zerohedge here under the headline "Here Is The Stunning Chart That Blows Up All Of Modern Central Banking" with this chart...

 

[Loki]

Quote

I think the trends for gold, silver & the miners are becoming increasingly bullish. This should not be a surprise given the unprecedented degree of CB money creation. I am raising my targets across the board. Gold to $2300, silver to $35, GDX to $55, GDXJ to $100 & SIL to $75.

Latest DH. I bought some more HOC minutes before I saw this too

[Bobthebuilder]

Postie just delivered my gas engineer magazine and oh look....

 

[sancho panza]

hattip Tim Morgan @surplusenrgy

https://www.zerohedge.com/markets/globalization-financialization-are-dead

Authored by Charles Hugh Smith via The Daily Reckoning,

A popular claim is that the 1918–19 flu pandemic killed millions but no biggie, the Roaring ’20s started the following year. It’s onward and upward, baby, once we toss the masks.

Wrong. Completely, totally, dead wrong.

The drivers of the past 75 years of growth — globalization and financialization — are dead, and so is everything that depended on them for “growth.”

Globalization Has Strip-Mined Economies

Under the guise of “opening markets,” globalization has strip-mined every economy that can’t print a reserve currency and hollowed out economies globally as only globally competitive sectors survive globalization.

The net result is that once vibrant, diversified economies have been reduced to fragile monocultures completely dependent on global flows of capital and spending for their survival.

Tourism is a prime example: Every region that has seen its local economy crushed by global corporations, leaving global tourism as its sole surviving sector, has been devastated by the drop in tourism, which was always contingent on disposable income and credit expanding forever.

But credit can’t expand forever, as it eventually runs out of income to service additional debt.

Financialization is not just the expansion of credit and leverage to marginal borrowers; it’s also legalized looting, as the true risks of soaring debt and leverage are hidden in obscure financial instruments and bogus claims of “safety” and “hedging.”

Excesses of debt and leverage funneled into risky speculations inevitably end in default.

Asset and Consumption Bubbles

Financialization manifests as asset bubbles and hyperconsumption as people who never had credit spend up to the credit limits and beyond.

Both asset and consumption bubbles pop, pushing the financial sector that feasted off the unsustainable expansion of credit into insolvency.

In other words, neoliberal globalization and financialization — essentially one dynamic — are inherently destabilizing, as all the incentives are perverse.

Just as asset and consumption bubbles are inevitable, so too is the bursting of those bubbles and the devastation of everything that had become dependent on the expansion of those bubbles.

And that has real consequences.

Food security, to take a basic example, is impossible once globalization has destroyed local agricultural production, and financialization has rewarded factory-farming since Big Ag can borrow capital at scales that only make sense in a world of globalized monoculture agriculture.

1919 Is Not 2020

Everyone touting 1919 as the model for 2020 is deeply ignorant of history and the destructive ontologies of globalization and financialization. There is virtually no overlap between the world of 1919 and the world of 2020 in terms of financial structures and excesses.

That globalization and financialization are dead is revealed by what Federal Reserve bailouts and fiscal free-for-alls cannot do:

1. They cannot create creditworthy borrowers out of thin air like the Fed creates dollars out of thin air.

2. They cannot force lenders facing mass defaults to loan more money to uncreditworthy borrowers

3. They cannot force creditworthy borrowers to borrow money.

4. They cannot reflate asset and consumption bubbles that have popped.

5. They cannot restore confidence in long, fragile supply chains.

6. They cannot magically turn unprofitable enterprises into profitable enterprises.

7. They cannot create income streams — revenues, profits, wages, etc. — with bailouts that continue the perverse incentives of moral hazard or “free money” designed to give debt-serfs enough cash to continue making their loan payments.

8. They cannot forgive debt payments without destroying the wealth held as debt: Mortgages, student loans, auto loans, credit card debt, corporate junk bonds, etc., are assets that lose their value once borrowers default.

9. The Fed can buy impaired debt, but that doesn’t change their abject powerlessness (points 1–7 above).

Financialization was never sustainable, and neither was the destructive globalization it enabled.

