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


spunko

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12 hours ago, JMD said:

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?

Gotta be boring, very boring, and mainstream atm!  Maybe when I'm done I might start a sex and sizzle portfolio!

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4 hours ago, DurhamBorn said:

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.

Thanks DB, its very much all food for thought for me. The 'problem' i'll have is that I will probably have a large cash sum sitting doing nothing, so to speak. I'm not yet fully invested in shares and PM's, but recent months has made me question how much exposure I want to the markets (i'm currently revaluating my risk tolerance), and now i'm actually buying more PM's/commodities than I initially planned. But even so I will probably need to find a 'home' for the cash that's 'left over'.

I know it kinda goes against the thread to be contemplating property, especially if with debt, but I shall keep pondering property. Also fully aware (as per your comments above) it is very often the tenant that's the spanner in the works.      

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2 hours ago, TheCountOfNowhere said:

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

No one's ready ( apart from Durham born )

Count, (apologies) I can't now find the actual story link (but especially if you believe in the cycle of history theory) you might be interested in hearing that there was an English banker convicted of financial fraud back in the 1910's, I think it was around that date. And his punishment was death by hanging (im not joking btw)... how times have changed!

Contrast with today's justice system where US police departments are being 'de-funded' - now that is an idea with massive-fail written all over it. But apparently not(!), and where this scheme has been recently trialled, it is being trumpeted on tv news outlets as a success story... I understand the theory is that 'high-fiving', smiling, community policing schemes eventually shame violent drug gangs into submission?!

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3 hours ago, JMD said:

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/

 

Thanks for posting this as I agree she explains things simply.  I read her explanation of the macroeconomics since the depression of the 30s which someone posted (you?) on this thread a few pages back and it made a lot of sense. It tallied with DBs views too.

I've signed up for her newsletter.

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1 hour ago, Harley said:

Gotta be boring, very boring, and mainstream atm!  Maybe when I'm done I might start a sex and sizzle portfolio!

I understand what you say, perhaps add potential stocks to your yet to sizzle crypto! It's just that I consider the 'lab grown meat' industry will become a massive future play. As big perhaps as hydrogen batteries.  

As an aside, and I'm not a vegetarian, but the story Jim Mellon/Money week podcast tells about dairy cow milk production was I thought shocking and cruel. And if accurate, surely worse than having battery hens, which are now banned.

But is the podcast accurate I wonder, does anyone here know? Harley, as you are now a rural dweller, with own wood store no less, would you know - you'd need to listen to the podcast first of course! (n.b. i'm not attempting to use nefarious tactics here!).

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40 minutes ago, Cattle Prod said:

Saudi will have a problem with their young restless population wanting to overthrow them before worrying about the green future!

Here's a contrarian move I'd like to see: Saudi buying a silver miner, to ensure supply for its future solar projects

Interesting CP, yes I agree that the Middle-East countries and their massive spending on so-called sustainable development, virtue-signalling energy projects and desert cities with indoor ski slopes(really!), is so much hot (and arid desert) air! But the media love telling their story, nothing at all to do with the lavish press junkets I suppose? I think your right about Saudi young becoming restless, and probably happening already in what passes for their own middle-classes, i.e. their functionary princes becoming more and more vocal for change and regularly getting house (hotel) arrest. If there were a definition of a dysfunctional country, Saudi would be it. 

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TheCountOfNowhere
54 minutes ago, JMD said:

Count, (apologies) I can't now find the actual story link (but especially if you believe in the cycle of history theory) you might be interested in hearing that there was an English banker convicted of financial fraud back in the 1910's, I think it was around that date. And his punishment was death by hanging (im not joking btw)... how times have changed!

Contrast with today's justice system where US police departments are being 'de-funded' - now that is an idea with massive-fail written all over it. But apparently not(!), and where this scheme has been recently trialled, it is being trumpeted on tv news outlets as a success story... I understand the theory is that 'high-fiving', smiling, community policing schemes eventually shame violent drug gangs into submission?!

I think there'll be a few death by hangings when the £ collapses

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8 minutes ago, JMD said:

Interesting CP, yes I agree that the Middle-East countries and their massive spending on so-called sustainable development, virtue-signalling energy projects and desert cities with indoor ski slopes(really!), is so much hot (and arid desert) air! But the media love telling their story, nothing at all to do with the lavish press junkets I suppose? I think your right about Saudi young becoming restless, and probably happening already in what passes for their own middle-classes, i.e. their functionary princes becoming more and more vocal for change and regularly getting house (hotel) arrest. If there were a definition of a dysfunctional country, Saudi would be it. 

Saudi oil was discovered by the Americans. Saudi slowly pushed the Americans out of ARAMCO and took sole ownership.

They then spent a great deal of the money showing off to the west as to how rich they are and lording it over their neighbours.

