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

[DurhamBorn]

34 minutes ago, Cattle Prod said:

Gazprom, Repsol, Shell

Repsol is a fantastic gas play isnt it,maybe the best for potential in the cycle among the bigger companies.

I think the liquidity we have so far means inflation of around 8.2% at some point,but my road map says the "likely" inflation high in the cycle is 12.9%.I have an outlier at 22% inflation,but thats with a maximum derivative unwind and massive printing (four times what we have now).The main thing is i think we have now printed back the dis-inflation of the last couple of decades,so now its a case of how high,not if.

I noticed lots of articles saying that the jump in value shares would be short term etc.This is good.Everyone thinks its a rally simply on being so low.The cycle should see rise,shake out,people think thats it,then up to new recent highs,repeat over and over.Most people we be shaken out or never enter.

[Loki]

26 minutes ago, DurhamBorn said:

The cycle should see rise,shake out,people think thats it,then up to new recent highs,repeat over and over.Most people we be shaken out or never enter

Me if I'd never seen this thread for one

[DurhamBorn]

I just want to add my road map for gas here and also oil use from my macro road map.There is a lot of cross market work here and i dont normally put these out because they are in depth and arent about short term moves,prices of assets etc.They are not signs to buy any share,or asset,simply what the numbers show me.These numbers will shock people and are way out on what the mainstream expects.

Ok gas.

IF electric car use keeps growing and takes 90% of the car market by 2040 oil use will fall 0.5mbpd,but most of the falls are in the last 10 years.Up until 2030 oil flatlines at worst or a tiny decline.

IF electric replaces oil by 2040 then gas prices will rise by 450% minimum by then due to massive gas demand in Asia and other areas for electric production.

However my road map lag shows gas demand outstrips supply by a long way by 2024 and prices will rise by maybe 400%+ later in the cycle.This will hugely slow the fall in oil demand and slow the move to electric vehicles in the east as electric from gas becomes much more expensive.

This shows oil use HIGHER in 2040.

The cross market work on this gas shortage shows oil will start its run above the $80s levels in 2023/4 and short pull backs will be just that.$300 oil is very very likely by 2028.

There is a huge pincer movement from 2023/4 as gas shortages force up the price by a large amount that forces up electricity prices and in doing so slows the move to electric cars and forces up oil.A perfect macro storm.

I predict that gas heavy integrated companies will provide massive profits by late cycle.In my opinion people need to ignore worrying about short term moves etc and buy the pull backs in the sector as divis land etc.

We will see massive investment in green energy,but it simply cant get ahead of the curve on gas in Asia in this cylce.

The irony of this cycle will be when everything is thrown at green,carbon hits the highest prices in history.

DYOR not advice etc etc

 

[Loki]

Blimey @DurhamBorn

Thanks for sharing that

[UnconventionalWisdom]

Fascinating post @DurhamBorn. Love your insights.

[Yadda yadda yadda]

@DurhamBorn very interesting. Gas is the backbone of our electricity supply as well as crucial to our heating. If the price rises it will squeeze the consumer. I often look at this site below and it shows the electricity supply mix. It has been windy today so less gas used than usual. If gas prices quintuple by 2028-30 then you could be seeing a doubling of UK domestic energy bills even allowing for alternative sources of power. Perhaps more.

https://gridwatch.co.uk/

Makes me wonder about windfall taxes on integrated energy companies. Might be better looking at exporting countries. So that would be Russia and Equinor. Canada?

[sancho panza]

8 hours ago, janch said:

From google:

Contango and backwardation are terms used to define the structure of the forward curve. When a market is in contango, the forward price of a futures contract is higher than the spot price. Conversely, when a market is in backwardation, the forward price of the futures contract is lower than the spot price.

Posted as it's all a bit complicated for lesser mortals like me

 

I think it relates to the current spot price (but I expect @Cattle Prod to bring his much greater expertise)

There's a couple of different deifnitons.your one above (the one I've always used) and then the one from Investopedia.The deifntion from google appears to be referring to an inverted futures curve ie one where the

'What Is Backwardation?

