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

[DurhamBorn]

Thesis of this thread starting to roll.

https://www.bbc.co.uk/news/business-53517251

 

The government says the acquisition will give it a re-purposed vaccine production facility on UK soil and will lay down a marker that it intends to make the UK more self-sufficient in critical medicine manufacturing.

It will also demonstrate that it can and will be an important cornerstone investor in industries that will help the UK become a high skilled, high-tech and knowledge-based economy.

When you are spending hundreds of billions of taxpayers' money on combating the economic consequences of Covid-19, this is small beer - a rounding error on the £385bn the government will borrow and spend in 2020.

Peter George, the Chairman of Benchmark UK, from whom the government bought the facility, saluted the government on completing the purchase of his business "at a pace never seen before".

[jamtomorrow]

Fed deciding 1/2" pipes aren't doing it, got to be 3/4"?

https://www.federalreserve.gov/newsevents/pressreleases/monetary20200723a.htm

The Federal Reserve Board on Thursday broadened the set of firms eligible to transact with and provide services in three emergency lending facilities. Encouraging a broader range of agents for the Term Asset-Backed Securities Loan Facility (TALF) and counterparties for the Commercial Paper Funding Facility (CPFF) and Secondary Market Corporate Credit Facility (SMCCF) will increase the Federal Reserve's operational capacity and insight into the respective markets

[Craig]

Hmmm... 

 

[Don Coglione]

11 minutes ago, Craig said:

Hmmm... 

 

Only 200% to go!

[AWW]

Ha, sold mine a few weeks ago as I just couldn't see it recovering.

[CVG]

BUZZ-Centrica set for best day in over 2 decades on North American unit sale

[leonardratso]

nice, just sold a tranch i bought @ 34pence, thats more for oil next buy up.

[JMD]

6 hours ago, Viceroy said:

I found a discussion on leveraged ETFs and a paper that concluded x2 leverage is the optimum level of leverage for the best returns over the long term.
http://ddnum.com/articles/leveragedETFs.php

As an experiment I put small amounts in July 2019 into NUGT (x2 Gold) and AGQ (x2 Silver) as a set and forget.  After the crazy price action in March this year, today NUGT is down 40%, but AGQ is up 50% 

Viceroy, its an interesting discussion. But leveraged etfs are meant only to be held during bullish rising markets, else the downslide (market corrections) more than wipes out the gains. I think the paper you refer to sort of says this... the maths is interesting, but the actual real world limitations of the financial product wrapper (expenses, etc) nullifies the gains.

Coincidentally, i also did an experiment approx. June-Aug 2019. My LPLA ETF (2x daily long platinum) increased approx. 1%, whereas my SPLT ('vanilla' platinum ETF) increased approx. 10%.

I am no expert and this performance disparity confused me. So i asked this blog to comment and was told that leveraged etfs are for holding during market upswings, and as nothing goes up in a straight line, holding for the long term 'wouldn't work as expected' (my words). i.e. these financial instruments are not the opposite of taking a short position, which is sort of what i thought they were.

As i say i am no expert. Please dyor, and happy to be corrected if i've got this wrong/or have overstated things.

[JMD]

15 hours ago, leonardratso said:

I was just rewatching some old stuff, but its still pretty relevant i suppose, if you have some time to kill these guys arent too dry at telling you what you should really know already anyway;

 

thanks Leonardratso for posting. But i didn't know this stuff!! But accept that i really should have known. In fact it has sort of alarmed me (not 'triggered me'! i hasten to add).

...Makes me think how 'dumb' our 'lefty-schooling system' truly is in not teaching children any of this, instead they merely bang on about how APR's, etc, are not taught properly or understood. Then again teaching concepts like 'wealth destruction' would be a truly radical step.

What is it the American educationalist John Taylor Gatto says about their public schooling system: 'Weapons of Mass Instruction'.

 

[leonardratso]

cool. after that watch the free avengement film, i quite like adkins, usually plays a bit part bad guy with no or very few lines, think its quite usual for brits to get shitty stuff to do in crappy american films to begin with, bit formulaic i suppose, but hey whatever floats your boat, i should be working from home but instead ive been binge watching really crappy old action movies from the 80's onwards, the worst is probably universal soldier series, having said that steven seagal will do anything for money, basically anything. 

Sorry to go on, but got to get away from the market and the BS at some point, let it get on with it, whatever will be, will be.

Check out their other videos, their courses are very expensive so i wont be buying those, but at least they arent bullshitting you all the way i suppose, so thats one good thing.

Heres another to be going on with;

 

[sancho panza]

# credit deflation cometh.

https://www.icis.com/chemicals-and-the-economy/2020/07/bankruptcies-now-the-key-risk-as-hopes-for-v-shaped-recovery-disappear/

 

Governments, financial markets and central banks all originally assumed the Covid-19 pandemic would be over in a few days or weeks. But it is now clear they were wrong. And unfortunately, there is little sign of a Plan B emerging.

