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


spunko

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reformed nice guy
4 hours ago, Yadda yadda yadda said:

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!

I agree with the per capita number, but China alone has 1.5 billion people. Three times the size of Europe.

My measure of when we are past the east/west tipping point is when people start opening menus in mid level restaurants in tourist cities (Paris, Rome etc) and Mandarin is on the first page.

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32 minutes ago, Cattle Prod said:

Maybe that region is risky because those reserves are sitting there (amongst many other reasons of course). In the meantime the dictator running the place is putting up statues of his dog, because, well, he can. Every government in the region must be kissing his arse. Funny old world.

image.png.f28d6e82f755b1e0d824660843235a3f.png

He gave Putin one of those dogs :ph34r:

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6 hours ago, Cattle Prod said:

In the last inflationary period, housing was perhaps the best thing to own (according to my old man, anwyay!).

Yes.  In the 70s it felt like the massive mortgage you took on was quite scary but then after a few years not so bad as long as you could keep up with the rising monthly payments (no fixed mortgage rates then  IIRC).  Wages lagged inflation but what seemed a very large proportion of ones wage at the beginning dwindled quite considerably.  Meanwhile the price of the house was rising steadily.  What people forget though is that most of the housing stock was in a very bad state of repair and all those boomers had to do a lot of DIY to get them habitable.  We were very naive too so had no idea of the cost involved and had made no allowance for it. (No Sarah Beeny types to give some reality).

The takeaway for now is: Don't overstretch with the purchase as the payments will probably rise considerably over the term of the mortgage plus any repairs/improvements allow a realistic amount.  I would get as long a fix on the mortgage as possible and overpay if its feasible. 

In the 70s some people advocated getting as big a mortgage as you could as you were paying back in devalued money but this time other bills will probably rise comparatively more especially council tax and fuel so overstretching with a mortgage is a real possibility.

Just my thoughts DYOR etc

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This is huge but isn't getting much coverage in the Western media:

 

China about to pull off ‘diplomatic coup’ by striking world’s largest free trade agreement

Fifteen Asia-Pacific nations including China and Japan plan to sign the world’s biggest free trade deal this weekend. The FTA will cut tariffs, strengthen supply chains with common rules of origin, and codify new e-commerce rules.

The Regional Comprehensive Economic Partnership (RCEP) is expected to be announced at the Association of Southeast Asian Nations (ASEAN) Summit, which Vietnam is hosting virtually. It will involve the ten member states of the ASEAN bloc – Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam – as well as their trade partners Australia, China, Japan, New Zealand, and South Korea.

The new economic bloc will thus represent around a third of the world’s gross domestic product and population.

It will become the first-ever free trade agreement to include China, Japan, and South Korea – Asia’s first, second and fourth-largest economies. 

https://www.rt.com/business/506564-china-worlds-largest-free-trade/

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10 hours ago, working woman said:

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

My very first memory of any sort of financial education I received from my parents was my Dad telling my that if you put a hundred into your bank account, one year later you'll get back 120. We had 2 decades of double digit inflation, usually in 20-30% range, but also including years with 250 and 600%. I don't know which one is crazier, those times or the ones we have now. 

Edit: those two years of consecutive tripe-digit inflation was when Poland's biggest and most famous fortunes were made.

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geordie_lurch

This seems like a decent new video for followers of this thread going by the title and quick skim of the description but not watched it yet myself...

 

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8 hours 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?

My son bought back in June with a fantastic 10 year fix from TSB,2.6%ish 5 year 10% over pay allowed then last 5 years can over pay as much as you want,no tie in but same rate.Cracking deal.Up here though the nice 3 bed semis etc are still low,some of the lowest in the country.Depends where really.Those 10 year fixes are going to prove fantastic.My son bought £30k of silver as well at $17ish and is going to sell it to pay the mortgage off when they meet,they are already wacking it down anyway,only 22 and 24.Should be mortgage free at 32.