Backwardation is when the current price—spot—price of an underlying asset is higher than prices trading in the futures market. Backwardation is sometimes confused with an inverted futures curve.'

 

wiki liekly settles my confusion

https://en.wikipedia.org/wiki/Normal_backwardation

Normal backwardation, also sometimes called backwardation, is the market condition wherein the price of a commodities' forward or futures contract is trading below the expected spot price at contract maturity.

Note: In industry parlance backwardation may refer to the situation that futures prices are below the current spot price.^[4]

 

 

As I udnerstand it backwardation is normalish in soft commodities where the prodcut has a shelf life and contango is more normal where there's a cost of carry eg oil/gas storage costs.

[sancho panza]

7 hours ago, arrow said:

I admire your thinking SP. I'm trying to find a signal at which the market will peak before the drop.

Oil peaking to as you said 80 will be a useful signal, as will Hunter's pm targets like silver to 35.

I do worry that I'll miss the drop. The march one was quick and Hunter has said that the turn could happen very quickly.

But then I have second thoughts and think that it might be a rotation with a medium drop but not the 80 percent drop.

 

The reason I liked CP and DB's $80 call is that it would coincide with a decent 100% + rise in oil as per the last 3 recessions.

I'm taking a liberty with the charts there but I think it'd be rash to sue the monthly bottom in WTI in march as a bottom to price off given the rather unprecedented situation then as the price was more the result of a lack of storage than anything else.

There are a lot of indicators I'm watching besdies oil eg copper price,DXY,eur/usd,gold and a few others I've got wirtten down on my notes.

Key thing is to have a plan .my main two are below

Plan A-top clearly seen,sell most stocks excpet bottom ladders in oil,then buy UST's before buying back shares.

Plan B- top not clearly seen,sittight in oilies goldies,potash n telecoms and see who emerges the other side of the BK.These secotrs being my picks for having the highest chance of going up or staying flat during a large downphase all hedging sterling.

I think Hunter's 80% down in tech stocks from peak is a fair call and history is on his side.I'd go for 75%.

[mcdongle]

9 hours ago, Knickerless Turgid said:

Australian + effective monopoly = truly shocking service.

Nice yield though! So many oldies have holdings in Telstra, I can't see them ever being allowed to cut their dividend too hard.

Dividend has been cut from 31 cents to 16 already

https://www.marketindex.com.au/asx/tls

[sancho panza]

8 hours ago, TMM said:

Do you think it's the same timeline for property/interest rates?

No,property works on different timelines imo and are moved by differnt factors.Stocks and bonds respond immediately to liquidity injections.Hosuing markets need consumers to apply for mortgages,go through the house buying process before the transaction can compelte.

Vritually the last place youll see a downturn is the hosuing market.But when you do it will be brutal.Teh barriers to entry are such that you can end up with a total lack of buyers which begets brutal falls.

In the past I've seen these shorting bans come in because the poltiicans think it will stop stock markets sell offs.It's financial illiteracy of the worst sort because when markets drop heavily sometimes the only buyers are shorts covering.The govt takes away the shrots covering and the only buyers you have are the 'long only' who,as per the name,with until they feel safe buying in.Hence shroting bans end up in deeper,steepers market drops.

For me,ref IR's,when you see the recent quarterly upticks in inflation and the really stark uplifts in M2/MZM supply/velocity,then you have to reassess IR polciy since 2008.They basically got away with cutting rates for a decade and not seeing inflation.If those charts are right,then inflation re emerges and all of a sudden negative rates are off the table.

Time will tell by the end Q1 if it's sustained or not.