Any system that depended on the ever-expanding exploitation of new resources, debtors and markets could never be anything but fragile. The ferociousness of its rapacity masked its inherent weakness, a weakness that is now exposed as fatal.

But let’s stick to the U.S. alone for now. The pandemic is having a dramatic long-term effect on Main Street local tax revenues.

First- and Second-Order Effects

To understand how, we need to consider first- and second-order effects.

The immediate consequences of lockdowns and changes in consumer behavior are first-order effects: closures of Main Street, job losses, massive Federal Reserve bailouts of the top 0.1%, loan programs for small businesses, stimulus checks to households that earned less than $200,000 last year and so on.

The second-order effects cannot be bailed out or controlled by central authorities. Second-order effects are the result of consequences having their own consequences.

The first-order effects of the pandemic on Main Street are painfully obvious: Small businesses that have barely kept their heads above water as costs have soared have laid off employees as they’ve closed their doors.

The second-order effects are still spooling out: How many businesses will close for good because the owners don’t want to risk losing everything by chancing reopening?

How many will give it the old college try and close a few weeks later as they conclude they can’t survive on 60% of their previous revenues?

How many enjoy a brief spurt of business as everyone rushes back, but then reality kicks in and business starts sliding after the initial burst wears off?

How many will be unable to hire back everyone who was laid off?

Falling off a Cliff

As for local tax revenues based on local sales taxes, income taxes, business license fees and property taxes: The first three will fall off a cliff, and if cities and counties respond to the drop in tax revenues by jacking up property taxes, this will only hasten the collapse of businesses that were already hanging on by a thread before the pandemic.

The federal government can bail out local governments this year, but what about next year, and every year after that?

The hit to local tax revenues is permanent, as the economy became dependent on debt and financialization pushed costs up.

Amazon and online sellers don’t pay local taxes except in the locales where their fulfillment centers are located.

Yes, online sellers pay state and local sales taxes, but these sales are for goods; most of the small businesses that have supported local tax revenues are services: bars, cafes, restaurants, etc.

As these close for good, the likelihood of new businesses taking on the same high costs (rent, fees, labor, overhead, etc.) is near zero, and anyone foolish enough to try will be bankrupted in short order.

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Now that working at home has been institutionalized, the private sector no longer needs millions of square feet of office space. As revenues drop and profits vanish, businesses will be seeking to cut costs, and vacating unused office space is the obvious first step.

What’s the value of empty commercial space?

Trying to Get Blood From a Stone

If demand is near zero, the value is also near zero. Local governments will be desperate to raise tax revenues, and they will naturally look at bubble-era valuations on all real estate as a cash cow. But they will find that raising property taxes on money-losing properties will only accelerate the rate of property-owner insolvencies.

At some point valuations will adjust down to reality and property taxes collected will adjust down accordingly. If municipalities think they can make up the losses by jacking up the taxes paid by the survivors, they will quickly find the ranks of the survivors thinned.

This doesn’t exhaust the second-order effects: Once Main Street is half-empty, the attraction of the remaining businesses declines; there’s not enough to attract customers, and the virtuous circle of sales rising for everyone because the district is lively and attractive reverses: The survivors struggle and give up, further hollowing out the district.

The core problem is the U.S. economy has been fully financialized, so costs are unaffordable.

The commercial property owner overpaid for the buildings with cheap borrowed money, and now the owner must collect nosebleed-high rents or he can’t make the mortgage and property tax payments.

Local governments spend every dime of tax revenues, as their costs are insanely high as well. They cannot survive a 10% decline in tax revenues, much less a 40% drop.

The Lesson of Yellowstone

The metaphor I’ve used to explain this in the past is the Yellowstone forest fire. The deadwood of bad debt, extreme leverage, zombie companies and all the other fallen branches of financialization pile up.

But the central banks no longer allow any creative destruction of unpayable debt and misallocated capital; every brush fire is instantly suppressed with more stimulus, more liquidity and lower interest rates.

