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

[The Idiocrat]

@DurhamBorn - a bit of a practical question, and I'm sorry to ask as you have been incredible in your insight and frequency of responses on here . When you talk about your "roadmap", is this literally a document that you have developed? Is it like a mindmap or tree or something like that with different scenarios and likely outcomes? I don't want a copy of yours but I'm interested in the methodology and perhaps doing my own (basic) one. TIA!

[DurhamBorn]

15 minutes ago, The Idiocrat said:

@DurhamBorn - a bit of a practical question, and I'm sorry to ask as you have been incredible in your insight and frequency of responses on here . When you talk about your "roadmap", is this literally a document that you have developed? Is it like a mindmap or tree or something like that with different scenarios and likely outcomes? I don't want a copy of yours but I'm interested in the methodology and perhaps doing my own (basic) one. TIA!

Yes it is.Its pretty much years from here until 2030 (actually broken down into quarters) and then different scenarios depending on different things.Mostly CB liquidity,and the speed of it.It then has lots of things coming in we call cross market work.That is where it gets tricky as you assume more.The cross market work doesnt tend to move the road map much.For instance cross market could be by year 4 if inflation has reached x on the road map,consumers will switch from cars by x amount and increase public transport use by x amount.The road map tends to be for direction of travel and a lot of work goes into  working out where the CBs are in relation.For instance when i said right sized during the sell off the road map was falling away because liquidity was being destroyed quicker than the Fed/CBs were adding.

The very basic part of the road map is that to stop collapse the CBs need to inject back the dis-inflation we have suffered for 35 years.The fact it took 35 years for that dis-inflation to work through,but the CBs are going to add it back in probably 3 years gives us a much higher than trend chance of inflation.

Its not a science and there are massive amounts of different data etc,but it does really help to ignore the noise,ignore short term whip saws and maybe come out of the cycle level or in front.

[The Idiocrat]

6 minutes ago, DurhamBorn said:

Yes it is.Its pretty much years from here until 2030 (actually broken down into quarters) and then different scenarios depending on different things.Mostly CB liquidity,and the speed of it.It then has lots of things coming in we call cross market work.That is where it gets tricky as you assume more.The cross market work doesnt tend to move the road map much.For instance cross market could be by year 4 if inflation has reached x on the road map,consumers will switch from cars by x amount and increase public transport use by x amount.The road map tends to be for direction of travel and a lot of work goes into  working out where the CBs are in relation.For instance when i said right sized during the sell off the road map was falling away because liquidity was being destroyed quicker than the Fed/CBs were adding.

The very basic part of the road map is that to stop collapse the CBs need to inject back the dis-inflation we have suffered for 35 years.The fact it took 35 years for that dis-inflation to work through,but the CBs are going to add it back in probably 3 years gives us a much higher than trend chance of inflation.

Its not a science and there are massive amounts of different data etc,but it does really help to ignore the noise,ignore short term whip saws and maybe come out of the cycle level or in front.

Thank you so much!! That's great. I think I'll give it a go at the weekend as a first pass. I love the idea of scenarios by type of industry or human activity like travel (future vehicle and connected mobility is a sector I work in so I'll probably start there - the Japanese client I have has spent a lot of effort planning for the years ahead and changes in behaviour, although Covid might change their predictions). Cheers, really appreciate it! 

[JMD]

14 hours ago, Harley said:

Diversification and money.  Not sure how much of a food company they are now!  Their published(?) battered strategy pre-CV was to expand geographically (Europe, US, etc) rather than via channels like on-line (but never say never).  Their real challenges seemed to me to be running out of cheap places to have their stuff made and designing in even cheaper costs of production.  Increases in raw material and transportation costs (lower weighting of production costs) could scupper them.  They are however apparently very agile at "turning" temporarily hot items around.  And then people love to shop and the stuff they currently have was not made to last!  Be an interesting one to watch.

Yes agree, Associated British Foods are definitely one to watch, diversified with brands such as pataks, twinings. Not sure what other food staples they own (?) - but they do own British Sugar which impressively processes all UK sugar beet production - and that represents half of all UK consumption. Other UK consumption is imported; perhaps ABF own some foreign sugar producers also?   

[Harley]

2 hours ago, Majorpain said:

https://www.lay-z-spa.co.uk/inflatable-hot-tubs.html

Hot tub website so busy they have had to put a traffic limiter on it, not the first time i've heard about wild hot tub demand so i'm going to take an educated guess that most of the UK's furlough money is not being spent on essentials!  Made in China obviously....

Thankfully its a Swedish bank that's doing the 0% financing, another countries problem when it all goes bang and the redundancies hit later this year.

