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

[Yadda yadda yadda]

31 minutes ago, Barnsey said:

So Dave just saw this and got all giddy

Others calling for gold to head much lower

Let the games begin!

Interesting that the 55+ age group is going to put the least into the stock market. You would expect them to have the highest propensity to save. Further stats showing what people expect to do with their windfalls would be interesting.

The case for a short boom and then crash is compelling.

Not sure why people are making such wild predictions about gold collapsing. I'd guess because they're trying to sell something else. Would be interesting to see the reasoning.

[Loki]

Stimmy day

[Yadda yadda yadda]

15 minutes ago, Loki said:

Stimmy day

Don't they arrive in accounts over a few days? So many to process.

I expect a lot of people intending to put stimmy money in the markets will have done it in advance. Makes sense if you know it is coming, expect it to push up prices and can do so.

Edit: I'm jealous. At least most people in the US have had something directly from the printing. It is unfair that all our money has flowed to people who haven't been working whilst the likes of me will be expected to pay for it through tax and inflation. Although I do understand it is reasonable for people who have been prevented from working by the Government are compensated by them.

[Barnsey]

42 minutes ago, ThoughtCriminal said:

I keep say it but does anyone else recall such widely held divergent views? 

 

On a daily basis I'm seeing "experts" calling for gold to the moon/lower than a snakes belly, bonds to explode/crash through the earth's core etc etc

 

My conclusion is that it indicates how finely balanced things are. I'd be interested to hear any other thoughts. 

Very hard to predict when retail trading in the US is now as large as mutuals + hedge funds combined. I think it's very apparent that Mr Hunter is pinning his views on the younger retail cohort shovelling their free money into tech, hence lack of excitement over other sectors like energy that aren't trendy. Essentially he's now following the herd, makes sense given his research on crowd mentality etc, but he's also saying this is going to happen fast enough to cause hesitation from the Fed et al. 

I keep reminding myself that Henrik Zeberg called the March crash superbly, and now he's making the same warnings. Very hard to know who will be right, maybe Henrik is still early. Maybe neither will be right, and we go straight into a new permanent stimmy regime?

[sleepwello'nights]

On 07/03/2021 at 01:12, Hancock said:

I just cant see Lloyds renting out average 50 year old houses scattered all over the country, cost to administrate this would be sky high.

The yield would be high enough as they would all be owned outright. Maintenance and repair costs are not that significant for each unit if you can leverage economies of scale. 

What else are they going to do with the money they hold if and when negative interest rates arrive. They have an interest in keeping property prices at current levels and even if they were to drip feed them into the market it would entail having numbers of empty properties still requiring some maintenance and might have an effect on prices.

Could they not finance a property company to do the same thing and keep the property off their balance sheets.  

[Hancock]

11 minutes ago, sleepwello'nights said:

The yield would be high enough as they would all be owned outright. Maintenance and repair costs are not that significant for each unit if you can leverage economies of scale. 

What else are they going to do with the money they hold if and when negative interest rates arrive. They have an interest in keeping property prices at current levels and even if they were to drip feed them into the market it would entail having numbers of empty properties still requiring some maintenance and might have an effect on prices.

Could they not finance a property company to do the same thing and keep the property off their balance sheets.  

I can see it being feasible they build/convert blocks of flats. Or get in on the govts build to rent scam.

I just don't see them renting out a load of repossessed houses scattered all around the country.

What you're suggesting is akin to when one person owns all the streets on the game of Monopoly, with the remaining players paying him rent every time they move or get a couple of hundred quid. Not long after this the game ends.

Once the communist Tories are out of power, a more free market govt would/could quite take these corporate houses from the banks at fire sale prices. 

[Hancock]

39 minutes ago, Barnsey said:

I keep reminding myself that Henrik Zeberg called the March crash superbly, and now he's making the same warnings. Very hard to know who will be right, maybe Henrik is still early. Maybe neither will be right, and we go straight into a new permanent stimmy regime?

The Fintwit mob make so many short term calls that sooner or later they get one right.

[DoINeedOne]

Michael Burry has had enough tweets deleted and just a few left recommending his favourite restaurant

 

 

 

[Barnsey]

32 minutes ago, sleepwello'nights said:

The yield would be high enough as they would all be owned outright. Maintenance and repair costs are not that significant for each unit if you can leverage economies of scale. 

