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


spunko

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6 hours ago, JMD said:

My question is are there other strategies (apart from PM's, land, crypto) that people here are thinking of doing, perhaps they are currently only researching an idea, or maybe a friend has mentioned an idea that at first sounded unworkabe but might like to share here for analysis or comment?       

Invest in things now to lower my living costs.  Something to do with companies, trusts, and/or some form of structured annuity type arrangement so just taxed on the income.  Leave!  Not sure whether to take 25% out of a pension is a good idea or not.  It might be sheltered but then harder to access.

PS:  I'm assuming the threshold will start at quite a low level or soon reach it and those with the real wealth (maybe including the pro ones) are well structured to avoid it bar a virtue amount. 

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12 minutes ago, Harley said:

Invest in things now to lower my living costs.  Something to do with companies, trusts, and/or some form of structured annuity type arrangement so just taxed on the income.  Leave!

Lowering living costs is nearly always forgot,but in an inflation really a biggy.I dont think i can do much more,im tooled up,house new windows central heating etc,good cooking skills,my partner is even making masks now on her sewing machine,bought on Facebook marketplace for £30 last year.I could stock up heavily on long life products and things like toiletries etc,but the savings would only be a few hundred.

 

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10 minutes ago, DurhamBorn said:

Lowering living costs is nearly always forgot,but in an inflation really a biggy.I dont think i can do much more,im tooled up,house new windows central heating etc,good cooking skills,my partner is even making masks now on her sewing machine,bought on Facebook marketplace for £30 last year.I could stock up heavily on long life products and things like toiletries etc,but the savings would only be a few hundred.

 

Don't you still have the odd container?  Or buy one!  Fill it up with stuff unlikely to be taxed as wealth (baked beans?) and avoid the wealth tax, plus sell at a profit come inflation.  I know a farmer who rents out a load of containers.  Very good money.

PS:  Probably better stuff than beans though.

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Personally, I don't see why people would think pensions and ISAs would avoid a wealth tax just because they have some forms of tax advantages at present.  A wealth tax is a completely new dimension of tax.  The structure/shelter of the asset is technically irrelevant.  We need to look at other countries for an insight into such a wealth tax. 

I doubt CGT and IHT, plus a few other changes, will be enough.  They may however structure things to encourage spending to pump their favourite consumption led growth instead, at least in the first instance.  Depends whether they really believe that BS. 

They are currently facing a liquidity/solvency issue rather than a theoretical economic one.  Printy Printy is there but somewhat limited, unless Sterling is the chosen relief valve, again!  Maybe they can get by with a little bit of everything.

PS:  We have been creeping to this wealth tax point for a while.  Asset, income, etc traceability has increased significantly under the guise of anti tupperist laws, international agreements on the exchange of information, and technical advances (e.g. standardised bank account data and APIs to enable data mining under the guise of it being beneficial to you).  The frog has been boiled!

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6 hours ago, dgul said:

That's not true.

Some things do better than cash.  Some things don't. 

Really you want to get stuff at the 'worthless' stage and wait until they're 'worth something.

I did this with ancient computers 15 years ago -- they were all going into skips, or could be picked up for peanuts at car boot sales.  My 'investment' is now worth 10's of thousands of £s.  

The question is (should be) -- what's next?  It definitely isn't 'virtually anything'.  Furthermore, it almost certainly isn't 'anything that's considered collectable' (as you're then playing with others who bid up prices).

[I'm not sure about the 'worthless' stage -- but what it does mean is that there's not so much risk of loss 'by getting it wrong', even if there is a cost involved in storage.  Classic cars might be worth something, but if you get the timing wrong you might be £10k down and you've got the hassle of storage.]

[My guess for something for 'not quite right now' -- the original purpose-built bitcoin mining rigs.  The early ones are now at the 'worthless' stage.  Give it 15 years and they'll be wanted for museums]

Being selective is correct and fashions change (eg many antiques are cheaper today than 30 years ago). Your bang on about computer tech and in particular if Bitcoin becomes a world currency your mining rigs will be worth lots. I wonder if there are other similar potential disruptive next cycle 'consumer items' that may themselves become future collectables? This is I think an interesting topic in itself.                                                                                                         In terms of asset classes, art, classic cars, wine (alternatives to gold, land, crypto) have been mentioned. But are there other less known or newly emerging, assets/potential assets, that contributors here are aware of?                                              btw I actually think that a well thought strategy here will produce better returns than leaving all investments in ISA/pensions, because I believe that many investments will be hit by wealth taxes. How to quantify how effective is i guess impossible and depends on the individual but still think it is a useful way of reducing risk of damaging wealth taxes.

