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

[DoINeedOne]

Couple of websites to do with telecoms that i have found useful for news and data

https://telecoms.com/

https://www.opensignal.com/market-insights

[DurhamBorn]

The only ways"money" in reality liquidity is destroyed in a western style Fiat economy is when the central bank destroys reserves.Reverse QE.The other way is when debt is liquidated in that someone loses,but the CBs try to front run this,as they are doing now by filling the pipes.They are trying to put in slightly more than is destroyed.

The sector that would suck in the massive amounts of liquidity and the biggest market in the world is the US treasury market.However as the Fed is front running now that would only be a short term move.Once the market sniffs inflation both techs and bonds will be selling off together.That is when the money will flow to commods and commod like sectors and is what will really drive the structural inflation.The economy wont lead inflation higher,the market will bid up commods that then feed into inflation.Once it starts it will be self feeding.The Fed will be loathe to run rates higher than inflation,so bonds will keep selling off as will tech.

Schlumberger pulling out of shale is another massive signal.Those guys know their market better than any city type.

Ignore short term prices,oil is going to $200 minimum,likely $300+ in the cycle,and the majors will make it to see those prices.

 

[sancho panza]

On 31/08/2020 at 16:38, geordie_lurch said:

More on the landlord stuff about a family who can't get back into their property they rented out to another family...

Some 600,000 tenants took the option to stop paying their rent, or to pay at a reduced rate as lockdown restrictions affected jobs, according to the Government.  

With courts usually dealing with up to 10,000 eviction requests a month, a significant backlog is expected once the restrictions are lifted.

The National Residential Landlords Association said 94 per cent of landlords rent property as an individual with 45 per cent renting out just one property and 38 per cent renting out between two and five.

https://www.dailymail.co.uk/news/article-8678889/amp/Tenant-staying-house-rent-free-amid-eviction-ban-says-forced-live-street.html

This will be the first of many such tales of woe.So many naive investors following the promsie of easy money arbitraging mortgae costs and rental income overlooking the costs assocaited with voids,evictions,non payments,Section 24 etc etc.Even when tenants aren't paying the LL's have to pay for maintenace required by law.

I can't see govt stepping in on the LL's side,its jsut not feasible or politcally tenable

Brutal.

 

 

'but in December 2019 they said their tenants stopped paying their £800 rent and refused to leave the house - meaning they could not return.

Now the tenant in the modern terraced house insists he will be reasonable and pay them back when he is able to.     

He told MailOnline: 'We want to be out, but they just seem to want us out on the street with a one-year-old and a 35-week pregnant woman.'

The tenant added: 'I have told them I will pay when this is all over, but at the moment we just don't have the money.

'I dropped from having about 4,000 a month to 800 because of coronavirus.

'I told the estate agent but they didn't get back to me.

'No-one expected it to last this long.'

The situation for the Burtons and their two children, Thomas and Poppy, had been worsened by the government's extension of their ban on evictions until September 20.

Many are thankful for the government's intervention to prevent evictions by rogue landlords, but the Burtons, who rely on rent income to support themselves, have been hit hard.

Their letter says the ban could mean many landlords will default on their mortgages  and it could expose them to legal action if they are unable to meet certain requirements within their property as a result of lost income.

 

 

On 31/08/2020 at 17:55, MrXxxx said:

Not sure if this point should be placed here or in pension, but here goes...

many people (including myself) currently have a work-based DC pension with limited/a few options I.e a stock/bond life style option, a cash/short term bond option, a developing markets/high income option...

....given the propensity for a BK in the near future would it be wise to move into the cash option (thus sacrificing time in the market) in the short-term to protect the capital and move back after it has struck?...thoughts/comments?

I wouldn't worry about the BK,it might see your bond portfolio pop up some.Longer term,you don't want inflation running at 5% and you 30 yr bonds paying 2% only to find that the 40% invested in equities(ie your inflation protection) is 25% in FAANG stocks and has dropped 70% as per @DurhamBorn point on the issue of passive investing to Harley jsut now.

key thing with having the funds under your control is that the msitakes are yours and not someone leses.

