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

[sancho panza]

8 hours ago, DurhamBorn said:

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.

Eye watering thought

5 hours ago, Cattle Prod said:

Excellent (in my amateur opinion) piece on dollar liquidity here, by Lyn Alden Schwarzter, a lady worth listening to in my view:

https://seekingalpha.com/article/4353843-dollar-liquidity-2-catalysts?utm_medium=email&utm_source=seeking_alpha&mail_subject=lyn-alden-schwartzer-dollar-liquidity-2-catalysts&utm_campaign=rta-author-article&utm_content=link-0

Excerpt:

Piece in bold: any views on this? I'm aware the dollar dived at first, but I didn't really twig that that was because they were buying other currencies with better balance sheets!

I think that's an assumption too far CP.In the inital stages it was panic that was driving decisions from what I could see not rational thinking.Whilst Lyn's a lot more knowledgeable than me,a second pair of eyes on somethign somtimes sees different things.

Potential other reasons for it may have been

1) investors repatriating cash into home currencies

2) investors fleeing USD to try and spread risk but with everyone squeezing out of the door at the same time it got oversold quickly and stayed oversold.

3)There was a really good Macro Voices podcast a while back with a dollar speciliast on and he was talkign about onshore and offshore dollars(red/green) and that the two markets function with different metrics.Again this could have come into play as offshore liquidty(over which the Fed has less control) got reduced as players reduced USD velocity.

Those three explanations might go some way to explaining the subsequent spike as

1) borrowers with USD denominated loans realised they were going to get squeezed

2) everyone trying to squeeze back through the dooor created an even bigger overbought spike.

 

Perrsoanlly,I find it hard to believe-but not impossible-that they were buying yen for it's current accoutn surplus.

 

5 hours 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.

 

We had a good debate on here a few pages back ref DXY and where you'd go if you sold USD.....EUR-not with Italy/Spain/Greece in tow,GBP-I wouldn't and I live here,JPY-mmmmmm,CAD-yes,SEK-yes,CHF-yes.But the best three are the smallest.....

This made me even more of a PM bull than I had been.

 

[JMD]

14 hours ago, Cattle Prod said:

Articles says BP sees lower than expected prices for 30 years, that's different to expecting low prices . What they expected is not stated.

All they have done is adjusted their internal price deck to the current futures curve, which is $55 to 2028. This is perfectly normal, and happens in both directions. It's really just to test current project robustness.

CP, I think you have commented on extraction costs before. But the BBC news had a segment talking about that 55 dollars oil figure going forward (paraphrasing), and with this being a new reality for oil companies to adjust/struggle with. I've loaded up with oil companies, but hope to get some more. In terms of costs I think the Russian co's have low costs, but how will the 'European' co's fare? Assets are crucial, but I guess it also comes down to intelligent management. As for the middle-east, I think Kuwait is very low cost, but are Saudi costs transparent and reliable? Your general thoughts on the impact of lower oil prices (even with high inflation effects) on the different competing regions/co's would be interesting to hear.

[JMD]

13 hours ago, Errol said:

This probably is the bottom then. It's like Brown selling the gold and the press declaring the death of gold.

...so would that be Browns 'black-gold' bottom!!??

[AWW]

A bit of anecdata for the thread... bank I currently contract at is getting rid of 2/3 of its City office space. We'll be in the office one day a week from September. The change is permanent. Still hiring.

I hope this is the new normal as I'll be buying a house next year when IR35 comes in and this means it won't have to be anywhere near London.

[AWW]

(The takeaway being that London house prices are completely fucked as are those who have large mortgages on them, unless high inflation keeps nominal falls at bay)

[JMD]

10 hours ago, Loki said:

The poor neglected trampolines 

Indeed... oh, the humanity of it! (appologies, bad taste Hindenburg disaster joke)

[JMD]

9 hours ago, Harley said:

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!

Thanks Harley for the informative reply.                                                                                                                                                            Re Europe, I read somewhere that value oriented European stocks, those earning a substantial/growing earnings from export markets, especially when derived from Asian middle class consumers, were a good prospect, though I suppose that is perhaps not much more than an investment truism.                                                                                                       I found the Jim Mellon/MoneyWeek podcast interesting, if I recall correctly he thought green infrastructure and most tech was now expensive, however he did favour 'lab produced meat' and some biotech. In fact he mentioned several companies in these sectors. If you had the time Harley it would be interesting if you could run your slide rule over them, though as start-ups I guess they will have negative cash flow etc, so speculation plays?

[JMD]

8 hours 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? 

