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

[ThoughtCriminal]

Does anyone seriously think the masses are itching to go on a spending orgy? 

 

I just can't see it. 

 

Anyone still on furlough in January doesn't have a job, they just don't realise it yet. 

 

The unemployment dam will break, it's just rising. 

[Noallegiance]

1 hour ago, Hardhat said:

Crazy, real surge on Powerhouse over the last week.

Hydrogen sector is very hot. But as we know a lot of big energy and engineering companies are betting on this technology. Could be more upside from here.

I expect them to be a hold until being bought out.

[JMD]

13 hours ago, sancho panza said:

Also lining up some Vodafone at £1-20 and some Rockhopper sub £0.06

With a bit of luck we might get some more downside.

These are intense times.I'm of the opinion this isn't the BK yet.

Be almost rude not to buy at those prices!

Decl: i own both.

[Bricormortis]

57 minutes ago, ThoughtCriminal said:

Does anyone seriously think the masses are itching to go on a spending orgy? 

 

I just can't see it. 

Holidays abroad

[JMD]

Latest newsletter from Evergreen GaveKal, as usual its great for global macro analysis, this one includes thoughts on Taiwan. (note: i have mentioned these guys before, but they are very generous with their research/free newsletter, so thought it worth giving them another plug. Also be interested in what others think regarding the quality/usefulness of their opinion/data) 

 

The 10 Important Changes of The Past Year - Evergreen Gavekal

 

Extract below...

'...No longer would supply chains be stretched across the globe. Instead, the world would break into three separate economic zones, each with their own currency of reference (US dollar, euro and renminbi), financial capital (New York, London, Hong Kong), bond market (treasuries, bunds, Chinese government bonds) and their own supply chains. But this breakdown would present challenges.

• For Europe, it is the lack of an army, space program or serious tech center. Also, after Brexit, its financial center will be outside its immediate borders.'

[JMD]

7 hours ago, Harley said:

This is what I expect to be been more key (i.e. explicit) in 2021 and onwards.  And what I mean by standing in the burning building.  Limited point discussing stock A versus stock B, wealth taxes, etc when FCA regulations deem you must put x% of your investments into a long term bond (with a nice name and mood music) paying well below real inflation.  An escalation in the war on savers, playing to the inter-generational, over-indebted, and spendthrift gallery.  The ramping of social causes and the new language being promoted makes sense - but as always look at what they do not what they say and remember, it's always about the money.  Pure political economy.  Happy Christmas!

https://moneyweek.com/investments/investment-strategy/602483/russell-napier-on-debt-financial-repression-and-what-it

or

https://api.spreaker.com/download/episode/42496485/201202_russell_napier.mp3

PS: And with regulation comes.....cronyism and corruption as it is decided by "them" what investments are deemed "productive"!

Harley, interesting topic because i have fully come round to the risk/danger of government financial control/regulation (stealth stealing!). (Its the reason why in the interum, why i am fixated(?) on the government covid-control policies... but i know, i know, enough of that already!).

You have raised the topic of financial repression before, but i wonder, have you come to any conclusions, maybe a strategy, for how to possibly avoid it? Napier says hold assets/equities in own name to avoid financial repression, but in the case of equities that does not work for most people who use isa/sipp instruments, which in turn must be held on government approved platforms.

[MrXxxx]

6 hours ago, Democorruptcy said:

Just reading 60-30-10 estimated returns in the latest Hussman downdate

https://www.hussmanfunds.com/comment/mc201220/

 

I suppose FT author would argue that that is looking backwards and not forwards?

[JMD]

28 minutes ago, Cattle Prod said:

Interesting table. Worth noting that the US empire is the only one energy independent, and that tech, finance, space and especially military all depend on energy. So those elements are not really independent in the other two spheres either. China is trying to sew up supplies in the ME, EU in Russia. Both very vunerable.

And the only way US empire is energy independent is through Canada. I've said it before, but Canada is going to be hugely important in the 2020s. Just watch Joe "green energy" Biden approve more pipelines from Canada, and Trudeau continue lying through his wokeist teeth as Alberta ramps up to its full potential.

