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

[AWW]

11 hours ago, spygirl said:

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

That doesn't pass the sniff test when you look at the last 20 years. Big HPI with depressed wages.

[spygirl]

12 minutes ago, sancho panza said:

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 house 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/

If you are lucky enough to live in an area where HPE is 'normalish' i.e. under 5

The ability to fix long and low and overpay is a no brainer.- best investment evah!

Your example with a 200/m overpayment. If theres two thats 100/m month - about ~23/w, . Well into should not be missed.

Even without much HPI - which I doubt we'll see in the UK, at least real terms, the mortgage is derisked by year 10.

Its that compounding interest again.

 

Overpaying would save you £15,194 in interest alone, and mean you pay the debt off in full 6 years & 4 months earlier.

---

Normally you repay £788 per month. If you regularly overpay £200, you'd be mortgage free 6 years and 4 months earlier. Your total payment over this period would be £221,277.

 

 

Year	Without Overpayment	With Overpayment
0	£180,000	£180,000
1	£174,599	£172,174
2	£169,074	£164,167
3	£163,421	£155,976
4	£157,637	£147,595
5	£151,720	£139,020
6	£145,666	£130,248
7	£139,473	£121,273
8	£133,136	£112,090
9	£126,653	£102,695
10	£120,020	£93,084
11	£113,234	£83,250
12	£106,291	£73,189
13	£99,187	£62,896
14	£91,920	£52,365
15	£84,485	£41,591
16	£76,878	£30,568
17	£69,095	£19,290
18	£61,132	£7,751
19	£52,986	£0
20	£44,651	£0
21	£36,124	£0
22	£27,400	£0
23	£18,474	£0
24	£9,342	£0
25	£0	£0

 

[DurhamBorn]

@jamtomorrow no,iv never invested in crypto,dont understand it and wont be for a while yet.Id never say never of course and i have thought about putting a small investment of a couple of k into that Swedish fund just in case.

[spygirl]

38 minutes ago, sancho panza said:

I

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/

 

Theres a lot of price illusion going on. And the HPE cycle is a lot more volatile than most people understand.

In 1988 the London HPE was ~6.

In 1996ish it was under 3

Near me the ate 90s saw HPE around 2.

 

 

 

[jamtomorrow]

4 minutes ago, DurhamBorn said:

@jamtomorrow no,iv never invested in crypto,dont understand it and wont be for a while yet.Id never say never of course and i have thought about putting a small investment of a couple of k into that Swedish fund just in case.

Fair enough - but is there an obvious way it could be worked into the Fidelity model nonetheless? I expect you'd have to make some heroic assumptions, but in my view there are only two BTC futures that matter: BTC goes to zero "soon" (in which case, nothing worth modelling); BTC becomes further entrenched in a "digital gold" role.

That second possibility: is there any sense in which it could be modelled as a "gold 2"?

[AWW]

20 minutes ago, DurhamBorn said:

@jamtomorrow no,iv never invested in crypto,dont understand it and wont be for a while yet.Id never say never of course and i have thought about putting a small investment of a couple of k into that Swedish fund just in case.

I think it's worth having a small allocation, just in case BTC does ever become the much vaunted "digital gold". I've got a bit over a grand's worth and view it as cheap insurance.

This is the best explanation I've read of the nuts and bolts https://michaelnielsen.org/ddi/how-the-bitcoin-protocol-actually-works/

[jamtomorrow]

34 minutes ago, AWW said:

I think it's worth having a small allocation, just in case BTC does ever become the much vaunted "digital gold". I've got a bit over a grand's worth and view it as cheap insurance.

This is the best explanation I've read of the nuts and bolts https://michaelnielsen.org/ddi/how-the-bitcoin-protocol-actually-works/

Bear in mind you'll have to access BTC ETNs from outside the UK from Jan 1, after FCA effectively banned UK providers from offering them: https://www.standard.co.uk/business/bitcoin-crypto-ether-ripple-a4564786.html

Note that HL have already welched on what they said for the article: "Hargreaves Lansdown ... spokesman said investors will still be able to invest until the rule comes into effect in January". Not true: they pulled up the drawbridge a few weeks back, and you already can't buy XBT (I know for sure because I was looking into XBT for CGT planning).