 

[sancho panza]

7 hours ago, DurhamBorn said:

Also money market accounts and for kicking in inflation institutional accounts.Raw liquidty sat waiting to buy assets.Its increased above trend since the early 90s,mostly as the dis-inflation really kicked in.It has jumped a huge amount along with M2 this year.Once inflation ticks higher it will unleash an inflation wave across the world as people dash for assets and pull forward that demand.MZM turning down should signal the start of a bond market sell off as people access liquidity by selling bonds.

Do you think there's an element of MZM getting bouyed by the fact that IR's are so low,it's harldy worth the bother of moving cahs to a time deposit?

It really is beginnign tofocus my mind aobut how peple will behave in behaviroaul sense @Harley when they start seeing their moeny depreciate by the month(we may be some time form that but...).Never has so much built up on the supply side without a correpsonding uplift in velocity.

I'm slack,until you started psoting about M2 I hadn't looekd in months and then boom,Q3 sees first uptick in a long time.(and what an uptick).

[sancho panza]

4 hours ago, Cattle Prod said:

Just been thinking about @sancho panza M2 graphs. M2 added this year is c. 4.5 Tn or $13700 for every man, woman and child in the US. MZM is similar. $35,000 an average household??? Did they really hand out that much money?! I suppose some of it has been saved by folks sitting at home, but either way, there is going to be a tsunami of spending unleashed chasing goods and services ince they are allowed out. I guess this is what Dave H means by huge money on the sidelines, and DB by liquidity in the pipes. As this money has been distributed across everyone in the states this time, they're not all going to put in the financial system this time...

Well, they did say over and over that they wanted inflation. And that Ronald Storfele video (a very good watch) reminded me that the Fed quietly switched to average rather than absolute inflation targets over the summer.

Sorry if I'm stating the obvious to some of you, I'm kind of just working through it in my head. Do they really need another couple of trillion on top? If DB says so, I believe him. But it really is an astonishing amount of money. I quite fancy a roaring 20s, a last party before I have to build a compound on a remote hill! 

I think the problem is that they don't really understand what they're messing with.The CBers are all neo classical economsits who've been taught that 'infaltion is always a monetary phenomenon' despite the fact that it blatantly isn't.They've printed trilions since 2008 and got away without any inflation.Why won't that happen the second time?

It's intriguing how people will react in terms of spending when they realise that each month they hold their £,is another fractional loss due to inflation.People arent daft,tehy;'ll bring forward spending in a way these govt types jsut don't understand and hwo can blame people?

I think the problem this year is that when the panicdemic kicked off ,lots of cash got printed and isntead of people spending it,,they saved it.What's going to happen if they all start rekief spending at the same time?

[sancho panza]

3 hours ago, DurhamBorn said:

Repsol is a fantastic gas play isnt it,maybe the best for potential in the cycle among the bigger companies.

I think the liquidity we have so far means inflation of around 8.2% at some point,but my road map says the "likely" inflation high in the cycle is 12.9%.I have an outlier at 22% inflation,but thats with a maximum derivative unwind and massive printing (four times what we have now).The main thing is i think we have now printed back the dis-inflation of the last couple of decades,so now its a case of how high,not if.

I noticed lots of articles saying that the jump in value shares would be short term etc.This is good.Everyone thinks its a rally simply on being so low.The cycle should see rise,shake out,people think thats it,then up to new recent highs,repeat over and over.Most people we be shaken out or never enter.

Until I'd seen those charts earlier,I'd have thought those calls are excessive but Q4 will likely be mroe of the same and in a year the press will be wodnering how noone saw it coming.

The real problem is that are so few CBers that have any exoereince fighting inflation.....theyve jsut never known it.

[DurhamBorn]

5 hours ago, sancho panza said:

Do you think there's an element of MZM getting bouyed by the fact that IR's are so low,it's harldy worth the bother of moving cahs to a time deposit?

It really is beginnign tofocus my mind aobut how peple will behave in behaviroaul sense @Harley when they start seeing their moeny depreciate by the month(we may be some time form that but...).Never has so much built up on the supply side without a correpsonding uplift in velocity.