I just know I'm gong to continue paying for all this and the myriad of other feckwittery.  Makes me sick.

[JMD]

15 hours ago, Harley said:

I've really enjoyed watching/listening to the macro strategists over the last few weeks.  Quiet a few.  Maybe I should have been more focused on the markets (tbd!) but I now have a clearer vision for my investing roadmap (i.e. journey not straight to end state) as a result.  Not all agree and not all come across as flippant (e.g. Jim Rogers certainly isn't on a rare longer interview) but there is a broad consensus at a more detailed level and some of the take aways don't conflict so nothing contentious or to "lose".  This thread scores quite well.  And the recent quick drops have reminded me this ain't over so game still on!  My biggest take away?  They've mostly all relocated geographically! 

Ouch!! Sounds a bit like 'could do better...' ?, as my school report card usually stated!! 

I haven't watched that Jim Rogers video yet (but will do so), but what were the other areas of consensus among the 'macro crowd' you mention Harley, food, tech, EM's/Japan perhaps, or was it more about investment strategies/warnings?   

 

[Majorpain]

1 hour ago, Harley said:

I just know I'm gong to continue paying for all this and the myriad of other feckwittery.  Makes me sick.

I laughed, then thought you might be right in an unexpected way.   Quick maffs time:

https://www.klarna.com/uk/business/products/financing/

Sale price (£800) - Hot tub cost (£700) - Financing (2%/£16) = £84 profit

Sale price (£800)  - Hot tub cost (£700) = £100 profit

Since the robbing bastards hide the cost of the 6 months interest free in the normal purchase price, you pay for it if you get financed or not!    They make more money if you pay with cash!

I wonder how many other retailers have this little scam going?

[Harley]

1 hour ago, JMD said:

Ouch!! Sounds a bit like 'could do better...' ?, as my school report card usually stated!! 

I haven't watched that Jim Rogers video yet (but will do so), but what were the other areas of consensus among the 'macro crowd' you mention Harley, food, tech, EM's/Japan perhaps, or was it more about investment strategies/warnings?  

Na, doing fine, just must not be complacent!  A mix between the macro picture and sector specifics:

. Pretty much what's on here regarding deflation and inflation with differing timings, although Hugh Hendry argued no inflation given the Japanese experience.

. Regulation warnings from Mr Napier in particular while many others seem to have run off to various boltholes so more doing than talking!

. Mr Napier also mentioned Emerging Markets today as possibly an area to suffer less from financial repression (low debt to GDP levels).  Others warn about their currencies though.

. One outlier thinking the EU will come through and Europe will do well but was well slated in the comments.  TBF, I'm reviewing companies atm and might be seeing some strength.

. Sector wise, tech is the one not all are writing off despite it's current strength.  While some are out of all sectors and moving to hard assets! 

. Not the depth regarding the sectors discussed here such as telecoms but some mentioning a rush for assets while others are negative on the old asset heavy businesses.

. Bonds pretty much disliked by all, eventually and PMs liked.  Some keen on silver in particular too.

. Those talking bullishly about rallies are tending to talk in the short to intermediate terms and a few highlighting the current retail bubble.

. Hugh Hendry mentioned my beloved Permanent Portfolio in positive terms which was nice of him!  Not sure he included the future though.

Probably more but a bit focused elsewhere right now.  Anyways, keep up the good work folks!

[Harley]

7 minutes ago, Cattle Prod said:

I like the idea of this Harley, but the problem I have I can't think what bond I would want to own. Afaik this was originated in the 80s, and fair play as bonds have done very well since then. But what about the next cycle? Are you still happy with bonds going forward from here? 

Not happy at all and am wrestling with the problem.  Back to basics.  Must be some new equivalent.  Or maybe part of a hedge in case I'm wrong about the future?  The portfolio is not meant to be about supersized gains after all.  I would hold short term bonds but they don't count (they form part of the cash section).  Tough one.

[Loki]

Looks like Schroders bought a load of Drax today? I can't make head nor tail of the acquisition rights form, sorry.  

[Wheeler]

42 minutes ago, Cattle Prod said:

I like the idea of this Harley, but the problem I have I can't think what bond I would want to own. Afaik this was originated in the 80s, and fair play as bonds have done very well since then. But what about the next cycle? Are you still happy with bonds going forward from here? 

I don’t know if you’ve seen any of the videos by Chris Cole of Artemis Capital Management but he has a take on a permanent portfolio that he claims works through all situations; his dragon portfolio. There should be a link on the page below for a copy of the document explaining it (the allegory of the hawk and the serpent).

https://www.artemiscm.com

The summary is:

• 21% long vol 
• 18% commodity trend
• 19% gold
• 18% bonds
• 24% equity

The long vol part is the tricky one. Basically anything that will do well as things fall apart such as farmland, tobacco etc.