On 31/08/2020 at 18:34, JMD said:

My standpoint is that I want all kinds of change but am no fan of revolution. This is because I maintain that our electoral system can be 'gamed' by us plebs. The referendum vote was given because of increasing electoral support for ukip. However, rather stupidly many ukip voters returned to voting conservative at last election. I know there was real Corbyn fear across the country but having no Brexit party MPs is a travesty - I think the Brexiters would have spoken real truths during this pandemic and the party popularity would have grown. A massive missed opportunity for this country to have changed politics and an example of why I lay blame on the electorate. For perspective, I consider that was our lost 'Kerensky moment', in that we could have had moderation and not full-on chaos under a Lenin-type character.                                                                                                                 Your property report post was interesting. Another trend I noticed while reading up on propertytribes website was that many landlords bought/improved/remortgaged their properties. The idea was to extract more funds from remortgaging than the original purchase price. They would then repeat the process. Lots of landlords have built their portfolios since the 2008 crash by doing this. I think many Ltv's may be very skewered. The shocking thing was, despite the new rules on BTL mortgages from 2010ish, many landlords still manage to buy with big ltv loans. But as the report shows there are many different types of landlord, some better placed than others. However as ordinary citizens they don't appreciate risks or what may be about to hit them. 

I lookat out electoral system and I think of Hyman Minsky-ie that stability in itself,if it lasts long enough,is inherently destabilising.I agree,we need to see the hard left and hard right coming through the electoral sytem into the tlaking shop ie parliament to keep democracy viable.Whilst on the surface our recent elections hints at stability,there's a lot more angry people out there than 15 years ago.

In crucail seats the Brexit party vote stayed home and Labour got pummelled.Tory vote didn't rise much in those seats.The way we're headed it looks more like it'll be chaos.

On teh latter pooint,that parliamentary report highlights that the bulk of the leverage is being carried in the bottom half of the BTL demogrpahic.Let's remember median average portfolio laons are £180k, 43% of BTLers own outright.Median average equity is £220k which means that LL's were getting a median average gorss income of £15k on £220k net equity.WHich soundfs good until you factor in that valuations may get cut and that further down the deciles as you get to the msot leveraged that raio is probably negative and thats before rates rise.Hence I think you may be right on teh LTV';s.

The bottom 5 deciles of LL's are very much exposed to eviction costs,voids,rising IR's,maintenance costs etc and section 24 will be a killer..

[Chewing Grass]

9 minutes ago, sancho panza said:

'but in December 2019 they said their tenants stopped paying their £800 rent and refused to leave the house - meaning they could not return.

Now the tenant in the modern terraced house insists he will be reasonable and pay them back when he is able to.     

He told MailOnline: 'We want to be out, but they just seem to want us out on the street with a one-year-old and a 35-week pregnant woman.'

The tenant added: 'I have told them I will pay when this is all over, but at the moment we just don't have the money.

'I dropped from having about 4,000 a month to 800 because of coronavirus.

Corona-psychic, knew it was kicking around in December, this guy is ahead of the curve.

[sancho panza]

On 01/09/2020 at 11:57, wherebee said:

I just saw that. 39.99 with the dollar low against the AUD.  I am tempted.  Someone tell me why not.

I can't.Sub $40 I think it's a great opportunity.We're up to our gills probably at higher prices than most but then I was dribbling bits in in Spet/Oct 2019.

On 01/09/2020 at 16:31, DurhamBorn said:

https://seekingalpha.com/article/4371775-death-of-u-s-shale-is-greatly-exaggerated-crippled-for-life?utm_medium=email&utm_source=seeking_alpha&mail_subject=the-death-of-u-s-shale-is-greatly-exaggerated-but-it-s-crippled-for-life&utm_campaign=nl-macro-view&utm_content=link-0

@Cattle Prod a lot of the things you have been saying in the article above.

Something in that article echoed back from hundreds of pages back when you said that in a bull market they would value gold companies by ounces in the ground.I reference this as someone who has studied(not that deeply) a lot of teh balance sheets in the sector and can confirm when I last checked,the debt levels were the opposite of that in telecoms.