As a result, the deadwood sapping the real economy of productivity and innovation is allowed to pile higher.

The only possible output of this suppression is an economy piled high with explosive risk.

Eventually nature supplies a lightning strike, and the resulting conflagration consumes the entire economy.

[BearyBear]

When you're thinking Amazon is unsinkable...

https://www.msn.com/en-us/money/companies/amazon-calls-delivery-drivers-back-closes-hubs-near-protests/ar-BB14PdmX

 

[JMD]

4 hours ago, sleepwello'nights said:

My perception is that the US, mainly also the UK and France, armed Saudi Arabia and encouraged them. A topic for another thread rather than derailing this one perhaps.

 

Yes, as you say discussion for another thread. I would just say that in regard to my original point, despotic regimes need no 'encouraging' to do wrong things; but with far less/no Western influence in the ME in future we will see how well the region can do. 

[sancho panza]

18 hours ago, Harley said:

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.

 

I forgot that Napier.DiMartion Booth has been all over the coming catastrophe in junk bonds.

18 hours ago, Harley said:

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

You're too kind sir......Every day is a learning day.

15 hours ago, Castlevania said:

More potential gold mining M&A. I’m hoping if the merger does happen that POG won’t be taken private

https://www.telegraph.co.uk/business/2020/05/31/mining-giants-petropavlovsk-ugc-explore-merger/

Me too,we got some at 10p....not a lot but a wins a win.

Market Ear

[sancho panza]

11 hours ago, JMD said:

President Xi made himself president for life. To me that signals there is no one at the top Chinese Table that shares Xi's vision or that Xi trusts to handover to. I liken China to the old USSR, historically it is 15 main provinces forced into servitude over milennia, but many still maintaining own language and culture, with some hostile to the ruling urban elites (the Muslim minority being just the most visible), especially with the ever growing wealth inequalities. So yes I think a Chinese revolution. The so called 'chinese miracle' is really just a schizophrenic melding of the worst of the totalitarian communist system with the worst of the consumerist/indebted capitalist system. I know Asians have a slightly higher IQ than Europeans, but how can such a system survive? After all, we keep hearing about political division and corruption, so I assume there are many more frictions that go unreported.

Countries that have narrow distributions of wealth histocially see rather swift regie change when it finally arrives.China suppresses a lot of disatisfaction but I think you're bang on in bold

Ripe for rapid change.

[sancho panza]

6 hours ago, jamtomorrow said:

On velocity: chanced on a diagram that neatly summarizes what's bothering me about how the next cycle might be different. It's from this paper: https://necsi.edu/s/econunivers_2.pdf

"Industrial cycle" says to me we'll primarily see velocity in the 'B' (biz to biz) eddy, presumably with some associated velocity in I/R (investments/returns).

I'm confident the ratio W/Y (share of production "captured" by wages) will be the lowest for any such cycle we've ever seen (because mad automation), so consumer velocity C/W is going to be weak (relatively).

What bothers me: to what extent can an industrial cycle "get going" if consumer demand doesn't get swept along like in previous cycles? And: what's the point anyway if the consumer (aka: the general population) only "sees" a diminishing fraction of any velocity uplift?

I think the point of the govt driving the industrial demand means it can force velocity higher.

experiments around the world eg Japan have shown that driving rates lower increases savings rates ie that stimulating the money supply doesn't necessarily stimulate demand..The key to moving velocity higher is to take demand away from consumers and put in the hands of those who will spend.

[JMD]

5 hours ago, sleepwello'nights said:

We successfully ran collectives starting from philanthropic Victorian times. John Lewis was one, The Co-op another. I'm sure there are others I could find with some research.

They never caught on in a big way. Probably because governments after the watershed social changes brought about by WW2 filled that role. 

And here we are. Well fed, well educated, with good health care, infrastructure and housing.

I only used the Mondragon example because it is wider in scope, it being industrial/retail/etc, and also goes beyond being a 'mere' co-operative. It is not perfect or course, but I think it shows what can be done - and I think how much more could be done, if for example, whole sectors of our own economy were encouraged to enact a similar model.