[CVG]

52 minutes ago, Cattle Prod said:

I'm starting to think gold is going to be the new bond. So 50% gold, 25% cash, 25% equities. Reading Luke Gromen at the moment (like his interview in the In Gold We Trust report), he is making some compelling connections between oil, gold, and currency. I have yet to fully understand them mind you, why can't these guys ever speak clearly. Or maybe I'm just thick!

I've gotten pretty comfortable with gold selling off in liquidity sequeezes. That short time horizon doesn't matter to me.

 

I'm also out of the long term gilts (I bailed out early and missed even more gains!). But I wouldn't just move that to Gold as that will junk the diversification rationale. If gold goes contrary to expectations then you'll be doubly sunk.

I use a Golden Butterfly version of the PP. 20% Cash, 20% Large Equity, 20% Small Equity, 20% Gold (or any version of PM's) and 20% LT Gilts. The 20% LT Gilts is currently held in cash until the Yield to Maturity gets to 5% at which point I'll ladder back in.

https://portfoliocharts.com/portfolio/golden-butterfly/

[Popuplights]

19 hours ago, Harley said:

We haven't been in a shop since mid February, apart from the pharmacy (thrice), dentist (once), and petrol station (once).  We prepped before and still am.  Everything (really) needed has been delivered, increasingly not Amazon (or eBay) as going direct is now often cheaper.  Delivery is now more rapid than before!  We have no desire to go again and as for discretionary stuff like restaurants, rip-off (especially compared to the home sourced "bella" stuff)!

I think this has opened a few peoples eyes on how much of their expenditure was discretionary. I don't think I will ever go back to a shopping mall now.

[DurhamBorn]

3 hours ago, The Idiocrat said:

Thank you so much!! That's great. I think I'll give it a go at the weekend as a first pass. I love the idea of scenarios by type of industry or human activity like travel (future vehicle and connected mobility is a sector I work in so I'll probably start there - the Japanese client I have has spent a lot of effort planning for the years ahead and changes in behaviour, although Covid might change their predictions). Cheers, really appreciate it! 

Exactly and anyone can do it.You could start with our inflation road map as it stands as the most likely course of inflation.It goes from around 2% now to 12% towards the end of the cycle.We will probably see higher than that,but higher is fine if we are positioned for increasing inflation.So if you take our work on inflation as the base road map,you could then look at your area of interest,vehicle and connected mobility alongside that as cross market work.At what points does the inflation push change,hold back etc?.Our road map had car use falling in year 3 of an inflation cycle and public transport then increasing.However i sold most of my transports when they doubled because im now questioning the structure of the cross market work.The trigger for the big falls was Covid,so the structure of the cycle might be different.Car use will still fall with the inflation,but maybe those people are working from home?.I increased my telco holdings from selling those transport holdings.Im still looking though,and i may yet increase the transports.So the road map is pretty much the same,but the structure of how the falls happened,the triggers are different,so the gainers in the reflation leans more to telcos now than transports.If that makes sense.

[Harley]

35 minutes ago, Wheeler said:

I don’t know if you’ve seen any of the videos by Chris Cole of Artemis Capital Management but he has a take on a permanent portfolio that he claims works through all situations; his dragon portfolio. There should be a link on the page below for a copy of the document explaining it (the allegory of the hawk and the serpent).

https://www.artemiscm.com

The summary is:

• 21% long vol 
• 18% commodity trend
• 19% gold
• 18% bonds
• 24% equity

The long vol part is the tricky one. Basically anything that will do well as things fall apart such as farmland, tobacco etc.

Ta.  Yes, I was thinking of hard assets (other than PMs) such as land.  Commodities would do but not readily investable (forget the ETFs).  Best I've seen of the very limited discussion about this was Real Estate as an alternative to bonds.  Land would be more attractive to me.  I also agree with holding some bonds - comes back to the objective of the portfolio.  Bonds can acts as a shock absorber like recently.  He's omitted cash, which is very useful for liquidity (opportunities tending to happen at times of little liquidity!).  I'm fine with 25% in all the classes, just the bonds.