Now they're heading for trouble and expect the Americans, who they elbowed out to help them.

Once the west doesn't need them anymore they're screwed.

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5 minutes ago, TheCountOfNowhere said:

I think there'll be a few death by hangings when the £ collapses

Didn't happen in 2008 did it?  Pound properly went down the toilet then and banker fatalities were "minimal".

Your anger is clouding your judgement, the UK will be fine in 3-4 years (as every other recession) and life will continue as normal for the vast majority of people.  You can accept reality or continue to live in the matrix, wondering why things are not happening like you thought they would, and thinking its actually reality that is wrong.

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My search for a bond proxy for my Permanent Portfolio (PP) is partly over! 

I'm lucky to have some NS&I index (CPI) linked bonds.  I've moved them back and forth between the cash and bond parts of my portfolio as I've never been sure where to put them. For expediency, and some justification, I've just put them back into the bonds part of the portfolio.  They are the least worse bond proxy I can find, they will not suffer the possible capital loss (due to higher interest rates) bonds will, they are a partial inflation hedge, and their yield is like a linker.  The only real difference is their capital value is fixed but then this would also be true holding a bond to maturity.  But in specific PP terms, their fixed capital value means they will not act as a shock absorber in deflation so I guess that puts me in the inflation camp!  Still fancy some wood though!

So that leaves my PP:

10% Equity

20% Bonds

30% PMs

40% Cash

That's for my floor fund.  I also have an equity only upside fund so my overall equity allocation is higher than that 10% but I will still ramp the floor fund up to 25% equity as the floor fund is the PP, not the upside fund.

Now the fun bit - how to split that target 25% equity allocation in my floor fund.  Per this thread, sectors are key.  But IMO regional splits are important too.  So I'm going for a 60% sector and 40% regional split for that equity.  Specific shares for the sector and, yes heresy, low cost ETFs to cover off the regional split. 

I could just buy one of the Vanguard global ETFs and settle for their regional split or buy a series of regional ETFs and create my own split.  Tbd but a key determinant will be the US exposure in the global Vanguard ETF (i.e. if it is too high).

The sector specific shares have been chosen through a fundamental screen of the top 15 international stocks in each of the 21 sectors of interest to me.  The criteria were heavily focused on debt and cash flows but included dividends to give a more total return bias.

Implementation (already underway for a while now) will involve buying initial low value stakes and then technical analysis to choose ladder in points.

Anyways, something like that!

I feel better now!

PS:  My FTSE upside (income) fund has been a ballache given it's loss of value and deciding what to do next.  Taking a step back and looking at it all, the best thing is to do nothing.  The reasons I bought the shares still stand in the long term and what would I do better with the proceeds if I did crystallise the losses?  Any additions will however be more international and indeed any new funds may go into trading instead (i.e. a more aggressive form of upside fund).  Options based hedges are a priority though (through the trading account).

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Transistor Man
On 15/06/2020 at 08:41, 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

The design RR have come up with surprises me. 

It doesn’t look much like a “Small Modular Reactor” to me. 

It’s a brand new conventional PWR, shrunk a little to 440 MWe.

I thought they were going to go for something like: one of their submarine reactors in a shipping container. 

something a little like the Russian barge mobile power station, with 2 x 70 MWe reactors. 

That would have been a SMR.

if you can build a conventional 440 MWe PWR — running normal fuel,, then I’m sure you could do one of a 1000 MWe. Which would have done the UK just fine. They wouldn’t have needed EDF/ Areva/GE/Westinghouse/ China.

A new, UK designed and built conventional PWR would need a massive commitment from the government. It’d cost Billions to develop. 

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TheCountOfNowhere
2 hours ago, Majorpain said:

Your anger is clouding your judgement, the UK will be fine in 3-4 years

It's not just the recession that's the problem, the UK is falling apart, former rich colonial power is now crumbling.

 

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13 minutes ago, TheCountOfNowhere said:

It's not just the recession that's the problem, the UK is falling apart, former rich colonial power is now crumbling.

 

It is falling apart,like a lot of western countries,thats why we are entering a reflation cycle.The economy needs boosting.Liquidity flows first into the pipes,then the market allocates it,but this cycle it doesnt.The government does.The market then allocates it after the government has.Thats why velocity will start to move faster.

In a long dis-inflation the market allocates captial,and goods and services get cheaper and cheaper relative to income.In a reflation things get more expensive,but the economy heals.UK has a very good chance to be one of the best performing economies in the world during the cycle.

 

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3 hours ago, JMD said:

But is the podcast accurate I wonder, does anyone here know? Harley, as you are now a rural dweller, with own wood store no less, would you know - you'd need to listen to the podcast first of course! (n.b. i'm not attempting to use nefarious tactics here!).

