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

[DurhamBorn]

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.

[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.

[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

[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.

[Noallegiance]

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.

[JREWING]

Horizonte Minerals

Any holders. Opinion. Thoughts.

https://www.lse.co.uk/SharePrice.asp?shareprice=HZM&share=Horizonte-Min

[Sasquatch]

2 minutes ago, Panda said:

Horizonte Minerals

Any holders. Opinion. Thoughts.

https://www.lse.co.uk/SharePrice.asp?shareprice=HZM&share=Horizonte-Min

Get thee over to ye olde sharing trading section of the forum. Make sure you order your lear jet accessories catalogue as well.

 

 

[Loki]

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.

[DurhamBorn]

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.

[Loki]

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.

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. 

[MrXxxx]

3 hours ago, Bricormortis said:

 

 

Just grabbing a bite to eat...

Just going out for a MuttDonalds!

[spygirl]

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.

 

 

[spygirl]

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.

[spygirl]

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.

 

[sancho panza]

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.

 

[Chewing Grass]

4 minutes ago, sancho panza said:

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.

and this since 2008.

That privilege resulted in Mercedes being a mass market lease car, driven by young girls who just passed their tests and sitting outside social houses (rented/private/social) as 2K miles per year 'status symbols'.

Strong currency and low-interest rates to keep the plebs solvent and spending whilst having their pensions i.e. retirement trashed.

[DurhamBorn]

Just now, Chewing Grass said:

and this since 2008.

That privilege resulted in Mercedes being a mass market lease car, driven by young girls who just passed their tests and sitting outside social houses (rented/private/social) as 2K miles per year 'status symbols'.

Strong currency and low-interest rates to keep the plebs solvent and spending whilst having their pensions i.e. retirement trashed.

BOE has been printing the welfare budget for a decade mostly and the amounts have caught up with wages for half the population.Like you say its incredible.

[reformed nice guy]

Imagine being a Chinese student coming to the UK, looking into the window of a council house and seeing a 80in TV for a family that hasnt worked in multiple generations. You think back to the relatives back in China working 12 hour days to make the parts for it.

They must find us mad

[Barnsey]

 

[jamtomorrow]

Been trying to round up some ideas on the timing of when BTC properly "breaks cover", specifically in terms of when its impact on wider macroeconomics becomes impossible to ignore.

I came across this from June and thought worth sharing:

https://coinmetrics.substack.com/p/coin-metrics-state-of-the-network-9b9

Here's the standout passage:

With daily trading volume of only $4.1 billion, Bitcoin’s spot markets are still minuscule in comparison to U.S. equity markets, U.S. bond markets, and global foreign exchange markets. The interpretation is that Bitcoin, in its current state, is most comparable in size to a large capitalization stock rather than a distinct asset class. A large institutional investor such as an endowment, pension fund, or sovereign wealth fund might reasonably conclude that Bitcoin is only suitable for a portion of the already small allocation to alternative assets rather than carving out a separate allocation towards it. 

If historical growth rates can be maintained, however, Bitcoin’s current daily volume from spot markets of $4.3 billion would need fewer than 4 years of growth to exceed daily volume of all U.S. equities. Fewer than 5 years of growth are needed to exceed daily volume of all U.S. bonds. 

Bearing in mind those are extrapolations to full parity with existing markets, I'm expecting the effects outside cryptoworld to reach "impossible to ignore" long before parity.

@DurhamBorn, have you tried incorporating crypto in your incarnation of the Fidelity model?

[Majorpain]

9 hours ago, spygirl said:

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.

China is to the US what Germany is to the UK - supressing their currency to make their goods artificially cheap.

The orange one put at stop to that, and i imagine he has quite a few things cooking for his second term that will make life for the commies quite unpleasant.  If China had been able to wait another 10-15 years the US would have been dancing to their tune, as it is the US president has control of things ATM.

[spygirl]

1 minute ago, Majorpain said:

China is to the US what Germany is to the UK - supressing their currency to make their goods artificially cheap.