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28 minutes ago, JMD said:

Being selective is correct and fashions change (eg many antiques are cheaper today than 30 years ago). Your bang on about computer tech and in particular if Bitcoin becomes a world currency your mining rigs will be worth lots. I wonder if there are other similar potential disruptive next cycle 'consumer items' that may themselves become future collectables? This is I think an interesting topic in itself.                                                                                                         In terms of asset classes, art, classic cars, wine (alternatives to gold, land, crypto) have been mentioned. But are there other less known or newly emerging, assets/potential assets, that contributors here are aware of?                                              btw I actually think that a well thought strategy here will produce better returns than leaving all investments in ISA/pensions, because I believe that many investments will be hit by wealth taxes. How to quantify how effective is i guess impossible and depends on the individual but still think it is a useful way of reducing risk of damaging wealth taxes.

One thing that makes me cautious about 'collectables' for the future is that the 1950-2020 period was a boom in collectable values, but it also matched a period of growing easy credit and increasingly wealth available to middle classes who would, in previous generations, not had spare money for collectables.

I could see, with a slow return to feudalism, a much smaller pool of buyers for such stuff.  Add to that that you have to get generational interest right (who now would pay for a groucho marx collectable?).  It's pretty random, I think, unless you can buy in bulk and store cheap now across loads of stuff which the millenials will want back.  Think Harry Potter, etc - but not the standard tat, limited existence stuff.

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Castlevania
4 hours ago, Cattle Prod said:

Alternative strategies?

Greece has just introduced a 7% flat tax across all income for ten years for *pensioners who move their tax domicile there. Might not be an inflation hedge, but it'd sure be easier if your money wasn't being directly stolen as well as indirectly.

Macro theme: the race to the bottom is on for assets/income to tax  This is a step beyond what Portugal offers, this is tax haven stuff in an affordable country. Accesible for any office based contractor. I assume the Germans will go nuts.

*I haven't managed to find out if this is defined by age or independent income

I’m pretty sure you need to be retired. They don’t want people competing for jobs with the local population in a country that already has very high levels of unemployment. They want your tax income; and they want you to spend money in local shops and restaurants etc. In all honesty it’s not a bad idea but can’t see it being popular with other EU member states.

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13 hours ago, Castlevania said:

I do think part of the bubble in classic stuff is due to zero interest rates. Some of the video games that I own now sell for stupid prices. I really should sell a lot of them.

Regarding the video games I definitely think it depends on specifics.  For example a handheld donkey Kong game from the early 80s (70s?) would probably be worth keeping but things like the SNES and games seem pretty expensive and are a bit more bulky. Saying that Nintendo is a clear winner in collectibles so maybe anything by them may hold.

Wish I had the space over the years to keep, as I definitely thought that it could be worth something back when it wasn't (granted I don't know if I would have known exactly what would have risen I clearly remember thinking about taking some random no name consoles from abroad just because they were old).

I still think the risk is very low so like I say if I had the room would have collected like mad.... As long as your acquiring for not much or free I can't see much risk.

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Was part of a newsletter

 

Russell Napier was never one of them. The Scottish market strategist has for two decades – correctly – seen disinflation as the dominant theme for financial markets. That is why investors should listen to him when he now warns of rising inflation.

Politicians have gained control of money supply and they will not give up this instrument anymore», Napier says. In his view, we are at the beginning of a new era of financial repression, in which politicians will make sure that inflation rates remain consistently above government bond yields for years. This is the only way to reduce the crushing levels of debt, argues Napier.

In an in-depth conversation with The Market/NZZ he explains how investors can protect themselves and why central banks have lost their power.

Mr. Napier, for more than two decades, you have said that investors need to position themselves for disinflation and deflation. Now you warn that we are in a big shift towards inflation. Why, and why now?

It’s a shift in the way that money is created that has changed the game fundamentally. Most investors just look at the narrow money aggregates and central bank balance sheets. But if you look at broad money, you notice that it has been growing very slowly by historical standards for the past 30 or so years. There were many factors pushing down the rate of inflation over that time, China being the most important, but I do believe that the low level of broad money growth was one of the factors that led to low inflation.

And now this has changed?

Yes, fundamentally. We are currently in the worst recession since World War II, and yet we observe the fastest growth in broad money in at least three decades. In the US, M2, the broadest aggregate available, is growing at more than 23%. You’d have to go back to at least the Civil War to find levels like that. In the Eurozone, M3 is currently growing at 8,9%. It will only be a matter of months before the previous peak of 11.5% which was reached in 2007 will be reached. So I’m not making a forecast, I just observe the data.