I'm slack,until you started psoting about M2 I hadn't looekd in months and then boom,Q3 sees first uptick in a long time.(and what an uptick).

Yes interest rates,but more the lack of inflation,and actual long term dis-inflation.There is little oportunity loss in holding.That all changes once inflation moves higher,or as might happen peoples mindset changes.My dads dog lies on the rug all day,but let him out and he bounds about with utter joy.M2 is slicing debt,CBs are forcing it down the fiscal route as much as they can.It not on banks balance sheets to make a lending choice or not,its on balance sheets waiting to be spent/invested.

[UnconventionalWisdom]

7 hours ago, sancho panza said:

I think the problem is that they don't really understand what they're messing with.The CBers are all neo classical economsits who've been taught that 'infaltion is always a monetary phenomenon' despite the fact that it blatantly isn't.They've printed trilions since 2008 and got away without any inflation.Why won't that happen the second time?

It's intriguing how people will react in terms of spending when they realise that each month they hold their £,is another fractional loss due to inflation.People arent daft,tehy;'ll bring forward spending in a way these govt types jsut don't understand and hwo can blame people?

I think the problem this year is that when the panicdemic kicked off ,lots of cash got printed and isntead of people spending it,,they saved it.What's going to happen if they all start rekief spending at the same time?

Household saving ratio for the UK.

[working woman]

@DurhamBorn Thank you for your longer term thinking on Gas and Oil prices.  It is truly depressing.

 It looks like flights are going to become very expensive. I was hoping to see the world over the next 10 years before getting too old. I knew oil wasn't going to last forever but had hoped I would get away with it.

It looks like Council Tax will be going up a lot to pay inflation rate pay rises.  It is the one bill I feel I have no control over. I already pay £160 a month on a 2 bed flat.

@sancho panza You said "It really is beginning to focus my mind abut how people will behave when they start seeing their money depreciate by the month. " 

Me too. It is not going to be pretty.  

For a start, people are used to cheap flights and holidays, they won't be happy if they become unaffordable.  Then, unless you are from the Baby Boomer generation who lived through the 1970's, most people in the UK have no experience of a high inflation environment. Look at how people panic bought toilet rolls this year.

 

 

 

[Yadda yadda yadda]

35 minutes ago, working woman said:

@DurhamBorn Thank you for your longer term thinking on Gas and Oil prices.  It is truly depressing.

 It looks like flights are going to become very expensive. I was hoping to see the world over the next 10 years before getting too old. I knew oil wasn't going to last forever but had hoped I would get away with it.

It looks like Council Tax will be going up a lot to pay inflation rate pay rises.  It is the one bill I feel I have no control over. I already pay £160 a month on a 2 bed flat.

@sancho panza You said "It really is beginning to focus my mind abut how people will behave when they start seeing their money depreciate by the month. " 

Me too. It is not going to be pretty.  

For a start, people are used to cheap flights and holidays, they won't be happy if they become unaffordable.  Then, unless you are from the Baby Boomer generation who lived through the 1970's, most people in the UK have no experience of a high inflation environment. Look at how people panic bought toilet rolls this year.

 

 

 

The most obvious read through from DB's gas and oil price post is that the West will become relatively poorer compared to the East. Still richer per capita but if the East is bidding up gas prices then they must be able to afford to do so. When you look at holidays you may see that inflationary pressure in accomodation as well as flights. Obviously there will be a running cost component but also a competition element. More people travelling, just from more countries. A lot of holiday destinations cannot increase capacity substantially. Think Venice.

Perhaps there will be a time to go long holiday hotels as destinations become as expensive as Venice? I wouldn't invest in Venice itself as there might be significant 'not sinking' liabilities.

That savings rate graph above is a bit depressing. All that money created and nothing for me!