Possible interpretation as a huge contrarian signal of course, but as ever DYOR etc

[Democorruptcy]

16 hours ago, UnconventionalWisdom said:

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.

I'm in a UK holiday destination and I don't see more UK breaks increasing my chances of affording a nice place here. Quite the opposite, even different planet. I think long term BTL is shifting to holiday lets. £10,000+ covid grants for having an AirBnb closed before the summer season then fully booked doesn't help.

[Thorn]

2 hours ago, DurhamBorn said:

@jamtomorrow no,iv never invested in crypto,dont understand it and wont be for a while yet.Id never say never of course and i have thought about putting a small investment of a couple of k into that Swedish fund just in case.

For leverage to Bitcoin there are companies like MARA, Argo blockchain, Hive which seem to go up when it rises.

Like my pizzas. Which by now are So Bloody Good, thanks again DB.

Wee Ferrari...Heat turned up to nearly full, heat the pizza with lid up for a minute first before you close it down to get a harder base so the slices do not flop when you lift them. 
Unbelievable.  Grazie once again. 

 

[UnconventionalWisdom]

34 minutes ago, Democorruptcy said:

I'm in a UK holiday destination and I don't see more UK breaks increasing my chances of affording a nice place here. Quite the opposite, even different planet. I think long term BTL is shifting to holiday lets. £10,000+ covid grants for having an AirBnb closed before the summer season then fully booked doesn't help.

IO BTL will get hammered when interest rates rise. Not sure how most holiday lets are funded- do banks lend in the same way as BTL?

[DurhamBorn]

https://www.telegraph.co.uk/business/2020/11/13/eu-hints-brexit-energy-blockade-power-blackouts-hollow-threat/

Just the start of this sort of thing.Of course the only reason the UK brings in the energy at peak is because it is a bit cheaper and we dont actually need it.That is as long as you fire up those lovely gas turbines and have DRAX running at full pelt on its wood chips.

The whole world will be like this soon.Blocks using energy supply as sticks to beat with and countries working out long term deals with countries and supplies they can trust.

If bozo Boris announces the end of combustion engines by 2030 it just moves the demand from oil to gas,but the gas price will go up much more than the oilies lose in oil sales.Those just go somewhere else,many countries still use two stroke engine  .

The other thing is the fact the EU will need UK wind power later in the cycle as the article mentions,though without more gas use it will be nowhere near enough.

Slowly slowly the energy sector is starting to see articles like this,moving back into centre stage.Lots of hyperbole of course,but underneath the road map is falling into place.Probably the story of the cycle.

[DurhamBorn]

22 minutes ago, Thorn said:

For leverage to Bitcoin there are companies like MARA, Argo blockchain, Hive which seem to go up when it rises.

Like my pizzas. Which by now are So Bloody Good, thanks again DB.

Wee Ferrari...Heat turned up to nearly full, heat the pizza with lid up for a minute first before you close it down to get a harder base so the slices do not flop when you lift them. 
Unbelievable.  Grazie once again. 

 

Best thing ever arent they.I buy Italian Caputo flour in bulk and fresh yeast and freeze that in 25g portions.I use the pizza express passata usually £1 from Tesco,enough for 5 pizzas.Il use that little trick myself for the base.I actually use trays now usually so i can have 3 or 4 pizzas ready to go in one after the other.When i have family nights they all say are you making pizzas,with a pasta bake chips etc i usually feed 10 for around £10.

I also really love my Morphy Richards 1l soup maker.20 mins press one button and fantastic soup.48p for Broccoli 1 potatoe,1 onion,1 kallo low salt stock cube,black pepper,pink salt,touch of cummin and touch of tumeric and touch of mixed herbs.

4 servings for 85p.Only tip is if anyone gets one is it says use cold water,iv found it doesnt cook enough if you do,so i use half boiled from the kettle.

Of topic i know,but fantastic healthy food dirt cheap means more for investing,or less needed to retire.Thats on topic 

 

[Democorruptcy]

34 minutes ago, UnconventionalWisdom said:

IO BTL will get hammered when interest rates rise. Not sure how most holiday lets are funded- do banks lend in the same way as BTL?