Ok, tbh i'm not entirely clear whether you are a fan of alternative models. But is your last point supposed to be ironic? ...i.e. Do you really think that we are well educated? As for housing, surely your having a laugh!   

  

[Loki]

1 hour ago, Bobthebuilder said:

Postie just delivered my gas engineer magazine and oh look....

 

Look at the way hydrogen is produced.  Energy bills are going to skyrocket.  (Regardless of night production storage, they'll want us all charging our electric cars from that - or cars will use the same fuel as your boiler)

[sancho panza]

3 hours ago, jamtomorrow said:

Hugely useful to see it explained in those terms.

Thinking about the UK, this might be the only way we were ever going to rebuild any kind of industrial base - there was just no way the sclerotic mess we had on our hands in the early 80's was capable of being evolved into something modern and efficient. Tearing it down (by offshoring) and rebuilding almost from scratch maybe gets us to a better place, ultimately?

The part I still don't see is how the consumer (i.e. general population) gets back in on the act. The 'W' flow is shutting down - for good - and the only participant I see capable of laundering future industrial wealth back out to the consumer is Government. And the politics of that isn't exactly uncontentious.

The politics that *will* work in this situation is the politics of national struggle ("ask not" etc). Recent talk here about escalating international tension and cold/hot conflict is the logical conclusion of that process, and bang on the money.

Rising wages possibly,but I suspect the consumer is the patsy this time around.Cost of living is going higher.

[sleepwello'nights]

1 minute ago, JMD said:

 

Ok, tbh i'm not entirely clear whether you are a fan of alternative models. But is your last point supposed to be ironic? ...i.e. Do you really think that we are well educated? As for housing, surely your having a laugh!   

  

On balance I would prefer an alternative to Capitalism, however I doubt that we could ever come up with one that would overcome our natural instincts of selfishness. To paraphrase Churchill the system may not be perfect but its better than the alternatives.

The alternative of cooperatives that suit my preferences have from the two examples I given demonstrate their shortcomings. A cynical salesman once mentioned to me how remarkable it was that the buyers from the Co-op he dealt with could afford such large houses on their salaries!

As regards your last point I'm talking in relative terms about education and housing.  Although there isn't a large problem in respect of housing availability in the UK. Most of the problems with homelessness are due to problems with the individuals themselves rather than a shortage of places to live.  

[JMD]

5 hours ago, DurhamBorn said:

The main point is because if it doesnt happen western democratic economies collapse.Consumers are mostly hugely wealthy at the moment.I can buy a large chicken in Aldi for £3.09 for instance.Thats insane compared to all of known history.BUT the backbone of the economy is failing and isnt producing enough wealth.It cant support the demands on it. The consumer will have to accept a distribution cycle.

DB, I don't think this question has been asked before but do you think that a distribution cycle could have been avoided? Or is a distribution cycle an essential part of the 'super-cycle' and must be gone through? i.e. similar to business cycles, expansion followed by recession, that can't be avoided and are actually required to enable stronger companies to emerge and prosper. I guess i'm asking whether governments could have restricted corporate/bank borrowing, or been honest with the electorate about what services our tax base can afford, and which might have meant governmnet being ejected from office, but would at least have prevented the prospect of total monetary collapse that we are now facing? 

...also, not sure if a distribution cycle does inevitably lead to a monetary collapse? Or is it just highly probable, given the scale of debt, etc? (not to mention the lack of political will to find a solution, oh and a cohesive society stoic enough to accept the pain; or is this being fanciful, where any cure would be worse than the actual disease, to coin a current term).

[JMD]

55 minutes ago, sleepwello'nights said:

On balance I would prefer an alternative to Capitalism, however I doubt that we could ever come up with one that would overcome our natural instincts of selfishness. To paraphrase Churchill the system may not be perfect but its better than the alternatives.

The alternative of cooperatives that suit my preferences have from the two examples I given demonstrate their shortcomings. A cynical salesman once mentioned to me how remarkable it was that the buyers from the Co-op he dealt with could afford such large houses on their salaries!