The idea was that consumers would have plenty of money in their pockets after the lockdowns, due to all the furlough payments. So by now, it was assumed, they would be coming out to ‘spend, spend, spend’:

• Businesses would have lost income for a while, but it would be quickly made-up over the summer
• Very quickly, everything would be back to ‘business as usual’, with pent-up demand leading to a major boom
• This would confirm policymakers’ view that the pandemic was simply a problem of cash-flow and liquidity
• And until recently, central banks were suggesting their stimulus was a “job well done” as the Bank of England claimed

“The economy is on track for a sharp V-shaped recovery thanks to a faster-than-expected rebound”.

Unfortunately, this was wishful thinking.

SENTIMENT IS NOW BEING REPLACED BY FUNDAMENTALS

Of course, the $tns of free cash on offer from central banks did lead to a sharp recovery in oil and financial markets.  And millions of frustrated sports bettors have also opened trading accounts with Robin Hood and other platforms:

• In the short-term, as Ben Graham noted, financial markets are a voting machine
• So if people are given free money, they will naturally run to bet on their favourite stock(s)
• But in the longer-term, fundamentals always win out, as the weighing machine takes over
• Markets are now starting to recognise the main risk is that companies may go bust due to lack of demand

Until very recently, of course, the “voting” machine has been pushing markets higher.

But now the risks are rising, as we saw in 2000 with the end of the dotc0m bubble, and in 2008 at the end of the subprime bubble.

IN A BALANCE SHEET RECESSION, COMPANIES GO BUST DUE TO LACK OF DEMAND

The issue is simply that we are now in a balance sheet recession. Consumers are worried they may not have a job tomorrow. So they are saving more and paying down debt when they can.

Whole industries are also being restructured almost in real time – travel, leisure (including airlines/transport/hotels/restaurants); commercial and retail property (including the retail sector and offices); energy (including oil/gas/petrochemicals.

None of these seem likely to go back to where they were. And at the same time, new business models based on sustainability and affordability are starting to emerge.

So what can we expect now the mood has changed and financial/oil markets have begun to fall again?

Most likely, attention will turn back to the IMF, and their forecast of a decade-long depression scenario where deflation becomes embedded in the economy.  This would tie in, of course, with the demographics. It is still widely overlooked that, as the chart confirms, over 50% of the 750m global population increase over the next decade will be due to the Perennials 55+generation.

Perennials are very bad news for growth as they already own most of what they need. And their incomes are set to decline as they enter retirement.  So it is hard to see where fundamental support for the economy could come from, once the myth of the V-shaped recovery has been exposed.

[sancho panza]

Wolf on deflation

https://wolfstreet.com/2020/07/23/media-continues-to-misreport-unemployment-claims-31-8-million-people-on-state-federal-unemployment-insurance-week-18-of-u-s-labor-market-collapse/

Realistic unemployment rate: 20%.

There are 160 million people in the civilian labor force, according to the Bureau of Labor Statistics (not that this number can be trusted). Of them, 31.8 million receive unemployment compensation under state and federal programs. This means that 20% of the labor force receives unemployment compensation, which forms the most realistic estimate of the actual unemployment rate: 20%.

 

 

Can't go wrong with CRE........................

https://wolfstreet.com/2020/07/22/work-from-home-unleashes-nightmare-for-office-landlords-surrounding-businesses/

This appears to be an increasingly global phenomenon. Roughly 60% of bank executives in the US said they don’t expect all of their employees to return to the office. And over 40% said they plan to reduce their real estate footprint in response to the coronavirus pandemic, according to a survey of US bank executives by Accenture Plc.

Some banks are already making long-term changes. In Midtown Manhattan, French megabank BNP Paribas renewed its lease at the 787 Seventh Avenue tower. But it shrank its footprint by 38%: According to the Commercial Observer, instead of renewing the lease for the 454,200 it currently occupies at the building, it signed a lease for only 280,000 square feet.

Last week, the 30 biggest employers in the City of London said they only intend to bring 20-40% of their workforce back in the coming months.

One of the UK’s “Big Four” banks, RBS (which was renamed “Natwest” today in yet another re-branding exercise for the scandal-tarnished lender) announced that close to 50,000 of its 63,000 workers will continue working from home, at least for the rest of this year.

The prospect of a mass exodus of large corporate tenants from landmark buildings terrifies major commercial property owners. It also worries their creditors, which, ironically, include big banks such as Barclays and RBS. According to public filings, the UK’s Big Four, which are rounded out by HSBC and Lloyds, had £49 billion in outstanding U.K. commercial real estate loans at the end of 2019.