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UnconventionalWisdom
10 hours ago, working woman said:

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

On the flip side housing should be a lot more affordable. The majority of young people are using ryanair as a means of escape. An industrial, inflationary cycle combined with falling house prices could mean a lot more owner occupiers at the expense of BTLers. 

I'd happily replace European trip for UK breaks if it meant I could afford a nice place.

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UnconventionalWisdom
10 hours ago, Cattle Prod said:

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

Over-leveraging. There's a lot of BTL in the UK. That model only makes sense with rising house prices. Most only just make enough from the rent to cover the mortgage and repairs with these low rates. If the rates go up, they are losing money. So the decide to sell, but then everyone else has the same problem, so the prices come down. Domino effect starts. 

People have pushed themselves to the limit and so if rates go up, they might not get good mortgage deals. Prices come down, banks don't lend and domino effect starts again. 

Might be wrong as they have thrown the kitchen sink  at housing in the past so who knows. 

It's already starting

https://www.thisismoney.co.uk/money/mortgageshome/article-8929545/Mortgage-rates-plummet-lots-equity-90-cent-mortgages-expensive.html

A tale of two housing markets: Equity-rich homeowners see mortgage rates plummet as first-time buyers watch rates climb as deals all but vanish

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UnconventionalWisdom
9 hours 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?

If you find a house you love, option 2. If you don't, option 1- paying a bit extra for freedom is a good thing. I'm renting because I live in the SE on the commuter belt. Never found anywhere where I thought it was worth it. 

I then found HPC as I wanted to know why my above average salary was only getting me a 1 bedroom flat. I'm happy that it got me into investing and macroeconomics. I also have 5+ years experience developing machine vision/learning solutions and people are starting to want to chat. Good to know I can move on if a good opportunity arised.

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1 hour ago, UnconventionalWisdom said:

Over-leveraging. There's a lot of BTL in the UK. That model only makes sense with rising house prices. Most only just make enough from the rent to cover the mortgage and repairs with these low rates. If the rates go up, they are losing money. So the decide to sell, but then everyone else has the same problem, so the prices come down. Domino effect starts. 

People have pushed themselves to the limit and so if rates go up, they might not get good mortgage deals. Prices come down, banks don't lend and domino effect starts again. 

Might be wrong as they have thrown the kitchen sink  at housing in the past so who knows. 

It's already starting

https://www.thisismoney.co.uk/money/mortgageshome/article-8929545/Mortgage-rates-plummet-lots-equity-90-cent-mortgages-expensive.html

A tale of two housing markets: Equity-rich homeowners see mortgage rates plummet as first-time buyers watch rates climb as deals all but vanish

So people with overpriced boxes with windows want their equity but it's like house bartering. They need to find someone else to buy who also has equity from someone else who's buying etc etc.

Please let this be "it". I'm in my forties and I can only get three kids in one bedroom for so long.

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Does anyone have any ongoing thoughts on DRAX?  I am now 50% up and thinking about adding more - but thinking of holding on until the bust, it seems buying now would be, while not buying at the 'top' (With our forecast), not an effective time to buy.  I know we don't do timing as such, but still. Nothing wrong with maximising your buying power.

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4 minutes ago, Loki said:

Does anyone have any ongoing thoughts on DRAX?  I am now 50% up and thinking about adding more - but thinking of holding on until the bust, it seems buying now would be, while not buying at the 'top' (With our forecast), not an effective time to buy.  I know we don't do timing as such, but still. Nothing wrong with maximising your buying power.

Im up 100%+ on them now but i wouldnt be buying more as there are other areas cheaper IMO.I actually trimmed a few ,but only to re-allocate as the holding was top heavy.Really pleased with them though and actually in profit now on Royal Mail,only the Scottish play share now,but i think humans will of visited Alpha Centauri before that happens.:o

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16 minutes ago, DurhamBorn said:

Im up 100%+ on them now but i wouldnt be buying more as there are other areas cheaper IMO.I actually trimmed a few ,but only to re-allocate as the holding was top heavy.Really pleased with them though and actually in profit now on Royal Mail,only the Scottish play share now,but i think humans will of visited Alpha Centauri before that happens.:o

Thanks, do you intend to hold the remainder for the rest of the cycle?  