There seems to be a trend here of public sector workers in more secure jobs so presumably no problem getting finance if they need it, buying 2nd homes to retire to years ahead but letting them out for holidays now. 

Mortgages and tax breaks.

[MrXxxx]

20 hours ago, geordie_lurch said:

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...

 

30 mins on summary of first.

Key statements:

FIAT survival=confidence.

Portfolio=ignore short-term noise, aim yrs.

 Commods time has come but diversify just in case.

Next 10 yrs everyone will lose, just some more than others, make sure latter via portfolio choices.

[spygirl]

2 hours ago, UnconventionalWisdom said:

IO BTL will get hammered when interest rates rise. Not sure how most holiday lets are funded- do banks lend in the same way as BTL?

IO BTL are getting hammered now.

95% of the  idiots just dint know the tax changed 5 years ago.

Holiday let mortgages (FHL) are very rare. 

Only Leeds BS offer them.

Other small BS do, but tend to restrict the mortgage to housing in a a very small area.

I reckon the FHL laons will take down Leeds BS.

 

 

 

[sancho panza]

On 13/11/2020 at 09:29, jamtomorrow said:

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.

When I finally get the time,I'll invest more time in reseacrhing behaviorual econ and game theory.It fascinates me and I saw extreme herding for the first time in 2000 tech bubble and saw a lot of people make a forutne and then lose it in a year.

I always remember reading Karl deninnger back in 08 and he said that in a crisis it becomes about the return of the money rather than the return of it.Now we've dropped all the samller banks,it's less of an issue but demonstrates the investors conundrum beautifully.

For years I'bve had most of my middle calss friend s telling me to buy a hosue but I've got my own strategy and aren't afraid of being on my own.Finding this palce and the people on it has helped me stay sane though.I won't lie.It's hard when you stay away from the herd.

Takking of panicing,I think this thread came into it's own at the bottom in March/April.They were some hard days to hold your line and to buy

On 13/11/2020 at 09:37, 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.

 

Fascianting as ever CP.As someone who has spent time in Afghan,anythign that requires routing pipes through their jsut isn't worth the risk in terms of people getting killed,pipelines getting drilled and blown up.Even if you put private armies down they jsut wouldn't be able to secure the pipleines to any cost effective degree in dollars let alone the loss of life.

How about a route through Georgia and ROmania into western eauope or would that cost too much?need a higher gas price?

It's also hard to see Pakistan helping the Indians out in that way although I always remmebr being shocked when you told us how the CCCP had suppleid western europe without interruption thru the cold war.Nothing would hsock me after that

[Yadda yadda yadda]

2 hours ago, DurhamBorn said:

I also really love my Morphy Richards 1l soup maker.20 mins press one button and fantastic soup.48p for Broccoli 1 potatoe,1 onion,1 kallo low salt stock cube,black pepper,pink salt,touch of cummin and touch of tumeric and touch of mixed herbs.

4 servings for 85p.Only tip is if anyone gets one is it says use cold water,iv found it doesnt cook enough if you do,so i use half boiled from the kettle.

Of topic i know,but fantastic healthy food dirt cheap means more for investing,or less needed to retire.Thats on topic 

 

Does the soup maker do all the chopping and blending? I quite enjoy chopping stuff up if I stick some music on. It does mean I tend to overdo it and freeze the extra.

I use bouillon powder as the stock. Kilogram tubs for £10-11.

With pizzas I haven't splashed out on the Ferrari but I do use a Panasonic breadmaker to mix the dough.

[sancho panza]

On 13/11/2020 at 10:05, 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?

I think you have to be careful carrying 90% LTV loans unless you have significant spare capacity.

My thesis is that when I retire,I want to have either  a portfolio that kick out the rents I need or a hosue paid off(or a bit of both).

The opportunity cost of buying a hosue is that you lose that ability to save into other asset calsses.

Having said that we rent on a 3-3.5% gross yield,if I was renting at 7%++ then I'dlikely look to buy somewhere

23 hours ago, janch said:

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

AS per my reply to DB wages actually kept up with HPI in the 70's.

Problem going forward is whether families will see food/fuled prices rising fastern than HPI.My view is that they wil and choices will have to be made.