The orange one put at stop to that, and i imagine he has quite a few things cooking for his second term that will make life for the commies quite unpleasant.  If China had been able to wait another 10-15 years the US would have been dancing to their tune, as it is the US president has control of things ATM.

Bar a few years after the war, the Germans have never had a cheap DM policy.

Germany out designed and quality the UK.

 

 

[Majorpain]

4 minutes ago, spygirl said:

Bar a few years after the war, the Germans have never had a cheap DM policy.

Germany out designed and quality the UK.

DM isn't the problem, Euro is!

[sancho panza]

On 13/11/2020 at 08:54, 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.

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

I think there are a couple of caveats/provisos.I incude some data below which I've had to finish at 2016 as I haven't time to find a 2020 source and my point remains the same anyway.The mrotgage repayment table is indicative.

Genererally,you're right hosue prices have beena good inflation hedge in the past.However the key feature of the 70's is that wages kept pace with infaltion.

 

However,there are two groups here imo.

1) People who own outright/have fixed rate mrotgages to see them to the end of their term/viable overpayment strategy

2) Everyone else with varying degrees of leverage

 

Group 1 will find housing a decent infaltion hedge depending when they bought and at what price.Plus or minus...

Group 2 is where the problems will most likely come and whether hosuing provides a decent inflation hedge depends on whether you can ride it through the trough.

Below are the data for hosue prices and wages from relaible sources.It's plain that wages kept pace with HPI during the 70's.Will the same happen in an environment where the average salary in Leicester is circa £25k and the average 3 bed semi £200k and the biggest employers here are the two Uni's,three hosptials and two councils(city and county)?I'm not so sure.It relies on a key number of things such as fiscal spending maintaining itself,unlikely imho-given the vast size of the state,the consistent fiscal deficits and the booming national debt.

Another key consideration is that the hosuing market prices are set at the margin where vendors need to sell.We also know the bankign system is more over leveraged than 2006.

So the prospect of a decent downdraft in hosue prices could be a significant feature of an economic dislocation.That may provide an opportunity for people to buy in at reasonable house price/salary multiples to then use as an inflation hedge.

Below the HP/Salary data is a screenshot of a 25 year repayment plan.The risks of non payment or rising IR's are patent.If IR's lift to 5%,then the inital interest payments are circa £9000 rather than £4000.Given hwo many people are highly leveraged at the start of their mortgage or via HTB,there are a lot that would be unable to take that uplift

So in essence a lot of hosuing potential as an inflation hedge relies on your abiblity to stay in the game.The belwo mortgage is 2.29% on £180k.Years 1-15 are the crucial ones where I would suspect default risk is highest.

Ave House price       Ave Wage Manual             House/Wage mulitple

1970 £3920k                   £1500                          2.61

1980 £19273k                 £6448                         2.98

2016  £205,555              £36,400                      5.64

UK inflation data 1970's-Macrotrends

Land Reg House price Data 1970+

ONS UK Wage data 1950 on

 

https://www.mortgagecalculator.uk/

[geordie_lurch]

Thanks for all the housing chat in this thread as I think it's vital to look beyond the other inflation assets we are all already on board with here and spread what little 'wealth' some of us have. The current environment does remind me a lot of the olden days on ToS wondering whether to sell to rent before the 2008 crash (I sold in 2006), I then bought again in 2009 when everyone was saying it was madness and then again in 2014 which worked out well thankfully but only because the powers that be did things none of us predicted.

However I now find myself in a different position as I'm now in my 40s and renting again. I thankfully have some cash coming my way and I'm realistically going to need a base in a certain area to be near my children so putting that cash into a fixed rate mortgage of minimum 5 years, possibly 10 even if house prices fall back from today's levels 20% I will still be better off than renting and probably having to pay increasing rent that landlords will try to pass on given what we all believe is coming.

Everyone's circumstances are different obviously but fixing in at the mortgage rates that are still currently available if you need to be in a certain area for that same time period, can overpay etc as DB mentions seems to have very little downside compared to there being no money available for mortgages when or if we FINALLY get the house price crash