Yes you are right in pointing out that Canada is key component of the US 'Empire'. The US has other benefits going for it, such as food security, extensive and cheap rail transport system, secure access to two oceans.

'US empire', 'European empire'... i love their non-pc, un-nuanced French take on things (GaveKal founded in France and partners are still French nationals). But their views/conclusions still very valid i think. 

[sancho panza]

How screwed is CRE?

If John Lewis can't get the Grannies in,who can?

https://www.chargedretail.co.uk/2020/12/22/online-purchases-now-account-for-up-to-70-of-john-lewis-sales/

Purchases made online accounted for up to 70 per cent of sales at John Lewis this year, as the retailer reported back on its Shop, Live, Look consumer report for 2020.

Examining customer trends in the past 12 months, John Lewis found customers were now using their working day to shop online, with peaks at 11am-4pm, as opposed to in the evening between 7-10pm.

Online now accounts for 60-70 per cent of John Lewis sales whereas before the pandemic it was only 40 per cent.

 

[JMD]

6 minutes ago, Cattle Prod said:

There is low hanging fruit here for the government, most people don't have a clue what their pensions are invested in, and the vast, vast majority are in funds. They can manadate some of that into their bonds before bothering with the likes of me where 80% of my SIPP is in directly held equities. Than can steal from the sheep before trying to work out how to subvert my property rights.

Property and ownership rights are some of the strongest areas of English law. Best go after the guy who says "I'd never invest in the stock market, gambling innit, bricks and mortar for me" whilst his pension is invested in stock and bonds on his behalf for a fat fee. He'd probably think gilts are a great idea anyway. "How could you lose money on government bonds anyway? Guaranteed return of me money." Sooo gilt-y....

Thanks CP, similarly for me, most of my investments are stocks held in isa/sipp. Hope you are correct, if so i can sleep a little easier.

Its just that, given mounting debt, growing state interference, and recent examples such as Japan gov. buying its own etfs/US gov. buying corporate bonds, i think Western states will surely become a far larger part of the economy going forward. This worries me because private wealth will necessarily then become a far smaller part of the economy, and therefore open to easy abuse. Perhaps i am fearing/going too far here? But I think the figures (dont have exact ones to hand) for state proportion of national economy pre-covid was: US/Europe/Northern Europe(Scandi, etc) was: 35/45/50%, and today each has increased by approx. 10%. 

 

[Hunty]

 The War In The Silver Market Is Heating Up As Price Of Silver Sees Major Upside Breakout.

December 21, 2020.

James Turk.

 

There are two key takeaways from today’s trading in the precious metals. First, there is a clear message from the big jump in volatility. Silver had a 9% trading range between its high and low price today, which is very unusual but also good news. Volatility like this normally accompanies bull markets, which is an observation also being confirmed by the second takeaway. Silver finally broke above $26 and out of a sideways trading range. Overhead resistance at the $26 level had been containing silver for three months. So this breakout means the uptrend in silver that began in March is resuming with the result that we can expect a fundamental change in sentiment… Previously, when silver approached $26 the prevailing thinking of traders was to sell because that level had been stopping advances in the silver price since August. Also, because of the prolonged trading range, a lot of traders over time had moved to the sidelines. But here’s the important change. Enter The Momentum Traders Those momentum traders who have been on the sidelines waiting for the breakout are again putting their money to work. It started last week and gained ground in Asia today as investors were gobbling up physical metal. So what had been overhead resistance at $26 now becomes support. Here is why that happens. Anyone who missed out buying silver under $26 will now be in there trying to buy when it gets to or below $26. We saw two good examples of that today. Both times silver dipped below $26 money came off the sideline to buy quickly, pushing silver back above $26. There is always uncertainty as to whether a new uptrend is beginning, but these momentum traders and trend followers buy just in case the train is leaving the station and silver is on its way to higher prices. One last point. There is a lot of talk about metal shortages. The problem is being misstated because there is metal around, but just not at current prices. It is in “strong hands” of people who understand value and are looking for higher prices. The Real Problem So the real problem is actually that there is too much fiat currency being created in an environment where precious metals are being actively capped by central planners. So to properly restate the problem, so-called metal shortages will disappear when gold and silver start trading at a fair valuation, which is a much higher price than at present. Regardless, I continue to focus on silver. Both gold and silver are good value, but even though their ratio has dropped to about 72, it is still too high. So I expect the ratio to drop further. Meaning silver will outperform gold like it did today. $30 In Sight So far OI is ticking higher like it did when the big move in silver was just getting started this summer. If this continues we will see volume surge and new buyers enter. OI will expand to over 200k contracts as the central planners go short by selling paper in a futile attempt to try stopping the rising price. In other words, a very interesting battle is shaping up as year end approaches and the summer’s high at $30 is in sight.