I've seen plenty of programmes on Youtube, etc about factory farming in general and the mega dairy farms in particular.  Not at all nice and an increasingly long way from what we think we're getting.  As with our investing strategy, best to get as close to the source as possible!  I would like chickens and goats but my partner is not keen and a couple of people I know ditched their goats. 

We have a local butchers who sources from locals.  We once made the mistake of asking where some chicken came from - first question was where we lived, followed by directions!  That said, there are a growing number of large not so nice egg plants popping up.  We source eggs locally with proper thick shells like when I was a lad.  The other butcher has its own abattoir so local meat, especially if you bring your own!

That said we eat little meat, saving up for the all-round better stuff now and then.  My dad was brought up on a farm.  Not a great meat eater either, especially turkeys at Christmas (ate duck instead).  Knew too much (although our near neighbour raises them well for Christmas)!  For our sins, we quite like Quorn.  Also, our new allotment is making vegetables even more centre stage given the taste.  Most people could try and grow a few tomatoes to see what I mean.

Jim seems to love the more exotic trend investing stuff.  I'll certainly listen.

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TheCountOfNowhere
47 minutes ago, DurhamBorn said:

It is falling apart,like a lot of western countries,

 

100% agree.  The Western democracies are akin to the end of the roman empire.  The banksters fiddle while we burn.

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Fully Detached
58 minutes ago, Harley said:

I've seen plenty of programmes on Youtube, etc about factory farming in general and the mega dairy farms in particular.  Not at all nice and an increasingly long way from what we think we're getting.  As with our investing strategy, best to get as close to the source as possible!  I would like chickens and goats but my partner is not keen and a couple of people I know ditched their goats. 

Chickens are ace and easy to keep. Do not buy goats. Goats are brilliant, but bastards. You will regret it.

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4 hours ago, Harley said:

My search for a bond proxy is partly over! 

I'm lucky to have some NS&I index (CPI) linked bonds.  I've moved them back and forth between the cash and bond parts of my portfolio as I've never been sure where to put them. For expediency, and some justification, I've just put them back into the bonds part of the portfolio.  They are the least worse bond proxy I can find, they will not suffer the possible capital loss (due to higher interest rates) bonds will, they are a partial inflation hedge, and their yield is like a linker.  The only real difference is their capital value is fixed but then this would also be true holding a bond to maturity.  But in specific PP terms, their fixed capital value means they will not act as a shock absorber in deflation so I guess that puts me in the inflation camp!  Still fancy some wood though!

So that leaves my PP:

10% Equity

20% Bonds

30% PMs

40% Cash

That's for my floor fund.  I also have an equity only upside fund so my overall equity allocation is higher than that 10% but I will still ramp the floor fund up to 25% equity as the floor fund is the PP, not the upside fund.

Now the fun bit - how to split that target 25% equity allocation in my floor fund.  per this thread, sectors are key.  But IMO regional splits are important too.  So I'm going for a 60% sector and 40% regional split for that equity.  Specific shares for the sector and, yes heresy, low cost ETFs to cover off the regional split. 

I could just buy one of the Vanguard global ETFs and settle for their regional split or buy a series of regional ETFs and create my own split.  Tbd but a key determinant will be the US exposure in the global Vanguard ETF (i.e. if it is too high).

The sectors specific shares have been chosen through a fundamental screen of the top 15 international stocks in each of the 21 sectors of interest to me.  The criteria were heavily focused on debt and cash flows but included dividends to give a more total return bias.

Implementation (already underway for a while now) will involve buying initial low value stakes and then technical analysis to choose ladder in points.

Anyways, something like that!

Perhaps I am just showing my own ignorance here @Harley but all this seems overly complicated, and I wonder at the end of the day whether it will really make that much of a difference over a) leaving it to an `expert` in a fund/ETF, or b) you making financial `mistakes` by trying too hard rather than just buying and waiting.

That said, if you are also doing it for the fun/challenge that's not a bad thing, and has worth in itself...assuming of course that you win! :-)

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29 minutes ago, MrXxxx said:

Perhaps I am just showing my own ignorance here @Harley but all this seems overly complicated, and I wonder at the end of the day whether it will really make that much of a difference over a) leaving it to an `expert` in a fund/ETF, or b) you making financial `mistakes` by trying too hard rather than just buying and waiting.

That said, if you are also doing it for the fun/challenge that's not a bad thing, and has worth in itself...assuming of course that you win! :-)

Not really showing any ignorance IMO. All sorts of strategies can win out. Personally I'd not be involved if it had to be rigid, mechanically designed, formulaic processes and to make decisions based on qualified data or tested models. But others thrive on that and are very successful with it. I've done okay thus far (I think) in life, school, business, investments etc. following a few simple principles and the rest trusting my gut. I like all the posts here mind including Harley's very solid contributions as lots to learn. 