Why is this relevant?

This is the big question: Does the growth of broad money matter? Investors don’t think so, as breakeven inflation rates on inflation-linked bonds are at rock bottom. So clearly the market does not believe that this broad money growth matters. The market probably thinks this is just a short-term aberration due to the Covid-19 shock. But I do believe it matters. The key point is the realization who is responsible for this money creation.

In what way?

This broad money growth is created by governments intervening in the commercial banking system. Governments tell commercial banks to grant loans to companies, and they guarantee these loans to the banks. This is money creation in a way that is completely circumventing central banks. So I make two key calls: One, with broad money growth that high, we will get inflation. And more importantly, the control of money supply has moved from central bankers to politicians. Politicians have different goals and incentives than central bankers. They need inflation to get rid of high debt levels. They now have the mechanism to create it, so they will create it.

In the aftermath of the Global Financial Crisis, central banks started their quantitative easing policies. They tried to create inflation, but did not succeed.

QE was a fiasco. All that central banks have achieved over the past ten years is creating a lot of non- bank debt. Their actions kept interest rates low, which inflated asset prices and allowed companies to borrow cheaply through the issuance of bonds. So not only did central banks fail to create money, but they created a lot of debt outside the banking system. This led to the worst of two worlds: No growth in broad money, low nominal GDP growth and high growth in debt. Most money in the world is not created by central banks, but by commercial banks. In the past ten years, central banks never succeeded in triggering commercial banks to create credit and therefore to create money.

If central banks did not succeed in pushing up nominal GDP growth, why will governments succeed?

Governments create broad money through the banking system. By exercising control over the commercial banking system, they can get money into the parts of the economy where central banks can’t get into. Banks are now under the control of the government. Politicians give credit guarantees, so of course the banks will freely give credit. They are now handing out the loans they did not give in the past ten years. This is the start.

What makes you think that this is not just a one-off extraordinary measure to fight the economic effects of the pandemic?

Politicians will realize that they have a very powerful tool in their hands. We saw a very nice example two weeks ago: The Spanish government increased their €100bn bank guarantee program to €150bn. Just like that. So there will be mission creep. There will be another one and another one, for example to finance all sorts of green projects. Also, these loans have a very long duration. The credit pulse is in the system, a pulse of money that doesn’t come back for years. And then there will be a new one, and another one. Companies won’t have any incentive to pay back these cheap loans prematurely.

So basically what you’re saying is that central banks in the past ten years never succeeded in getting commercial banks to lend. This is why governments are taking over, and they won’t let go of that tool anymore?

Exactly. Don’t forget: These are politicians. We know what mess most of the global economy is in today. Debt to GDP levels in most of the industrialized world are way too high, even before the effects of Covid-19. We know debt will have to go down. For a politician, inflation is the cheapest way out of this mess. They have found a way to gain control of the money supply and to create inflation. Remember, a credit guarantee is not fiscal spending, it’s not on the balance sheet of the state, as it’s only a contingent liability. So if you are an elected politician, you have found a cheap way of funding an economic recovery and then green projects. Politically, this is incredibly powerful.

A gift that will keep on giving?

Yes. Treason May made a famous speech a few years ago where she said there is no magic money tree. Well, they just found it. As an economic historian and investor, I absolutely know that this is a long-term disaster. But for a politician, this is the magic money tree...

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38 minutes ago, DoINeedOne said:

Was part of a newsletter........

https://themarket.ch/interview/russell-napier-central-banks-have-become-irrelevant-ld.2323

"As an investor, how do I protect myself?  European inflation-linked bonds are pretty attractive now, because they are pricing in such low levels of inflation. Gold is obviously a go-to asset for the long term. In the next couple of years, equities will probably do well. A bit more inflation and more nominal growth is a good environment for equities. I particularly like Japanese equities. Obviously you wouldn’t buy government bonds under any condition".

Does he mean Japanese government or all government bonds?

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Gold and silver coins are highly collectable ;)

11 hours ago, AQUAMAN said:

are we already out of the deflation cycle? because it seems like absolutely nothing happened and everything is ATH again

Melt up?

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10 hours ago, wherebee said:

One thing that makes me cautious about 'collectables' for the future is that the 1950-2020 period was a boom in collectable values, but it also matched a period of growing easy credit and increasingly wealth available to middle classes who would, in previous generations, not had spare money for collectables.