 

'And when it came to cheap credit, this came in the form of reserved-based lending facilities or RBLs. These credit lines were, in our view, the key reason why smaller US shale companies outspent massively. The reasoning was simple:

Every six months, banks in the RBL would assess the progress the company made on its drilling and exploration program (e.g. capex). And the greater the progress (e.g. more money spent), the more reserves could be derisked. The value of the RBLs was assessed on the proven portion of the reserve book. Banks usually took 65 cents on the dollar to whatever the proved reserve value was. And since banks didn't assess producers on its cash flow or free cash flow generation, but rather the reserves. Companies found out that the more they borrowed and spent on proving the reserves, the more money they could borrow.

This self-reinforcing positive mechanism allowed companies to keep borrowing and drilling without any consequences. Until of course, the $100/bbl oil days were over and companies realized that RBLs were a double-edged sword. But that's not even the worst part. The oil crash that followed was rather short lived and since 2014 to 2017 saw massive improvements in productivity gains, companies realized they could still do the same type of outspending and prove reserves but just at a lower price.'

20 hours ago, Cattle Prod said:

They makes a very good point about reserve based lending as the route for cheap money to those companies, I hadn't thought of that. It makes complete sense. I was a bit surprised at the graph of LTO projections, till I saw it came from Rystad. I don't think they understand permanent decline (currently clocking up 250k barrels per month), and what it takes to arrest that (~600 rigs). That's not going to happen till next year at the earliest.

It's a great graph showing the % of supply increase that shale has covered for the last few years. But I still haven't heard a commentator mention what I said was key in my first post here: the perception of supply. The market still thinks shale is going to cover supply into the future. What is going to happen when it becomes obvious that it's "crippled for life"? It's first going to say "where is the incremental barrel going to come from", then look around at a capital starved and demonised industry largely being run for cash, with no prospect of increasing supply and say. "..."

 

I remember soemtime back you mentioned that the spike in 08 was based on a 2% supply imbalance.is my memory right?

 

[Jesus Wept]

4 hours ago, JMD said:

Vendetta, i too am waiting for the BK, so agree with your thoughts on this. But now we are approaching the tipping-point (are we?; darn, already doubting myself in same paragraph!) i can see how smart/brave/committed(all 3?)... you need to be, to sell your investments and wait for things to 'unwind' (British understatement), before jumping back into the markets.

Having described my somewhat conflicted position, can i be nosey Vendetta? I believe you recently said that you have now sold much/all of your stocks and pm's - apologies if i've got that wrong? But the bit above intrigues me - are you saying you timed the markets right on those two occasions? 

btw what does 'STR'd' mean?

 

Sold To Rent....

Stepped out the housing bubble in May 2007 and rented for two years with money in deposit at Northern Rock - and then bought a final family house in May 2009 reduced by 30% off the original price from 2 years previous. 

I’ve been lucky not smart/brave or committed!

Watch me get left behind as stocks, commodities and PMs go to the moon....

I am just risk adverse. I’m reasonably comfortable and have much more to lose than gain. I just enjoy the psychology of bubbles and market crashes.....

[Democorruptcy]

49 minutes ago, sancho panza said:

This will be the first of many such tales of woe.So many naive investors following the promsie of easy money arbitraging mortgae costs and rental income overlooking the costs assocaited with voids,evictions,non payments,Section 24 etc etc.Even when tenants aren't paying the LL's have to pay for maintenace required by law.

I can't see govt stepping in on the LL's side,its jsut not feasible or politcally tenable

 

What about the governbankment stepping in pretending to help the tenants? The National Residents Landlords Association's proposal of a "Tenant Saver Scheme" has already been adopted in Wales. Cross party support for tenants taking out a loan that must be paid back over 5 years, the money loaned goes direct to landlords.
 

Quote

 

Once the loan is accepted, the money will be paid directly to the landlord or agent and tenants will be able to pay back the amount over five years.

The APR level (Annual Percentage Rate) of interest on the loan will be 1%, ministers said, and there will be no maximum amount but the scheme will cover rent arrears only.