[Yellow_Reduced_Sticker]

10 hours ago, DurhamBorn said:

I just want to add my road map for gas here and also oil use from my macro road map.There is a lot of cross market work here and i dont normally put these out because they are in depth and arent about short term moves,prices of assets etc.They are not signs to buy any share,or asset,simply what the numbers show me.These numbers will shock people and are way out on what the mainstream expects.

Ok gas.

IF electric car use keeps growing and takes 90% of the car market by 2040 oil use will fall 0.5mbpd,but most of the falls are in the last 10 years.Up until 2030 oil flatlines at worst or a tiny decline.

IF electric replaces oil by 2040 then gas prices will rise by 450% minimum by then due to massive gas demand in Asia and other areas for electric production.

However my road map lag shows gas demand outstrips supply by a long way by 2024 and prices will rise by maybe 400%+ later in the cycle.This will hugely slow the fall in oil demand and slow the move to electric vehicles in the east as electric from gas becomes much more expensive.

This shows oil use HIGHER in 2040.

The cross market work on this gas shortage shows oil will start its run above the $80s levels in 2023/4 and short pull backs will be just that.$300 oil is very very likely by 2028.

There is a huge pincer movement from 2023/4 as gas shortages force up the price by a large amount that forces up electricity prices and in doing so slows the move to electric cars and forces up oil.A perfect macro storm.

I predict that gas heavy integrated companies will provide massive profits by late cycle.In my opinion people need to ignore worrying about short term moves etc and buy the pull backs in the sector as divis land etc.

We will see massive investment in green energy,but it simply cant get ahead of the curve on gas in Asia in this cylce.

The irony of this cycle will be when everything is thrown at green,carbon hits the highest prices in history.

DYOR not advice etc etc

 

 

Highly informative THANK YOU!

 

I've just UP-ticked ya so you've got 10,000 rep-points now!...in fact YOU should have 100,000 with the VALUABLE info you give out freely here!

 

Anyway, thanks again DB ...you're a TRUE gent!

 

 

[jamtomorrow]

40 minutes ago, Cattle Prod said:

Does anyone understand the toilet roll thing? I simply don't understand it. Food, I can understand, but would people rather starve than not have toilet roll? Of all the weird things to happen this year, this has me stumped.

I understand it in the sense that once a "run" on something or other starts, the run becomes self-sustaining.

It's an expected outcome of a system comprising rational actors if you look at it from a game theory perspective (i.e. per John Nash). IIRC the optimal game strategy (which I'm sure is also a familiar investment trope) boils down to "don't panic, but if you are going panic be sure to panic first".

People who don't understand that tend to get very emotional about the situation, hence all the press and social media hype demonizing stockpilers. Whereas in a sense, they're the ones behaving rationally and "optimally".

Edit to add: why toilet roll? I suspect it's down to shelf space and perception of scarcity. Typical supermarket carries *far* fewer arse-weeks of toilet roll *on the shelves* than mouth-weeks of food in the rest of the store. So in a general stockpiling situation, it will always look like the bogroll has run out first, going by gaps on shelves.

[geordie_lurch]

1 hour ago, Cattle Prod said:

The one area I differ with people here is on housing. In the last inflationary period, housing was perhaps the best thing to own (according to my old man, anwyay!). It's a classic inflation hedge, and I don't quite understand DB when he says it'll be one of the worst hit areas of the UK in the coming inflation. I agree that the SE is bloated to the rest of the country, but if you own a property at a reasonable price other parts of the country, I think it'll serve you very well as a hedge. (a) houses are going to be the first thing more well off people are going to want to 'grab', (b) the materials in the house are going to inflate, per the commodity themes here, and overall prices will have to keep up or else new houses will become too expensive relative to existing stock. A house was a very good thing to buy in the 70s, even if you didn't manage to own it outright or get a fixed rate, you still got it essentially for free as long as you could service the debt.

I'm just about to get the equivalent of a 10% deposit on a basic house around me or that would obviously stretch a lot further on a flat but I like many think house prices will actually fall this time however if they do mortgage rates will be WAY higher than now so the way I see it have 2 options...