I could see, with a slow return to feudalism, a much smaller pool of buyers for such stuff.  Add to that that you have to get generational interest right (who now would pay for a groucho marx collectable?).  It's pretty random, I think, unless you can buy in bulk and store cheap now across loads of stuff which the millenials will want back.  Think Harry Potter, etc - but not the standard tat, limited existence stuff.

I agree and you make good points. Fashions do change, and most will have reduced discretionary spending in future, and (hopefully) a move away from todays kidults - all these things will conspire to limit the collectables market.

As you say the key is identifying future generational interests and switch in social values, its not easy but in many ways that is what macro (investment) trends is about. And we do have generational cycles happening; so why not perhaps previous icons like Groucho Marx (with his painted-on moustache; its amazing how many miss this until its pointed out!) becoming popular again, as people reject the modern-day vacuous celeb? I suppose that my point that 'pop'ular psychology will be different in 20 years time is an easy remark to make, but making money from those changes is i accept a far bigger challenge.

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The Idiocrat
6 hours ago, Castlevania said:

I’m pretty sure you need to be retired. They don’t want people competing for jobs with the local population in a country that already has very high levels of unemployment. They want your tax income; and they want you to spend money in local shops and restaurants etc. In all honesty it’s not a bad idea but can’t see it being popular with other EU member states.

Yes, I think you need to prove a pension income and total independent income (ie. not having to work for it) of €2000 per month (household rather than individual I think). So it's possible you don't technically have to be retired, but are drawing a pension.

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Bit of chat on this thread previously about transferring workplace pensions to a SIPP.  I'm currently in the process of doing this with an old pension which, tbh, I'd completely forgotten about.

I was paying in from 2006-2010 and hadn't touched it at all. Since 2010, the fund managers have managed to turn £23k of total contributions into £45k. Which beats inflation, but doesn't exactly blow me away, given that I could have stuck it all in gold and done better.

The more worrying thing is that a quarter of this pension is invested in a currently-suspended property fund (this one: https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/a/asi-global-real-estate-income)

I hope this lesson doesn't cost me too much when it's all worked out, but it's a reminder to everyone with old pensions they've not touched in years to get their eyeballs on the investments made on your behalf.

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The Idiocrat

Anyone know why oilies have taken a hit today? I'm overweight in them but still tempted to buy more. Can't believe they've stayed so low. 

Good to see silver motoring! I don't think I've ever had shares double as quick as a couple of the miners I bought in from @DurhamBorn's list he did - thank you my friend! :Beer:

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Castlevania
1 hour ago, The Idiocrat said:

Anyone know why oilies have taken a hit today? I'm overweight in them but still tempted to buy more. Can't believe they've stayed so low. 

Good to see silver motoring! I don't think I've ever had shares double as quick as a couple of the miners I bought in from @DurhamBorn's list he did - thank you my friend! :Beer:

Out of favour. I see it as an opportunity to buy more.

Chevron’s buying up Noble which was greeted with a rather muted reaction.

https://www.google.co.uk/amp/s/www.bloomberg.com/amp/news/articles/2020-07-20/chevron-agrees-to-buy-noble-energy-for-5-billion

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I've previously stated my own worries (several times) here about our politicians over-reaction to the Corona virus. Just saw this. Its an interesting conversation, though Hugh Hendry is his usual chaotic self (but outdoing himself this time i think; from investment manager to sweaty vested minger!.. sorry Hugh!!).  

But is this interview as explosive as i think it is? Richard Werner is a respected commentator - but toward the end of interview they both refer to the power-grab that's happened, in regard to the government response measures to the pandemic. Also, though it wasn't the main topic of conversation but Werner for example views commercial (retail also?) banks as now pretty much imasculated, and that central bank/government crypto is heading our way - though perhaps just wishful thinking on his part? (he has always been a big protagonist of small local banks).

I would be interested in others comments after viewing this. 

 

 

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2 hours ago, Cattle Prod said:

I think sluggish demand recovery is acting like a drag anchor. Meanwhile, supply is balanced, with a big draw from US stockpiles last week as I thought thered be. And rig counts down again (though bottoming) ensuring natural decline chews through the shale.

I think it's no accident that Noble Energy key asset outside the US are the giant Eastern Med gas discoveries. Chevron is a huge LNG operator, running most of Australia's exports.

If you look at a map of Australias oil and gas it's pretty huge, and largely blocked from exploitation by leftie state gvts.  Cultural stuff, innit, digging holes in the ground or under the sea.

Good thing is that as fossil fuels become more and more expensive, those untapped huge assets become better and better for Australia.

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