The scheme will be managed by the Wales Council for Voluntary Action and be delivered via credit unions.

https://www.bbc.co.uk/news/uk-wales-politics-53729400 

 

 

[sancho panza]

 

 

6 hours ago, Barnsey said:

UK house prices have hit a record high, and highest monthly gain for 16 years??? Banks withdrawing high LTV products to cope with demand. Just when I thought the stars had aligned...

Really quite mad though isn't it? The low paid renters are the ones suffering, but I can't help thinking (as we're now starting to see over the pond) that the job losses will move up the chain to white collar middle classes as reality refocuses on the global demand issues.

Furlough reduces to 70% I beleive,then it ends in oct.Going to get interesting thereafter

[sancho panza]

20 hours ago, Majorpain said:

#still not a bubble

Worth noting as per MP's chart,the Russell 2000 has been in a bear market since 2018.the index is a good representation of industrial/commerical USA.

The investment thesis of a good few on here is to accumualte reflation stocks while they are cheap and worry about timing the credit event later.Could be they rise up into it,could be they don't.

My experience of investing over nearly 30 years is that I'm not intimidated by a 50% pullback,and whilst such would cause me to retest my thesis,it wouldn't cause me to sell in itself.

As I've stated several stocks I'm sat on had early pullbacks since 2017 eg Godlfields(briefly dropped to $2).Scottish play aside,the rest have bounced back and then some.Laddering takes the guesswork out.

Noone knwos if XOM will bottom here or rise up,the question to ask is are they good value given what we expect in the future.I would argue they are.

Trying to time the big credit event is extremely hard.And I've been predicting it for fifteen years.

 

15 hours ago, Sugarlips said:

I know these are 64Tr$ questions but I may as well ask as I can’t be the only one who can comprehend the DB roadmap but is still not yet properly positioned (aside from my $20k play fund which is up 50% since March - thanks all).

What’s everyones thoughts on the BK event? Seems most here are buying oilies for the reflation period but how will they perform during the deflationary bust?

for those of us still hovering over the ‘buy XOM’ button, is now as cheap as they’ll ever be? Will conservative stocks run when the 1929 moment occurs or get bashed short term along with everything else?

Is the plan just ignore the noise and fear just keep averaging in in tranches from here?

 

[sancho panza]

18 minutes ago, Democorruptcy said:

 

What about the governbankment stepping in pretending to help the tenants? The National Residents Landlords Association's proposal of a "Tenant Saver Scheme" has already been adopted in Wales. Cross party support for tenants taking out a loan that must be paid back over 5 years, the money loaned goes direct to landlords.
 

 

but they need the tenants to apply, and there's no complusion to do so.

Take up in Spain is extremely low on the similar scheme they have.(I'll try and find the link)

Why would a tenant take out an extra loan jsut to make his LL's life easier.

Most tenants are going to get a free year before they lose possession if the backlog in courts is as bad as predicted.

[sancho panza]

been buying tranche 1 in telco's.Picked up BT at a pound yesterday.same price as Feb/Mar 09 or pre 1988 before that.

Intersting times.

VOD rocking around it's 2002 price

[Underwhelmed]

40 minutes ago, sancho panza said:

but they need the tenants to apply, and there's no complusion to do so.

Take up in Spain is extremely low on the similar scheme they have.(I'll try and find the link)

Why would a tenant take out an extra loan jsut to make his LL's life easier.

Most tenants are going to get a free year before they lose possession if the backlog in courts is as bad as predicted.

A similar scheme exists in Wales that is supposed to start this month, let's see what the take up will be, as you say why would tenants increase their indebtedness.

https://www.rentsmart.gov.wales/Uploads/Downloads/00/00/01/32/DownloadFileEN_FILE/Tenancy-Saver-Loans-FAQs.pdf

[Transistor Man]

49 minutes ago, sancho panza said:

been buying tranche 1 in telco's.Picked up BT at a pound yesterday.same price as Feb/Mar 09 or pre 1988 before that.

Intersting times.

VOD rocking around it's 2002 price

 

When I see those year 2000 telecoms share prices, I think about what happened to some of the optical equipment manufacturers back then.

JDS Uniphase ....... briefly worth $125 bn.