As regards your last point I'm talking in relative terms about education and housing.  Although there isn't a large problem in respect of housing availability in the UK. Most of the problems with homelessness are due to problems with the individuals themselves rather than a shortage of places to live.  

Thanks for clarifying, (I can sleepwellonight knowing) that we are in broad agreement!

Yes, housing is probably the most expensive 'political football' we have in this country. Don't get me wrong, I accept that property is very expensive currently. But the real issues are never addressed. For example during cv19 temporary housing has been found for rough sleepers. I agree with you that most have only themselves to blame due to addiction, etc, but I do object to them sleeping on our pavements. So they should be moved on or housed - total government inaction drives me mad I admit. And have you noticed that on tv program: 'The baiffs are coming', the squatters are invariably middle-class 20-something anti-capitalist dropout types, or am I being too judgmental?  

[JMD]

1 hour ago, sancho panza said:

Bad enough, but I wonder how accurate those figures are, i.e. could the government debt be a lot higher? And I suspect that the banking debt is much higher, at least for those domestic Chinese banks, never mind the secret 'shadow banking' system! 

[Thorn]

Crazy times out there.

Alongside having some Canadian/US pm miner shares in a SIPP, does anybody have a view on holding some Hochschild, Fresnillo and the Smith and Williamson Global Gold fund - from a US/UK taxes point of view are they ok to hold in an ISA?

[Loki]

6 minutes ago, Thorn said:

Crazy times out there.

Alongside having some Canadian/US pm miner shares in a SIPP, does anybody have a view on holding some Hochschild, Fresnillo and the Smith and Williamson Global Gold fund - from a US/UK taxes point of view are they ok to hold in an ISA?

I hold HOC in my ISA, I thought as long as you'd signed a W-8 BEN form it was all good 

[janch]

2 hours ago, sancho panza said:

I think the point of the govt driving the industrial demand means it can force velocity higher.

experiments around the world eg Japan have shown that driving rates lower increases savings rates ie that stimulating the money supply doesn't necessarily stimulate demand..The key to moving velocity higher is to take demand away from consumers and put in the hands of those who will spend.

I know a few pages back you were thinking about why we won't just "turn Japanese" and I think you've answered your own question!  Thanks as I was not sure either.  Velocity seems to be a very important factor which is often missed and you've explained it.

The printing last time 2008 just sat in assets (houses in UK) and didn't flow elsewhere.  The Japanese are more cautious and saved it.

[NogintheNog]

27 minutes ago, Thorn said:

Crazy times out there.

Alongside having some Canadian/US pm miner shares in a SIPP, does anybody have a view on holding some Hochschild, Fresnillo and the Smith and Williamson Global Gold fund - from a US/UK taxes point of view are they ok to hold in an ISA?

 

21 minutes ago, Loki said:

I hold HOC in my ISA, I thought as long as you'd signed a W-8 BEN form it was all good 

HOC and Fresnillo are both listed on the London exchange, so there is tax liability once wrapped in an ISA provided you buy the UK shares. Not sure about the Smith and Williamson Global Gold fund but pretty sure if it's UK based again no tax to pay in an ISA wrapper. W-8 BEN form is for US shares inside a UK ISA/SIPP. I have some American listed miners in my ISA, and have done the form so I only loose 15% tax instead of 30% on US dividends.

[MrXxxx]

59 minutes ago, NogintheNog said:

 

HOC and Fresnillo are both listed on the London exchange, so there is tax liability once wrapped in an ISA provided you buy the UK shares. Not sure about the Smith and Williamson Global Gold fund but pretty sure if it's UK based again no tax to pay in an ISA wrapper. W-8 BEN form is for US shares inside a UK ISA/SIPP. I have some American listed miners in my ISA, and have done the form so I only loose 15% tax instead of 30% on US dividends.

Just to clarify your last point, with US/Cdn shares you still have to pay tax (15%) even if you keep them in an ISA and have filled in the w8 BEN form?