[MrXxxx]

17 minutes ago, Cattle Prod said:

There is low hanging fruit here for the government, most people don't have a clue what their pensions are invested in, and the vast, vast majority are in funds. They can manadate some of that into their bonds before bothering with the likes of me where 80% of my SIPP is in directly held equities. Than can steal from the sheep before trying to work out how to subvert my property rights.

Property and ownership rights are some of the strongest areas of English law. Best go after the guy who says "I'd never invest in the stock market, gambling innit, bricks and mortar for me" whilst his pension is invested in stock and bonds on his behalf for a fat fee. He'd probably think gilts are a great idea anyway. "How could you lose money on government bonds anyway? Guaranteed return of me money." Sooo gilt-y....

Edit: Anecdote - my pension is with Aegon, a large provider. I actually broke their system in March trading equities, and they ended up refunding me a 5 figure sum, as well as sending out a letter to all their clients to inform them of the system change I forced. This wasn't because my trades were big. It was because hardly anyone buys equities directly at all! 

Can I extend this in to the two pension types (DB and DC), and give my thoughts.

DB - This 'bail in' to government bonds holds two threats depending on where you are age wise in the pension cycle. For those about to start or already drawing their DB pension its not going to be an issue until inflation rates go above 10%; the usual ceiling where they 'stop out'. For the younger members it is going to be a big issue, as to guarantee the payments of pensioners due to lower rates of return, their % of salary pension contributions will rise; I am thinking non-public here. In addition, if things get really bad and the scheme collapses before they start their pensions they will only be eligible to a 90% protection, whereas those already drawing get 100% protection. Finally there is the 'spectre' that if enough schemes collapsed the government might move the 'goalposts' and reduce the amount of protection or make it means tested on other pension provision you might have....makes you wonder if taking a % early retirement cost may actually be better/there may be a 'sweet spot' where its make financial sense to retire a few years early rather than 'ploughing' in the extra years higher contributions?

DC - Once again as for DB above this will depend on where you sit in the pension cycle. If you are over 50 you can start drawdown, here once again it may be worth starting drawdown early rather than waiting for SRA as you will be able to decide where to reinvest (although outside a tax wrapper unless via ISA) i.e. shares/commods/physical PMs, rather than being compelled to be partly invested in low yield government bonds.

NOTE, DYOR as I am not sure if this understanding is correct (it seems it to me), but as always I am sure people will correct if not.

[DurhamBorn]

8 hours ago, Democorruptcy said:

Just reading 60-30-10 estimated returns in the latest Hussman downdate

https://www.hussmanfunds.com/comment/mc201220/

 

Exactly what my figures show 20%ish over the cycle,very interesting they are coming up with similar.Nominal as well.

[DoINeedOne]

Looks interesting not checked full facts busy cooking 

 

 

[DurhamBorn]

2 hours ago, Cattle Prod said:

Interesting table. Worth noting that the US empire is the only one energy independent, and that tech, finance, space and especially military all depend on energy. So those elements are not really independent in the other two spheres either. China is trying to sew up supplies in the ME, EU in Russia. Both very vunerable.

And the only way US empire is energy independent is through Canada. I've said it before, but Canada is going to be hugely important in the 2020s. Just watch Joe "green energy" Biden approve more pipelines from Canada, and Trudeau continue lying through his wokeist teeth as Alberta ramps up to its full potential.

And Enbridge will be sending me and the seed of my loins big fat divis for years to come as they pump those liquids south.