[The Idiocrat]

1 hour ago, DurhamBorn said:

Exactly and anyone can do it.You could start with our inflation road map as it stands as the most likely course of inflation.It goes from around 2% now to 12% towards the end of the cycle.We will probably see higher than that,but higher is fine if we are positioned for increasing inflation.So if you take our work on inflation as the base road map,you could then look at your area of interest,vehicle and connected mobility alongside that as cross market work.At what points does the inflation push change,hold back etc?.Our road map had car use falling in year 3 of an inflation cycle and public transport then increasing.However i sold most of my transports when they doubled because im now questioning the structure of the cross market work.The trigger for the big falls was Covid,so the structure of the cycle might be different.Car use will still fall with the inflation,but maybe those people are working from home?.I increased my telco holdings from selling those transport holdings.Im still looking though,and i may yet increase the transports.So the road map is pretty much the same,but the structure of how the falls happened,the triggers are different,so the gainers in the reflation leans more to telcos now than transports.If that makes sense.

Cheers DB. I guess to an extent, and informally, my investment thinking has often been along similar lines, trying to predict trends. Only thing is, politicians have a habit of getting in the way. I remember thinking the increasing oil prices of the noughties should create (general) inflation but they didn't, until it all went tits up of course. I really appreciate your view the CBs are logical in what they are doing - I hadn't worked out a rational argument for the madness! Cheers.

[sancho panza]

Intersting video for oil bulls from George G featuring Art Berman at 9 mins for 3 minutes.

George initally runs over the price action of oil.Sees the Chinese starting a run on oil especially as USD weakens.

At 9 mins Art separates the cost,price and value of oil.Equating a barrel of oil to 4.5 years of human labour.I've read this 4.5 figure on Surplus Energy in the (often) learned comments section.

Art says 4.5 times the average US salary is ergo value barrel of oil $120,000..............

George sees oil getting a bid for the next 20/30 years especially given it's value.

 

[MrXxxx]

4 hours ago, Majorpain said:

I laughed, then thought you might be right in an unexpected way.   Quick maffs time:

https://www.klarna.com/uk/business/products/financing/

Sale price (£800) - Hot tub cost (£700) - Financing (2%/£16) = £84 profit

Sale price (£800)  - Hot tub cost (£700) = £100 profit

Since the robbing bastards hide the cost of the 6 months interest free in the normal purchase price, you pay for it if you get financed or not!    They make more money if you pay with cash!

I wonder how many other retailers have this little scam going?

You mean to tell me you don't ask for a discount when paying cash?...call yourself a Dosbodder, you should be ashamed of yourself! :-)

[Majorpain]

29 minutes ago, MrXxxx said:

You mean to tell me you don't ask for a discount when paying cash?...call yourself a Dosbodder, you should be ashamed of yourself! :-)

Many years ago, i got a taxi back to my parents house after a night out.  After suggesting a reduction for paying with loose change, the taxi driver replied "you live on this street and you are negotiating a discount??!!"

He did give me one. 

[sancho panza]

22 hours ago, Chewing Grass said:

Just had a root on Primark, the Home Bargains of clothing.

Primark parent company ABF’s financial director John Bason told Retail Week this week that going online was still “not a priority” and Primark would be as relevant as ever to shoppers through its reopened bricks-and-mortar stores.

I smell a Woolies moment coming in August.

Could never work out why a food company would really be interested in owning a clothes retailer.

https://www.retail-week.com/fashion/analysis-can-primark-afford-not-to-sell-online/7034978.article?authent=1

I think it may well be their model jsut doesn't work online ......

21 hours ago, DurhamBorn said:

Tax is going up in the form of inflation so the people paying it will be those who's income and savings dont go up with it.Think gilts,bonds,cash,etc.Over the 10 year cycle i expect people owning bonds today to lose around 70% to 80% in real terms.

Council tax will be a tax that hits hard though as it tends to be inflation linked,though im also expecting massive push back from the public against council tax.

I think you're bang on with council tax.

A good friend of mine works for jsut baove min wage driving.Has his own pad,pays the best of £1300 p.a to get his bins emptied the roads not manitained.Even for people higher up the food chain,3 bed semis cost £1700.................that's a lot of cash

In 2000 council tax was jsut £728 for a band D

INflation in that time ran at 2.8% so that £728 should now be £1230.With the way they're spending ,accrusing pension entitlements and old people are needing social care,council tax only going one way .

https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator

13 hours ago, Fully Detached said:

Problem with any sort of housing or wealth tax is that a lot of people have assets but no cash to pay the tax bill with. You can't force someone to sell their home to pay a 2% tax on it. Second homes maybe...

I think council tax is headed that way especially for a lot ofpoeple in homes they've owned for years.

13 hours ago, Majorpain said:

Rolls will be fine in the long run, they have too much cutting edge tech in the right areas for the government to let them go without a fight.  Its getting that tech into a marketable product that has historically been the UK's weak spot.