AS a family I'm far keener to hedge our food and fuel than I am the cost of renting/buying a hosue

 

[DurhamBorn]

15 minutes ago, Yadda yadda yadda said:

Does the soup maker do all the chopping and blending? I quite enjoy chopping stuff up if I stick some music on. It does mean I tend to overdo it and freeze the extra.

I use bouillon powder as the stock. Kilogram tubs for £10-11.

With pizzas I haven't splashed out on the Ferrari but I do use a Panasonic breadmaker to mix the dough.

No you chop it up yourself into small cubes etc,but it does blend it to a smooth soup,it has blend setting or  chunky setting,chunky is good for veg soup/broth etc,i also use mine for pasta cooks perfect and mean to try rice,only tip is put a bit of water in before veg so it doesnt stick to bottom.Great device.

[MrXxxx]

19 hours 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.

Out of interest and to learn from others, for those who have bought the Scottish play share:-

1. What made you buy them in the first place?

2. How has it changed since?

3. What are you plans to do with them now, and why?

Share as much or a little as you like...

[Castlevania]

33 minutes ago, MrXxxx said:

Out of interest and to learn from others, for those who have bought the Scottish play share:-

1. What made you buy them in the first place?

2. How has it changed since?

3. What are you plans to do with them now, and why?

Share as much or a little as you like...

I sold back at the beginning of April. They’re still on my watch list, and I like the new CEO. The nuclear part is a problem that they really should have offloaded years ago, and now that China isn’t liked finding a buyer looks difficult. I’d say they’re probably worth holding unless there’s something way more compelling to buy.

[Erewhon888]

On 07/11/2020 at 21:01, MrXxxx said:

Just listened to this throughout the day; had to come back a couple of times, and found it really difficult to understand the detail. Can anyone explain the following:-

1. What is long volatility and short volatility?

2. He mentions volatility exposure, what doe she mean by this i.e. is it buying call options when long volatility and put options when short volatiliy?

3 He mentions the tails (of a distribution?) and towards the end an example cites is the "Right tail with the collapse of FIAT, and the left tail with the default of loan"...I cant get my head around this...all I can think of is say a -ve skewed distribution for equities where they steadily climb on the left tail and then suddenly drop after the peak on the the right hand side...how can you get the default crashs mentions above on the left hand side when its climbing?

I also found it very difficult to get my head around. You may find this whiteboard review from Gammon relevant.

 

[arrow]

Martin "Magic Money Tree" Lewis is now covertly attempting to support house prices by getting the government, ie taxpayers, to bail out mortgage owners.

They're not "mortgage prisoners", they're idiots who didn't want to believe low or zero interest mortgages and liar loans would last forever.

Getting renters through their taxes to support this scheme is obscene.

 

https://www.moneysavingexpert.com/news/2020/11/government-must-act-now-to-release-250-000-mortgage-prisoners--s/?utm_source=MSE_Newsletter&utm_medium=email&utm_term=10-Nov-20-50647520-2093&utm_campaign=nt-oneliners-one&utm_content=1

 

 

[arrow]

Looks like Saudi is in a bind, with oil prices this low.

"After the collapse of oil prices this year, oil revenues actually decreased to approximately 410 billion riyals. These revenues alone are insufficient to cover even the salaries bill estimated at 504 billion riyals in this year's budget, not to mention the difficulty of financing other items which include capital spending by 173 billion riyals and social security benefits by 69 billion riyals as well as operation and maintenance bill estimated at 140 billion riyals and others, which means an economic recession and millions of jobs lost."

https://www.spa.gov.sa/viewfullstory.php?lang=en&newsid=2157536#2157536

I wonder how hard they'll push to get oil prices higher.

The next opec+ meeting is going to be interesting

[sancho panza]

On 13/11/2020 at 18:35, DurhamBorn said:

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.

I think anyone who can access these ten year rates,wants to stay in the hosue 10 years + and has an overpayment startegy would be mad not to take it.Mad.....it's hard to envision how mortgage moeny gets cheaper here with some of the data coming out.

Barclays are doing a 10 yr 2% fix at 60% LTV ffs............no wonder they're not making any money.