[harp]

SSE makes deal to sell gas exploration and production assets
 

[harp]

2 hours ago, DurhamBorn said:

And Enbridge will be sending me and the seed of my loins big fat divis for years to come as they pump those liquids south.

https://seekingalpha.com/article/4395761-enbridge-valuable-canadian-oil-giant

[Harley]

4 hours ago, JMD said:

You have raised the topic of financial repression before, but i wonder, have you come to any conclusions, maybe a strategy, for how to possibly avoid it?

If I was rich, I'd go to one of those swanky advisors and be sunning myself in the Caribbean like the rest.  But a friend used some guy for a property purchase and got well HRMC roasted.  That's the problem not having the right address book!  I post hoping for answers!  The best I can do for this and other reasons is to spend some on things to reduce my future cost of living.  I could buy a woodland or something but I need income and that means divs.  One hope is higher rates so an annuity becomes feasible again.  I may be being paranoic but apart from a cough, loss of taste, etc this time last year(!), who would have expected us to be where we are now?  And initial dimwittery or not, they will no let this opportunity go and without that their behaviour is, IMO, completely insane/stupid/etc. 

[sancho panza]

9 hours ago, ThoughtCriminal said:

Does anyone seriously think the masses are itching to go on a spending orgy? 

 

I just can't see it. 

 

Anyone still on furlough in January doesn't have a job, they just don't realise it yet. 

 

The unemployment dam will break, it's just rising. 

There are a lot of people who have been largely unaffected by lockdown eg public sector workers/retirees/people working for big companies.....

we could see a sharp rise in the cost of getting artex done.

 

 

Meanwhile.Dimartino gets it,possibly a reader of these pages

 

[Democorruptcy]

Have Virgin Media got better lobbyists for governbankment money than BT?

 

Quote

 

The telecoms sector has “no genuine belief” the government will be able to meet its broadband targets, a parliamentary inquiry has found, despite those targets having been cut just weeks ago.

In its national infrastructure strategy, published in late November, the government announced plans to connect 85% of the country with ultrafast gigabit broadband, which usually requires a fibre-to-the-home connection, by 2025.

That target was a downgrade from a previous goal, affirmed as recently as October, to connect 100% of the country by that date. “There is no genuine belief that it is achievable,” one witness told the DMCS select committee about the nationwide goal.

But despite the reduced ambitions, the committee has warned that the government still risks missing the new target unless it improves management of the infrastructure plan.

“It would not be acceptable having abandoned one unrealistic target, for the government to fail to meet a second, less ambitious, target through lack of effective planning or inadequate investment,” the committee writes in the final report from its inquiry into the UK’s broadband infrastructure.

“The government should outline … how it settled on the new gigabit-capable broadband target of 85% coverage by 2025, a full assessment of how likely it considers it to be met, and the detail of how it plans to deliver it,” the report adds.

The committee was also doubtful that the government’s belated shift to a “technology-neutral” approach would help achieve the target.

Whereas the initial focus had been on securing full-fibre connections, running fibre-optic cables to the doorstep of every home in the UK, the new strategy takes into account other modes of delivering ultrafast broadband, including the latest technology underpinning Virgin Media’s cable TV network, and the fastest varieties of 5G.

While the shift makes sense, the committee reported, “the government must not let it come with a trade-off in performance or longevity: any technologies used to deliver gigabit connectivity must be future-proof.

“Moreover, fibre will be a significant component of other gigabit-capable technologies, such as 5G, and therefore the challenges of rolling out a truly nationwide full-fibre network must not be underestimated.”

The committee also warned that the funding from the government, a £5bn pledge to bring broadband to the hardest to reach fifth of the country, was not enough.

“It is difficult to see how £5bn will be enough to meet the government’s aim [and] it is therefore disappointing that over the next four years, the government will make available only 25% of the £5bn it had committed,” the report finds.

https://www.theguardian.com/business/2020/dec/22/telecoms-sector-has-no-belief-uk-will-meet-broadband-targets-mps-find

 

 

 

[Democorruptcy]

RMG workers happy.

Quote

 

Postal workers have ended their long-running dispute with Royal Mail and agreed a 3.7% pay rise as the company refocuses to cash in on the lucrative parcels market.

The news came as the company reported strong parcel growth during October and November with Royal Mail revenue up £380m in the eight months to November compared to the same period last year, driven by e-commerce activity, lockdown restrictions during November and the beginning of the peak Christmas period.