The cracks are already beginning to show. According to the latest edition of CBRE’s Central London Office View, take up of new office space in Central London slumped to 1.1 million sq ft, a decline of 66% from the 10-year quarterly average. Availability continues to increase in the City as a whole, rising by 18% year-on-year in the second quarter, while the vacancy rate rose from 5.4% to 6.5%. In Central London, the vacancy rate rose to 5.3%, from 4.4% at the end of Q1, the highest level since 2010.

Non payment of rents is also on the rise. According to research by Remit Consulting, only 53% of office rents were paid on the June quarter day and 12% was still outstanding from the March quarter day. Ominously, large tenants are demanding concessions from their landlords more than smaller tenants.

As non-payment of rents rises and rental income slides, the value of the underlying properties will inevitably fall. The UK’s Treasury watchdog, the Office for Budget Responsibility (OBR), warned that the price of offices and commercial buildings could fall by as much as 14% this year while transactions are expected to slump by close to a quarter.

[Loki]

Cheers for posting those @sancho panza

[spygirl]

39 minutes ago, sancho panza said:

Wolf on deflation

https://wolfstreet.com/2020/07/23/media-continues-to-misreport-unemployment-claims-31-8-million-people-on-state-federal-unemployment-insurance-week-18-of-u-s-labor-market-collapse/

Realistic unemployment rate: 20%.

There are 160 million people in the civilian labor force, according to the Bureau of Labor Statistics (not that this number can be trusted). Of them, 31.8 million receive unemployment compensation under state and federal programs. This means that 20% of the labor force receives unemployment compensation, which forms the most realistic estimate of the actual unemployment rate: 20%.

 

 

Can't go wrong with CRE........................

https://wolfstreet.com/2020/07/22/work-from-home-unleashes-nightmare-for-office-landlords-surrounding-businesses/

This appears to be an increasingly global phenomenon. Roughly 60% of bank executives in the US said they don’t expect all of their employees to return to the office. And over 40% said they plan to reduce their real estate footprint in response to the coronavirus pandemic, according to a survey of US bank executives by Accenture Plc.

Some banks are already making long-term changes. In Midtown Manhattan, French megabank BNP Paribas renewed its lease at the 787 Seventh Avenue tower. But it shrank its footprint by 38%: According to the Commercial Observer, instead of renewing the lease for the 454,200 it currently occupies at the building, it signed a lease for only 280,000 square feet.

Last week, the 30 biggest employers in the City of London said they only intend to bring 20-40% of their workforce back in the coming months.

One of the UK’s “Big Four” banks, RBS (which was renamed “Natwest” today in yet another re-branding exercise for the scandal-tarnished lender) announced that close to 50,000 of its 63,000 workers will continue working from home, at least for the rest of this year.

The prospect of a mass exodus of large corporate tenants from landmark buildings terrifies major commercial property owners. It also worries their creditors, which, ironically, include big banks such as Barclays and RBS. According to public filings, the UK’s Big Four, which are rounded out by HSBC and Lloyds, had £49 billion in outstanding U.K. commercial real estate loans at the end of 2019.

The cracks are already beginning to show. According to the latest edition of CBRE’s Central London Office View, take up of new office space in Central London slumped to 1.1 million sq ft, a decline of 66% from the 10-year quarterly average. Availability continues to increase in the City as a whole, rising by 18% year-on-year in the second quarter, while the vacancy rate rose from 5.4% to 6.5%. In Central London, the vacancy rate rose to 5.3%, from 4.4% at the end of Q1, the highest level since 2010.

Non payment of rents is also on the rise. According to research by Remit Consulting, only 53% of office rents were paid on the June quarter day and 12% was still outstanding from the March quarter day. Ominously, large tenants are demanding concessions from their landlords more than smaller tenants.

As non-payment of rents rises and rental income slides, the value of the underlying properties will inevitably fall. The UK’s Treasury watchdog, the Office for Budget Responsibility (OBR), warned that the price of offices and commercial buildings could fall by as much as 14% this year while transactions are expected to slump by close to a quarter.

Re: banks n finance.

This was on the cards since 2008.

Theres just nto enough margin or work to justify the level of finsec.

On regulated banks i..e lending, once you remove the insane leverage, now only present on HTB and seriously automate the backend, slowly happening, 80% of those bank jobs are just not needed.

Posted before, on other threads:

Mortgages provide a vast lot of work, for banks, EAs, lawyers, etc etc .

Chuck in the the scams, such of any life endowment investment or PPI, those two great mainstays of the uK finsec 1988 -> 2012ish. Gone. Dead. No need forthe employees.

 

 

 

 

[reformed nice guy]

4 minutes ago, spygirl said:

Interesting chart.

The population in 2007 was (allegedly) 61.4 million.

The population in 2013 was (allegedly) 65.4 million.

Therefore the lending/approvals fell from roughly £0.52 billon per million people to £0.24 billion per million.