CP, on several occasions DurhamBorn has mentioned the idea of buying a holiday let, although I think mostly for personal use though not exclusively so, and more recently maybe even buying a property rental. 'Heresy!! And burn the witch!!' I can hear coming from some readers here. However, I'm begining to think that investment property in some income producing form(suggestions welcome?), It being a separate asset class, it might actually be an adequate substitute for bonds? After all, if potential property can generate a consistent inflation beating yield, and at least maintain its initial purchase price value - inflation adjusted of course, and probably necessitating northern properties (won't crash like southern property) - surely job done in financial terms. Of course the additional work required is an issue, but this could be mostly mitigated I think by using agents, etc, so long as profits were still sufficient to meet those extra costs. Needs more thought in terms of factoring in maintenance costs for example, and also the risk of government future punative taxes. But I wonder - is anyone thinking in similar way?

[Bricks & Mortar]

11 hours ago, sancho panza said:

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

Not sure about that.

Barrel of oil is 158 litres.  Would move a moped, maybe 4000 miles.  You could cycle in 4 months or so.
My mini digger would maybe dig 40 hours non-stop on 160 litres.  Estimate a man with shovel could do the same in about 10 weeks... or 4 months if they're lazier.
It's all kinda rough & ready, assuming the worker is fit and able...

Am I missing something?   Have they confused months for years?

Don't suppose we'd complain if they 'only' went to $10K/barrel.  Least, not when viewing your portfolio.  Might be different mileage at the filling station.
 

[CVG]

6 minutes ago, Cattle Prod said:

Letting property is a total ballache, especially if you don't live near it. I wouldn't be interested in under 10% yield, it can be a part time job. I think Sancho said something similar sbout yield.

Illiquid too.

[MrXxxx]

5 hours ago, JMD said:

Of course the additional work required is an issue, but this could be mostly mitigated I think by using agents, etc, so long as profits were still sufficient to meet those extra costs

If you thought EA did f-all for their money take a look at letting agents...until they are made liable for any losses from their due diligence they have no `skin in the game` and so are indifferent to both sides of the customer equation.

[Option5]

1 hour ago, Bricks & Mortar said:

Not sure about that.

Barrel of oil is 158 litres.  Would move a moped, maybe 4000 miles.  You could cycle in 4 months or so.
My mini digger would maybe dig 40 hours non-stop on 160 litres.  Estimate a man with shovel could do the same in about 10 weeks... or 4 months if they're lazier.
It's all kinda rough & ready, assuming the worker is fit and able...

Am I missing something?   Have they confused months for years?

Don't suppose we'd complain if they 'only' went to $10K/barrel.  Least, not when viewing your portfolio.  Might be different mileage at the filling station.
 

Oil product breakdown (USA)

 

[JMD]

1 hour ago, MrXxxx said:

If you thought EA did f-all for their money take a look at letting agents...until they are made liable for any losses from their due diligence they have no `skin in the game` and so are indifferent to both sides of the customer equation.

Mrxxx, CP, Cvg, thanks for your comments. The other biggy i forgot to include above was that leveraging was possible, enabling a (say large) loan to take some of the 'stress/pain' out of ownership!? Leveraging is pretty unique in investment, and also if prop. prices fell it would kinda balance out the 'losses' as the loan-value would also diminish if we get that large inflation. Can't help thinking there may be a way of structuring this to make it all worthwhile, as you all say it's extra work, etc, but owning a different asset class (especially as it is one of those 'needs not wants') even if property will suffer next cycle, might be worth it.

[Agent ZigZag]

Another way to look at property (area depending) is if the cost of rebuild is greater than the current value.

[DurhamBorn]

7 hours ago, JMD said:

CP, on several occasions DurhamBorn has mentioned the idea of buying a holiday let, although I think mostly for personal use though not exclusively so, and more recently maybe even buying a property rental. 'Heresy!! And burn the witch!!' I can hear coming from some readers here. However, I'm begining to think that investment property in some income producing form(suggestions welcome?), It being a separate asset class, it might actually be an adequate substitute for bonds? After all, if potential property can generate a consistent inflation beating yield, and at least maintain its initial purchase price value - inflation adjusted of course, and probably necessitating northern properties (won't crash like southern property) - surely job done in financial terms. Of course the additional work required is an issue, but this could be mostly mitigated I think by using agents, etc, so long as profits were still sufficient to meet those extra costs. Needs more thought in terms of factoring in maintenance costs for example, and also the risk of government future punative taxes. But I wonder - is anyone thinking in similar way?

We actually have another paid for house,its my partners.I have 3 children and i didnt want her in a bad position if i pegged first.Best solution was keep her house.We rent the rooms out under the rent a room scheme,2 tenants,so tax free,she has a bedroom there but of course to be within the lodger rules.We could make slightly more renting properly,but this way if she gets a crap tenant i can sling them out without any comeback at all.Its only happened twice.First was just an arse with her,so a couple of my mates helped him pack,another younger moved his brother and mate into the room as well pretty much.I gave him a few chances,but ignored so i removed him myself.I have been tempted a few times to buy more property up here in the past.I think many areas will do well.I thought of getting a one in Wolsingham in Weardale near me as a holiday let.My partner also has family in Brid and Scabbie and there is a good chance id buy something there later for our use,and maybe rent out small scale enough to cover running costs,so maybe rent 8 weeks a year.It would be a cash buy.