The settlement includes a two-year pay deal backdated to April and one-hour reduction in the working week, the union added. There would also be no compulsory redundancies as the business introduced change, the the Communication Workers Union (CWU) said on Tuesday.

Royal Mail and the CWU said the company could now introduce changes more quickly with the full support of the union including the development of a 24/7 operation for parcels, and the rollout of new technology and automation.
 

https://www.hl.co.uk/shares/shares-search-results/r/royal-mail-plc-ordinary-gbp0.01/share-news

 

 

[sancho panza]

Excellent explanation of how inflation measures(CPIH/CPI/RPI) are calcualted and prices collected by the ONS.Also the differences in laymens terms.

https://www.ons.gov.uk/economy/inflationandpriceindices/methodologies/consumerpriceinflationincludesall3indicescpihcpiandrpiqmi

[sancho panza]

3 hours ago, DurhamBorn said:

And Enbridge will be sending me and the seed of my loins big fat divis for years to come as they pump those liquids south.

Question to both of you regarding Candian oil exposure.Is there a big oilie/s for less experienced punters to have a look at.I now from previous discussions that it's a risky area.

Or would you be covered by the big international oilies ?

2 minutes ago, Cattle Prod said:

Sounds cheap, typical rogering of a utility company that should never have been in that business. That said, I've heard that Laggan-Tormore have not been living up to expectations. As a shareholder I'm annoyed they couldn't manage to hand off the decomm liabilities.

as above CP?

[Democorruptcy]

Reminds me of that scene after the Bridge on the River Kwai was blown up, a bloke sat there saying "madness.... madness..."

Quote

 

Investors and analysts surveying the damage wrought by the pandemic have warned that it has exacerbated some of the most worrying trends in corporate debt markets and left balance sheets in a far riskier state.

US companies have borrowed a record $2.5tn in the bond market in 2020. The borrowing binge has driven leverage — a ratio that measures debt compared with earnings — to an all-time peak for higher-rated, investment grade companies, having already surpassed historic records at the end of 2019, according to data from Bank of America.

At the same time, companies’ ability to pay for the increase in debt has declined, with the number of so-called zombie companies — whose interest payments have been higher than profits for three years running — rising close to the historic peak, according to data from Leuthold Group.

Rating agencies have responded to the increase in risk by downgrading credit ratings. A record number of companies were this year rated triple C minus, one of the lowest rungs on the rating ladder — and close to double the number there were last year, according to S&P Global Ratings.

Yet major market players are still preparing for a rally in corporate debt prices next year, with rising risks outweighed by expectations of continued support from the Federal Reserve following the central bank’s historic decision to begin buying corporate debt in March.

“The Fed has created an expectation of a bailout,” said Alex Veroude, chief investment officer at Insight Investment, adding that it, “almost doesn't matter” what other indicators of debt or leverage show.

“If you think about it, it is insane,” he said. “It’s exactly what critics would say capitalism has created. But it’s the reality.”

In March, as asset prices tumbled and markets seized up, the Fed announced the unprecedented decision to begin buying investment-grade corporate bonds, as well as exchange traded funds that tracked either the investment-grade or the lower-rated, high yield market.

Without even purchasing a single bond, prices began to recover, bolstered by the Fed’s support. Investor confidence in corporate America returned and the floodgates opened to fresh corporate debt raising.

What has followed is the largest corporate borrowing spree on record, allowing companies to plug the hole in their earnings left by the shutdown of the global economy and skirt bankruptcy. The move was widely applauded for averting a more severe crisis. Jonny Fine, US head of debt syndicate at Goldman Sachs, said he viewed it, “as the most important piece of central bank policymaking I have seen in my career.”

But what began with companies rushing to market to raise cash they desperately needed to stay afloat, transitioned into a red hot debt market, with companies taking advantage of demand to opportunistically sell debt at historically low borrowing costs.

The surge in borrowing followed a decade of low interest rates that had already encouraged companies to take on cheap debt following the 2008 financial crisis.

In the summer, the balance of power swung back from investors hoarding cash that companies desperately needed to issuers offering up debt that investors clamoured to buy, leaving them accepting higher risk despite the offer of lower returns.