Thank god our population growth is almost completely high earning, net tax contributors 

[spygirl]

2 minutes ago, reformed nice guy said:

Interesting chart.

The population in 2007 was (allegedly) 61.4 million.

The population in 2013 was (allegedly) 65.4 million.

Therefore the lending/approvals fell from roughly £0.52 billon per million people to £0.24 billion per million.

Thank god our population growth is almost completely high earning, net tax contributors 

The UK has somewhere between 15m-20m extra heads since 2000.

Thats 20 odd Vietnam shoved in a room above a nailbar. And daft Uncles sleeping on Anja concil house sofa, working cash in hand delving Dominoes.

 

Once you start working numbers out, per capita, the sheer idiocy and direness of that great UK job miracles crumbles away.

[jamtomorrow]

Great post SP. The perfect beautiful irony of this bit was just too much to bear, and I've had to go and have a lie down ...

1 hour ago, sancho panza said:

The prospect of a mass exodus of large corporate tenants from landmark buildings terrifies major commercial property owners. It also worries their creditors, which, ironically, include big banks such as Barclays and RBS. According to public filings, the UK’s Big Four, which are rounded out by HSBC and Lloyds, had £49 billion in outstanding U.K. commercial real estate loans at the end of 2019.

 

[DoINeedOne]

GOLD $1903

[sancho panza]

23 minutes ago, jamtomorrow said:

Great post SP. The perfect beautiful irony of this bit was just too much to bear, and I've had to go and have a lie down ...

 

Indeed.I personally,would be readying for a 50% haircut on most CRE.And they'll be the lucky ones.I look at Leicester CIty centre and what Covid hasn't finished off the council bike lanes will.

As per your quote £49bn in CRE loans,let's get some perspective.

From a debt deflation point of view,huge restrictions in credit creation coming the moment CB's have to stop forcing liquidity into the pipes.

http://eumaeus.org/wordp/wp-content/uploads/2020/05/Can UK banks pass the COVID-19 stress test 6 May 2020.pdf

Which perhaps explains this

and ultimately this

8 minutes ago, DoINeedOne said:

GOLD $1903

whats the all time high?It's around this level isn't it?

[AWW]

2 minutes ago, sancho panza said:

whats the all time high?It's around this level isn't it?

Intraday ATH is $1917.

[sancho panza]

1 hour ago, spygirl said:

Re: banks n finance.

This was on the cards since 2008.

Theres just nto enough margin or work to justify the level of finsec.

On regulated banks i..e lending, once you remove the insane leverage, now only present on HTB and seriously automate the backend, slowly happening, 80% of those bank jobs are just not needed.

Posted before, on other threads:

 

Mortgages provide a vast lot of work, for banks, EAs, lawyers, etc etc .

Chuck in the the scams, such of any life endowment investment or PPI, those two great mainstays of the uK finsec 1988 -> 2012ish. Gone. Dead. No need forthe employees.

ALso as you've psoted before iirc,huge chunks of back office jobs have been automated.

[sancho panza]

4 minutes ago, AWW said:

Intraday ATH is $1917.

$2250 by labor day?

[AWW]

3 minutes ago, sancho panza said:

$2250 by labor day?

That would maintain the "new normal" ratio to silver.

[sancho panza]

More credit deflation on the cards.WHo'd have thunk it but looks like private equity going up poop creek sans paddle.

https://www.institutionalinvestor.com/article/b1mjsrg38mw9k6/Private-Equity-Owned-Companies-Fuel-Surge-in-Defaults

More than half of companies that defaulted in the second quarter are owned by private equity firms, Moody’s said in a report this week. For example, Blackstone-backed Gavilan Resources and Apollo’s CEC Entertainment filed for bankruptcy, while KKR’s Envision Healthcare Corp. defaulted through a distressed debt exchange. 

U.S. defaults have more than tripled since the end of the first quarter, as companies with buyout debt proved vulnerable in the downturn, according to Moody’s. The credit rater expects the default rate to keep rising to about 12 percent next year as it continues to be fueled by private equity-owned borrowers, according to Moody’s analyst Julia Chursin, who spoke to II by phone Friday.

The oil and gas, services, and retail sectors have been particularly hard hit, representing almost 60 percent of defaults in the second quarter, according to the report.

Private equity firms have mostly held back from investing more equity in companies they own to help them through tough times, according to Chris Padgett, the head of leveraged finance at Moody’s. That would hurt their returns.

“For the most part, they haven’t put in additional equity,” Padgett said during the phone interview. “They’re really more likely to use some negotiation with the lenders.”

[janch]

Everything turning? 

DXY 94.4; wti $41; silver $23; gold $1900; GBP/USD 1.279

Dow opened 180pts down

 

Maybe some dosh will find its way to our reflation stocks.  CNA has signs of life......(I can name it now)