I agree on Rolls being fine long term MP.We'l be buyign themin a year or two.More important to me was the effect on places like Derby of lsoing so many top private sector jobs.Lot of companies in Leicester supply Rolls.

[sancho panza]

12 hours ago, Sugarlips said:

V shaped starting to turn into a W?

Oil down 5% is anyone buying more oilies here or further to fall?

https://edition.cnn.com/2020/06/14/investing/global-stocks/index.html

We're up to our gills so can't add any more, but if we weren't I'd be happy to add.

12 hours ago, Fully Detached said:

I'm not so sure. I guess they could jack up council tax or something of that nature, but we live in a world where many people decide how much debt to take on based on the affordability of the monthly payments. Those probably aren't people who can afford an extra £500 a year taxation at the same time as the cost of living is going up and their job security or real earnings are evaporating.

At the very least they'll bitch and whine so vocally that the govt will go after softer targets.

The low hanging fruit has been picked.Not sure where they're going to go for the rest espcially if COuncil tax rises are pushed up to 3% regularly.

10 hours ago, DurhamBorn said:

They will probably cut the dividend,but i cant speak for anyone else,but the price i paid for them a 50% divi cut i priced in.My aim over the cycle is to outpace inflation,1% would be fine,3% compounded fantastic.My road map says inflation over the cycle will be around 80%,it could be 65%,or 120% on outliers.I bought BP on average at £2.66.If they cut the divi in half thats still 6.5% a year to me on my purchase price.Compounding if the shares were the same price and the divi remained at the new level would return me 87% over the cycle.If they can increase the cut in half divi by just 1% a year my return increases to 106%.If the shares also increase by an average of 1% a year then BP return me 126% return,

So if BP cut the divi in half,then manage to increase it by just 1% a year for 10 years and the shares also go up 1% a year for ten years my investment goes up 126% while my road maps outlier for inflation is 120%

My portfolio is tilted to companies who will follow that pattern,because i fully expect them to outperform my numbers,if we do indeed get a reflation cycle.

Solid cash flow companies who cut the dividend,but their massive share price falls have already priced it in are probably the best areas to be buying at cycle turns.

Must say I feel the same way.The average price I got us down has given us the room to accept a huge divi cut and not fret too much.Especially when compared to the other opporutnities out there and the amazing scope the oilies will have to rasie payouts going forward.

In fact where divis are cut too pay down debt/exploration then I'm happy for that trade off.XOM/RDSB/BP/EQNR holdings we've built since last year and mainly thought March are genereational at the prices we got in at.I didn't do as well as many on here but using the monthly charts(which cuts out the noise and the intraday volatility) eg RDSB monthly shows low of £12.26..In ten years,we'll hopefully be laughing.

[Chewing Grass]

I'm piling everything into Pension Co with less than 5 years to go as the government will per forced to nationalise private pension schemes when the lose 80% of their value so they can leverage the assets at 80:1.

If they destroy pension assets they will have broken the final bit of the contract with workers.

[AWW]

2 hours ago, sancho panza said:

Art says 4.5 times the average US salary is ergo value barrel of oil $120,000..............

Or a barrel of oil is $4,500 and the average US salary is $1,000...

[Green Devil]

Fed announcing massive corporate bond buying and the market which was down 1000 before the opening bell in NY, market closes up. Print printy. SS DD. On an aside the dollar is also sliding which is looking more onimous.. 

[JMD]

14 hours ago, jamtomorrow said:

Will be interesting to see how small-scale nuclear pans out for them: https://www.newcivilengineer.com/latest/plan-for-small-nuclear-reactors-in-uk-this-decade-28-01-2020/

Entirely logical step for Rolls, given their position in nukes for marine propulsion.

Government look ready to get behind it with policy if it has legs: https://www.gov.uk/government/publications/advanced-nuclear-technologies/advanced-nuclear-technologies

Thanks, interesting links. RR was already on my watch list.                                                                                                             As Majorpain says the UK is historically bad at capitalising on its inventions. Things will need to change where government, industry, banks work together. This has been happening in Germany since the times of Bismark! A different time but we will I think come to emulate that form of integrated industrial 'brutalist national vision'. Nationalisation of large parts of the economy is pretty much priced in. As for the banks, I note Dominic Raab today said 'we will not sacrifice the UK Chinee people at the alter of banking bonuses'!!! - ok he was referring to HSBC, but could such a thing have been said by a senior minister anytime previously?                                                                                                           ...having said all this, am I being foolish saying RR is on my watch list?...probably a prime candidate itself for nationalisation!?