[King Penda]

50 minutes ago, Underwhelmed said:

A similar scheme exists in Wales that is supposed to start this month, let's see what the take up will be, as you say why would tenants increase their indebtedness.

https://www.rentsmart.gov.wales/Uploads/Downloads/00/00/01/32/DownloadFileEN_FILE/Tenancy-Saver-Loans-FAQs.pdf

Maybe one that does not want a ccj 

[Democorruptcy]

1 hour ago, sancho panza said:

but they need the tenants to apply, and there's no complusion to do so.

Take up in Spain is extremely low on the similar scheme they have.(I'll try and find the link)

Why would a tenant take out an extra loan jsut to make his LL's life easier.

Most tenants are going to get a free year before they lose possession if the backlog in courts is as bad as predicted.

Rather than not pay rent and face an eviction notice that will mean the next rental might be lacking a landlord reference, why wouldn't tenants in the UK apply? It gives them 5 years breathing space at 1%.

It's going to reduce the supply of rentals and/or properties for sale.
 

Quote

 

"This is not about pushing people into unaffordable debt," a spokesperson said.

The National Residents Landlord Association said it was "delighted the Welsh Government has listened to what we had to say and consequently adopted our proposals for a tenant loan scheme".

"These loans will help keep tenants who have been affected by coronavirus in their homes, while supporting landlords reliant on rental income to pay their own bills," it said.

 

 

[dgul]

1 hour ago, Underwhelmed said:

A similar scheme exists in Wales that is supposed to start this month, let's see what the take up will be, as you say why would tenants increase their indebtedness.

https://www.rentsmart.gov.wales/Uploads/Downloads/00/00/01/32/DownloadFileEN_FILE/Tenancy-Saver-Loans-FAQs.pdf

What you're going to see is 'good' tenants, professionals that have just had a bit of a hard time during covid will take out the loan.  'bad' tenants, that are just scum, won't.

And in the fullness of time the scum will be bailed out, and the debt for the 'good' will remain.

I can see a new welfare state coming, where normal folk having a bit of bad luck will only be offered debt until their life turns around, while the feral welfare class will continue sucking on the teat.

[or, even worse, the welfare class have debt based welfare.  They'll max out on the loan every month but never pay a penny of it back.  Oh, but the government will keep the loan as an asset on its books for as long as possible.]

[Democorruptcy]

7 hours ago, Castlevania said:

So expect the FTSE to fall and the Dow to continue rising.

I know where you are coming from re being contrarian etc but at current levels I'd prefer FTSE to DOW. Wouldn't you?

[DurhamBorn]

@Cattle Prod i think i speak for everyone when i say how thankful we are to have your superb knowledge of the oil sector on this thread and the way you gladly share that knowledge.

The irony is my $200 to $300 road map target 2028/2030 is based only on liquidity and oil getting its normal share of that liquidity and the fact oil demand is going to grow and not fall over the cycle,at least until late.

I sold a few Mosaic today (+150%) and bought some more BP and Repsol.

The market seems to of thought BP said 6.2% divi,no extra for 10 years,but they didnt.

They said 6.2% divi + $5 billion CAPEX in renewables,+60% of cash left on buy backs,at $55 brent that would be roughly 6.2% divi+6.2% buy back and 4% spare cash for more buy backs (likely below £4 a share) more divis (likely over £4 a share) or more debt repayment (likely in first couple of years of the cycle).

Given the renewables might get 10% ROE by the end of the cycle BP will be on a PE of 3 with a $55 brent average.However i expect closer to $100 as a minimum average.

After buy backs BP might be on a PE of 3 maximum in 2029 for people buying today.Maybe a PE of lower than 2.Buyers today might be getting a dividend of 25% and a 300% to 400% share price increase.

Just my opinion and road map,but its why im not interested in if BP is £3.00 today or £2.00,my selling window is 2027 to 2030 and $200 is the minimum before i even consider selling.

 

 

[Castlevania]

1 hour ago, Democorruptcy said:

I know where you are coming from re being contrarian etc but at current levels I'd prefer FTSE to DOW. Wouldn't you?

Nah. The fact that most people who spreadbet lose money. IG don’t hedge their exposure for a good reason. Short term I’d prefer the Dow. Longer term FTSE.