I think I feel the same about DRX as you did about BAT.  It's been good to me. :xxD

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12 hours 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. Then again, in Lionel Shrivers book "The Mandibles", about a future America where the dollar is worthless, people stockpiled all sorts of odd things, like cupboard hinges. I can see that rush to physical goods in an inflation, along with a roaring Gumtree/FB Marketplace economy.

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 wouldn't worry too much about flights being prohibitve. Oil prices in 2008 were almost $200 a barrel, inflation adjusted. They handled it by slapping on fuel surcharges. They were annoying, but I did plenty of long haul travel around then, and I wasn't well off. I think it was less than a £100 on say a £600 ticket to Asia. It's a fair whack, but it's not going to be double or triple. High oil prices hit the entire worlds population equally, when our incomes are far from equal, so they will hit poorer countries much harder, relatively. There were food riots in poorer countries while I was grumbling about my fuel surcharge. Fact is we are relatively rich, globally speaking. I'd be more worried about how this is going to hit and destabilise some parts of the world you might want to visit.

Agree on Council Tax, but we might see some good old fashioned tax riots on that one. It's an awful tax.

You've got to grasp theres a number of different inflations at play.

Theres -

- wage inflation.

- general price inflation.

- house inflation.

Then you've got gormless banks lending too much.

Simply put - medium to long term houses are a hedge on wage inflation.

Sure London/SE has seen some gormless lending to support high prices, but they are collapsing as theres not the wages to support them.

And you've gormless schemes like htb, which are hitting a brick wall due to lack of wage inflation.

BoE MMR bakesin housing to wage.

 

 

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14 hours 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.

 

 

 

Cost if foriegn holidays has gone up massively since Brexit.

That's why people are pouring into Islamic shutholes to escape the €/£.

What's the choice? UK holidays and eating out are not cheap. And the sun doesn't shine.

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3 hours ago, UnconventionalWisdom said:

Over-leveraging. There's a lot of BTL in the UK. That model only makes sense with rising house prices. Most only just make enough from the rent to cover the mortgage and repairs with these low rates. If the rates go up, they are losing money. So the decide to sell, but then everyone else has the same problem, so the prices come down. Domino effect starts. 

People have pushed themselves to the limit and so if rates go up, they might not get good mortgage deals. Prices come down, banks don't lend and domino effect starts again. 

Might be wrong as they have thrown the kitchen sink  at housing in the past so who knows. 

It's already starting

https://www.thisismoney.co.uk/money/mortgageshome/article-8929545/Mortgage-rates-plummet-lots-equity-90-cent-mortgages-expensive.html

A tale of two housing markets: Equity-rich homeowners see mortgage rates plummet as first-time buyers watch rates climb as deals all but vanish

The BoE doesn't control med-long UK rates. The FED does.

We are ok whilst the Fed is zirping/expanding.

However the UKs economy is more european now - low growth, high welfare which doesn't drive growth.

The fed will turn when prices get higher - they will as China is no longer exporting deflation and in the shithouse for the foreseeable future.

 

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13 hours 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.

 

Your psot has got me thinking.People in the UK and the West in general have been used to much higher standard of living than their counterparts in many other countries around the worldover many decades.

A chunk of that has been down to the 'exhorbitant privilege' afforded them by the strength of their currency.

The toilet roll panic is an example of herding which we see throughout economic and societal activity.But imagine what it s going to be like if people are fighting for food? or fuel?

The change in holiday habits will be the start but for many this slow erosion of living standards has been going on for 15 years when you consdier the slow but organic growth of Aldi and Lidl alongside the mismeasurement of inflation for the average Joe and the consequential decline in real wages for working age hosueholds.

 

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