1. Stick the cash into next year's ISA allowance to complement my inflation stocks and carry on renting
2. Get somewhere as a fixed base on a 10 year fix etc to hedge in a different way

Thoughts?

[TNS]

11 minutes ago, geordie_lurch said:

I'm just about to get the equivalent of a 10% deposit on a basic house around me or that would obviously stretch a lot further on a flat but I like many think house prices will actually fall this time however if they do mortgage rates will be WAY higher than now so the way I see it have 2 options...

1. Stick the cash into next year's ISA allowance to complement my inflation stocks and carry on renting
2. Get somewhere as a fixed base on a 10 year fix etc to hedge in a different way

Thoughts?

10 year fix would be my recommendation but who knows what could happen.

[AWW]

15 minutes ago, geordie_lurch said:

I'm just about to get the equivalent of a 10% deposit on a basic house around me or that would obviously stretch a lot further on a flat but I like many think house prices will actually fall this time however if they do mortgage rates will be WAY higher than now so the way I see it have 2 options...

1. Stick the cash into next year's ISA allowance to complement my inflation stocks and carry on renting
2. Get somewhere as a fixed base on a 10 year fix etc to hedge in a different way

Thoughts?

Personally, I would rather borrow less money at a higher interest rate.

[Democorruptcy]

1 hour ago, Yadda yadda yadda said:

That savings rate graph above is a bit depressing. All that money created and nothing for me!

Slowly slowly catchee monkey.....

I thought the idea was to invest in inflation loving assets? Don't you need people to have money to be able to pay higher prices for such as energy, so those firms do well and pay dividends? The people saving cash now are treating it lovingly as if it were their own but it's coming to you.

[Yadda yadda yadda]

3 minutes ago, Democorruptcy said:

Slowly slowly catchee monkey.....

I thought the idea was to invest in inflation loving assets? Don't you need people to have money to be able to pay higher prices for such as energy, so those firms do well and pay dividends? The people saving cash now are treating it lovingly as if it were their own but it's coming to you.

Yes but I want the free money to invest also.

The bigger issue is that my commuting cost was near zero, I cycled, so I'm not saving money by working from home.

Strangely my work mates claim not to be saving money, even those who spent three hours per day driving.

[Yadda yadda yadda]

2 hours ago, Cattle Prod said:

Here is an example of @DurhamBorn gas market analysis in play right now. Iran has enormous gas reserves, second only to Russia. And China have just pretty much sewn up the entire lot for themselves:

https://oilprice.com/Energy/Natural-Gas/Irans-Mega-South-Pars-Gas-Field-Nears-Completion.html

 

It's hard to understate how big this gas field is, and it's only 40% of Iran's reserves. I have to take his figures with a pinch of salt, because it's about 20% of world production. But the field is the biggest in the world by far (c. 25% of the entire worlds reserves), and the Chinese have apparently secured its Iranian (the other half of the field lies across the border in Qatar) supply, for a bunch of fiat currency from its client states alone the Belt and Road Debt Enslavement initiative. Unintended consquences of sanctions? If this is true, the Iranians have sold their crown jewel. I'm sure their proud and ancient people arent going to be too happy about that, longer term. It's no coincidence that so many military bases have been built in Qatar in recent years.

The other big untapped gas resource is Turkmenistan, believe it or not. I think the Indians, a near neighbour, are going to have to get friendly. Of course in between are Kashmir and Afghanistan, war zones both, with China just to the North. The resources in Turkmenistan have also been known about for a long time, but are landlocked. The obvious route is a pipeline to India, I think this will be an even bigger flashpoint in the coming years.

 

India reliant on gas via Afghanistan and Pakistan looks a risk too far to me. Even if the Governments became mutually reliant it would be vulnerable to independent action.

Could Turkmenistan go across the Caspian to Russia and onwards to Europe? Supply LNG from the gulf could go to India.