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2 hours ago, Loki said:

Is it correct that the Fed announced yield curve control today?

I thought they've been already doing it for a while..?

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1 minute ago, BearyBear said:

I thought they've been already doing it for a while..?

I read it but I wasn't sure if the writer was being sarcastic

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15 minutes ago, BearyBear said:

I thought they've been already doing it for a while..?

They have and will until the they can monetize enough for the government to fuel an inflationary recovery cycle.Dollar isnt far enough away from 100 so the Fed will be still fully engaged,at 100 systemic risk is on the table,they will print and print until under 90.Short end has liquidity so they will be flattening the long end so the treasury can get the T-bills away at very low rates.I think page one of the thread mentioned they would do this as the government spend direct into the economy.Fed might be getting close to halfway on the printing,unless derivatives start to unwind,then likely only a quarter through.Silver will run higher again very soon with the Fed working that far down the curve.

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My contact at shell informed me today that in his business unit it is anybody who wants voluntary can take it. Unsurprisingly the business is using this backdrop to try to axe/coax out a lot of international people the world over with a plan to re-hire in the next upswing predominantly within their Krakow, Poland base which will become more of a key strategic operational hub. He says this is projected to save up to 80,000 USD per employee at the level these jobs are at when factoring in a significant number of staff still on final salary pensions + other perks etc. And the talent in Poland is supposedly very high by international standards, multi-lingual, hard-working etc...sharp contrast to the UK. 


Nynas have staved off the wolfs at the door by (for now) getting out of US sanctions by their parent company PDVSA  (Venezuelan state owned) reducing their stake in the business to a level the Americans are happy with. That was killing them. But they still remain in administration so Shell monitoring this.

Total's Lindsey refinery is in chaos supposedly and Shell picking up more and more UK market share. How much of this is true has to be taken with a pinch of salt given who I am talking to but I do know we've had no supply from them since March so rings true on a personal level.


He also advised the whole pricing system the industry follows rigidly has been turned on its head as sour grade crudes have been trading at a premium to lighter grade crudes due to the Saudis fucking about and the fact that bitumen is the only thing selling (road projects had a good go of it during lockdown). Light crudes for kero, diesel, petrol not so in vogue for obvious reasons. This price reversal creates a lot of problems for the majors. Little bit of background here:
https://www.argusmedia.com/en/news/2112636-light-crudes-back-at-premiums-to-medium-grades

 

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sancho panza
10 hours ago, JMD said:

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/

 

She's very good.A clear appreciation of the importance of stock market precents.

 

 

'If we look back over the past three recessions, we actually see similar market behavior. It’s just that the magnitude and time compression of this job loss was so unprecedented.

In the early 1990’s recession, the market bottomed slightly before initial jobless claims peaked. In the early 2000’s recession, which was really more of an equity bubble with a very long stock market decline, the market bottomed a bit after initial jobless claims peaked. In the 2008/2009 recession, the market bottomed slightly before initial claims peaked.

We don’t know if the March 23 stock market low was “the bottom” or just “a bottom”. But if it happens to have been “the bottom”, it occurred right before initial jobless claims peaked, just like in 2 of the past 3 recessions:

In other words, the market doesn’t historically tend to bottom at the lowest point in total job losses and rebound when jobs start to come back. Instead, it tends to bottom closer to the highest rate-of-change period of job losses, which comes earlier.

Record S&P 500 Concentration

If we dig a little deeper, we can see that most of the stock market actually still does look like the real economy: down big and with little improvement yet.

The top five stocks in the S&P 500 (Microsoft, Apple, Amazon, Alphabet, and Facebook) now make up over 20% of the index, which surpasses the amount of concentration that occurred even at the height of the Dotcom bubble:

S&P 500 Concentration

Source: Goldman Sachs, via Business Insider

We have to look back to the 1980’s and 1970’s to find more concentration in the U.S. stock market than we have today. Back then, AT&T and IBM dominated the index, and the overall market was much smaller, so it was easier for companies to dominate it. AT&T was broken up, and IBM went on to gradually diminish in relative importance.

The Nasdaq 100 (QQQ) is up the most, as the top five stocks account for over 40% of that index.

So, this has not really been a case of a performance differential between U.S. stocks vs international stocks broadly. It has been a case of the top five U.S. stocks outperforming just about everything else, including the rest of the American stock market.'

14 hours 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.
 

As CP says it's the princicpale that's interesting.4.5 years souds extreme  and an outlier but maybe should be adjusted for the deficit and the amount of public sector jobs.

Reef you point,you maybe need to add some incidentals such as the fuel needed to make the digger.I suepct Berman used a broader calcualtion as CP has sugested eg population growth/fuel use or some such rather than a sum of parts which would be tough to assess.

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