I think the best bond proxie but inflation hedged might be woodlands,or farmland.Iv been looking into that as well.Iv always fancied a field,but its not the easy to find small lots local.Woodlands are easier.

[JMD]

18 hours ago, Cattle Prod said:

Excellent (in my amateur opinion) piece on dollar liquidity here, by Lyn Alden Schwarzter, a lady worth listening to in my view:

https://seekingalpha.com/article/4353843-dollar-liquidity-2-catalysts?utm_medium=email&utm_source=seeking_alpha&mail_subject=lyn-alden-schwartzer-dollar-liquidity-2-catalysts&utm_campaign=rta-author-article&utm_content=link-0

I agree (I subscribe to her free newsletter, link below), I think Lyn Alden deserves to be better known. Does the macro and also stock picks!

So many finance commentator people hedge their bets, she does not do this. A very smart person, technical but also has the common touch (which is btw why I can understand and follow her; can you tell i'm a fan!).  

https://www.lynalden.com/may-2020-newsletter/

 

[JMD]

17 hours ago, Harley said:

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.

Harley, what type of land are you thinking? i.e. does it need to be (income producing) farmland which is so often spoken about? Or could it be any piece of land that has potential 'future value', for say development. Or perhaps just a cheap(?) piece of land purchased as a physical asset? All these different land options (and other options I haven't even thought of) come with different price tags, so are they/might they all be good 'land assets to hold', or will only agricultural land do? ...hmm, I guess this is a long way round of asking what your strategy for holding land is!

[Bobthebuilder]

As all you posters probably know, woodland can be free from inheritance tax

[JMD]

14 hours ago, sancho panza said:

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

I think the state will get larger. Question is how much larger, and I fear what this means for us in terms of policies. Could be for example continued lending and loans to companies in return for part ownership, eventually leading to nationalisation. For individuals, maybe they will put legal charges on residential property for those who cant pay for services (council tax, health care). Government balance sheets have to look sane even if they are not, and we must notlook too much like we are 'going Japanese'. But I think all this will be easily sold to the voter by putting all these 'collected' assets into a sovereign wealth fund of some description. What i'm concerned about is this 'constructed setup' might be a way for governments to kick the can further into the distance, and more importantly for us PM's won't perform as we hope and expect?

...I once would have thought this fantasy, but the last few months and the age of the 'new normal', along with the clapping crowds, has taught me to start expecting the unexpected.  

[Sugarlips]

Wall Street Journal: If Inflation Is Coming The Market Isn’t Ready

 

https://www.wsj.com/articles/if-inflation-is-coming-the-market-isnt-ready-11592305397?redirect=amp#click=https://t.co/GCUHeE7SjE

[TheCountOfNowhere]

26 minutes ago, Sugarlips said:

Wall Street Journal: If Inflation Is Coming The Market Isn’t Ready

 

https://www.wsj.com/articles/if-inflation-is-coming-the-market-isnt-ready-11592305397?redirect=amp#click=https://t.co/GCUHeE7SjE

Me: If Inflation Is Coming The Bankers are going to be swinging from lamposts.

 

No one's ready ( apart from Durham born )

[JMD]

5 hours ago, Cattle Prod said:

Kuwait and Saudi have low extraction cost, but you can't invest there. Some of Russia is low cost, some expensive (where they have invited Westerm Majors in like Sakahlin Island). There are major fields in the generally high cost North Sea that have lifting costs of $8 a barrel. It's not really country specific. My suggestion is to just buy what you think are the best large companies, and trust them to deliver the best projects.

And whatever is being discussed on the BBC is probably serving an agenda!

Thanks, I have only really bought the majors as per this thread. But I was also thinking about Middle-East oil and its future customers/markets, though I guess they will continue selling to the rapacious India/China whatever the reality of the economics. Perhaps I was secretly hoping Saudi might struggle with the new green future agenda, but think i'm very wrong in thinking that might happen.  

[Harley]

2 hours ago, JMD said:

Harley, what type of land are you thinking?

Forestry for me log burner!  Nothing speculative or too hard to maintain for little gain.  Some of the stuff out there seems to be for gullible townies.  The countryside is a business for those in it.

PS:  Land ain't cheap to maintain so has to have some carry, although agricultural rental is not great.  I had a bit fenced and gated once and where I lived that involved some hefty plant.  Then grass and hedge cutting, etc.  Has to be used.

[Harley]

1 hour ago, JMD said:

.I once would have thought this fantasy, but the last few months and the age of the 'new normal', along with the clapping crowds, has taught me to start expecting the unexpected.

Spot on!  Apparently, nothing is off the table.

[Harley]

1 hour ago, Bobthebuilder said:

As all you posters probably know, woodland can be free from inheritance tax

And CGT rollover relief?