[Jesus Wept]

26 minutes ago, DurhamBorn said:

@Cattle Prod i think i speak for everyone when i say how thankful we are to have your superb knowledge of the oil sector on this thread and the way you gladly share that knowledge.

The irony is my $200 to $300 road map target 2028/2030 is based only on liquidity and oil getting its normal share of that liquidity and the fact oil demand is going to grow and not fall over the cycle,at least until late.

I sold a few Mosaic today (+150%) and bought some more BP and Repsol.

The market seems to of thought BP said 6.2% divi,no extra for 10 years,but they didnt.

They said 6.2% divi + $5 billion CAPEX in renewables,+60% of cash left on buy backs,at $55 brent that would be roughly 6.2% divi+6.2% buy back and 4% spare cash for more buy backs (likely below £4 a share) more divis (likely over £4 a share) or more debt repayment (likely in first couple of years of the cycle).

Given the renewables might get 10% ROE by the end of the cycle BP will be on a PE of 3 with a $55 brent average.However i expect closer to $100 as a minimum average.

After buy backs BP might be on a PE of 3 maximum in 2029 for people buying today.Maybe a PE of lower than 2.Buyers today might be getting a dividend of 25% and a 300% to 400% share price increase.

Just my opinion and road map,but its why im not interested in if BP is £3.00 today or £2.00,my selling window is 2027 to 2030 and $200 is the minimum before i even consider selling.

 

 

A fantastic insight @DurhamBorn into your thinking. 
 

My oil targets are:

XOM

PSX

SLB

REP
 

and cost average down on some more RDSB and BP.

I am hoping these ‘targets’  don’t turn up before the ‘predicted’ large scale downturn in the NAS/DOW. If it ever comes.....

[JMD]

8 hours ago, Cattle Prod said:

Good point, I was using money and wealth there interchangeably which was a bit sloppy. A curve ball could be when the money creator (the Fed) starts to buy stocks...

Yes, and if they 'just' allocated 13trn dollars of their QE they could buy half the s&p 500. Crazy numbers, but maybe if we did see those type of my policies it would reveal some small element of method in this government Corona-horror-show madness. What me paranoid?

[Popuplights]

2 hours ago, Vendetta said:

A fantastic insight @DurhamBorn into your thinking. 
 

My oil targets are:

XOM

PSX

SLB

REP
 

and cost average down on some more RDSB and BP.

I am hoping these ‘targets’  don’t turn up before the ‘predicted’ large scale downturn in the NAS/DOW. If it ever comes.....

Got plenty of XOM through work, and enough RDSB to make me sad, so BP is my next look.

[JMD]

9 hours ago, Talking Monkey said:

Really got me thinking that bit in bold JMD

Yes, but (unfortunately) being suspicious about the decisions made by the powerful behind closed doors is the easy bit. The difficult part for me is translating such cynicism into investment strategies!?! ...I must add that a great resource for me is visiting and learning from this fantastic blog. And an example here would be Sancho P's reminder of watching what 'they' do, not want 'they' say, e.g. the BofE pension is index linked and therefore anticipating inflation.       But really welcome any conclusions you might have TalkingMonkey.

[JMD]

8 hours ago, Vendetta said:

Sold To Rent....

Stepped out the housing bubble in May 2007 and rented for two years with money in deposit at Northern Rock - and then bought a final family house in May 2009 reduced by 30% off the original price from 2 years previous. 

I’ve been lucky not smart/brave or committed!

Watch me get left behind as stocks, commodities and PMs go to the moon....

I am just risk adverse. I’m reasonably comfortable and have much more to lose than gain. I just enjoy the psychology of bubbles and market crashes.....

Very interesting. I think the serious money will be going long on 'lucky' Vendetta completing his hat-trick! 

[MrXxxx]

17 hours ago, Cattle Prod said:

Reality bites. Trends start in California, this is an inevitability in the UK and Germany etc too.

And with the UK breaking free of the EC legislation in 2021it will make the job even easier....Environmentally before joining the EC the UK was the dirty man of Western Europe, looks as though we will be it once again.