Private equity companies raised debt to funnel cash into their own bank accounts through so called “dividend recapitalisations”. New ground was broken in the years-long erosion of lender protections in debt documents.

It means that while the Fed and other central banks have curtailed the severity of the impact from coronavirus, helping open up debt markets to keep companies alive, the concern is that it has simply left businesses comatose on central bank’s life support.

“Companies even in the worst affected industries now look like they will get through the pandemic but what do they look like on the other side?” said Richard Zogheb, global head of debt capital markets Citigroup. “Can they ever get out from this huge debt burden they had to take on?”

Analysts note that companies remain conservative, with much of the cash raised remaining on their balance sheets, rather than shifting to more aggressive activities like stock buybacks. The combined cash balance of S&P 500 companies has risen to a record $3.4tn, up $1.3tn from 2019 and more than three times the level seen in 2008, according to data from S&P Capital IQ.

Some corporate finance chiefs have also already pledged to reduce leverage going forward.

Todd Mahoney, head of investment grade debt capital markets at UBS, added that typically a rise in borrowing to recover from an economic downturn is done when yields are high, increasing the borrowing cost to companies. The sharp recovery brought about since March means much of the debt added this year has been borrowed at record low yields. “It’s not as much of a drain on margins,” he said.

Nonetheless, there remains an open question of whether investors would be as willing to still support companies in their current condition if it were not for the implicit backing of the Fed.

The central bank’s corporate bond-buying programme is set to end on December 31, but the Rubicon has been crossed and many investors bet the Fed will find a way to step in again if the market is hit like it was in March.

https://www.hl.co.uk/news/2020/12/22/fed-backstop-masks-rising-risks-in-americas-corporate-debt-market

 

 

 

[sancho panza]

A good explanation of the three methods the ONS use for calcualting owner occupied hosuing costs.It's enlightening to see the reasons why the ONS and the wider academic economic community use to sjutify the exclusion of the cost of a hosue from the infaltion data.

Doesn't make it any less worng,but hey ho.Hosue trebles in purchase cost-not included,sofa goes up 15% -inlcuded.Bizarre but at least gies an insight into their mindset.

Real basic outline below.The subtleties are at the link.

https://www.ons.gov.uk/economy/inflationandpriceindices/articles/understandingthedifferentapproachesofmeasuringowneroccupiershousingcosts/quarter4jultosep2016

4. Payments -not used currently

The payments approach is calculated using the below model:

Payments approach = Mortgage interest payments
+ Council Tax (Great Britain)
+ Northern Ireland rates
+ Dwelling Insurance
+ Ground rent
+ Stamp duty
+ Estate agent fees
+ Home-buyers survey
+ Major repairs and maintenance
+ House conveyancing

5. Net acquisitions-not used currently

The net acquisitions approach is calculated using the below model:

Net acquisitions approach = Acquisition of new dwellings
+ Self builds and renovations
+ Existing dwellings new to the OOH sector
+ Services related to acquisition
+ Major repairs and maintenance
+ Insurance connected with the dwelling
+ Other services related to ownership of dwellings

 

6. Rental equivalence

What is the rental equivalence approach?

The final section presents the rental equivalence approach to measuring owner occupiers’ housing costs – OOH(RE), which targets the measurement of ongoing consumption of OOH services, rather than when OOH is acquired or when it is paid for. As a consumer price index, CPIH is a measure of the cost of consumption. Therefore the choice of method for measuring OOH should be based on the most statistically accurate method for measuring the cost of consumption in the UK. This means that asset prices should not be included, as an asset is not consumed in the way that goods and services are. The rental equivalence approach is our preferred method for measuring OOH costs in CPIH because the other approaches include either a measure of interest rates, or some measure of the capital element of housing, which make them unsuitable for a price index that measures the changing cost of consumption. The approach is also based on a higher quality data source than the other approaches presented in this article, allowing for a more reliable estimate of the measure. For more information about why the rental equivalence is used in CPIH, please see the CPIH compendium.

https://www.ons.gov.uk/economy/inflationandpriceindices/articles/consumerpriceinflationupdatingweights/2019