What else are they going to do with the money they hold if and when negative interest rates arrive. They have an interest in keeping property prices at current levels and even if they were to drip feed them into the market it would entail having numbers of empty properties still requiring some maintenance and might have an effect on prices.

Could they not finance a property company to do the same thing and keep the property off their balance sheets.  

That's exactly what they'll do, I currently rent from a property management company:

https://www.touchstoneresi.co.uk/

They've been pretty good to be fair, good online system for reporting issues.

They don't run the whole block, just a few flats.

[Barnsey]

21 minutes ago, Cattle Prod said:

I try to be very careful who I select to listen to Barnsey. I was lurking here for years before getting on board, it was DBs track record of dollar calls that convinced me he was legit and this place was worth pitching into. I've looked into this Henrik guy, and I think he's a charlatan. Not criticising you at all, it's great to bring in opposing voices. This is just my view. He seems to have a full time job in sales or something and is trying to get subs as a side hustle. He had been calling for March for years, and I think it might be the broken clock syndrome there. He's also been calling for gold to $1000 for years, and seeing his call there again gave me a little endorphin rush (he's blocked me for calling him out). I use him as a contrarian indicator.

Hunter on the other hand is verifed as a large money manager in the 70s, and I put a lot of weight on what he says. He is one of the very few who has seen this before. I don't know why he is on Twitter, probably ego like most of the rich and successful people who don't need to be. Fine with me, I take what I like, and bin what I don't (his timing calls. He's looking at macro roadmaps and has 100% conviction in his calls. It's just those roadmaps don't give you timings as @DurhamBorn keeps saying).

Raoul Pal I listen to, but he is always, always talking his book. Which is currently bitcoin, having sold his gold to add more btc. That said, he is a fine mind with lots of pearls of wisdom. He nailed the recent Eurodollar trade, which I made money off. I note that Raoul has not written off gold here, in fact he highlights it is at major major support which I agree with. I think I mentioned those 1680/1690 fibb levels here before. Everyone is watching them. If it goes below here on a closing monthly basis I think that negates the Gold bull market and something different is happening. I have low conviction in this.w

I think you are sniffing in the right direction with the permanent stimmy regime. Henrik has zero clue what that is going to do to his models, as he only using Elliot Wave. Hunter does. Raoul does too, he just thinks Btc is going to suck it all up.

Dyodd of course, these are just my views. 

Wise words CP!

I just struggle to see a stock market melt up cause the powers that be to go "job done". The policy mistake that Dave refers to could be as subtle as a reduction of stimulus in future or lower salary qualification bands. I'm not advocating for MMT per se, but we are no doubt caught in a loop. Yellen and Powell's willingness to look through this and put their sole effort into running employment as hot as possible, including their honesty about the participation rate, is very intriguing.

Current working theory, bitcoin and tech stocks are acting as the perfect truck run off ramp for indiscriminate much needed stimulus. They can go bang without causing too much harm to the real economy. Probably also why they're allowing mortgage rates to rise a bit to cool the market off, although they'll be hyper focused on this, upping their MBS purchases if needed.

Another positive:

 

[Talking Monkey]

20 minutes ago, Cattle Prod said:

I try to be very careful who I select to listen to Barnsey. I was lurking here for years before getting on board, it was DBs track record of dollar calls that convinced me he was legit and this place was worth pitching into. I've looked into this Henrik guy, and I think he's a charlatan. Not criticising you at all, it's great to bring in opposing voices. This is just my view. He seems to have a full time job in sales or something and is trying to get subs as a side hustle. He had been calling for March for years, and I think it might be the broken clock syndrome there. He's also been calling for gold to $1000 for years, and seeing his call there again gave me a little endorphin rush (he's blocked me for calling him out). I use him as a contrarian indicator.

Hunter on the other hand is verifed as a large money manager in the 70s, and I put a lot of weight on what he says. He is one of the very few who has seen this before. I don't know why he is on Twitter, probably ego like most of the rich and successful people who don't need to be. Fine with me, I take what I like, and bin what I don't (his timing calls. He's looking at macro roadmaps and has 100% conviction in his calls. It's just those roadmaps don't give you timings as @DurhamBorn keeps saying).

Raoul Pal I listen to, but he is always, always talking his book. Which is currently bitcoin, having sold his gold to add more btc. That said, he is a fine mind with lots of pearls of wisdom. He nailed the recent Eurodollar trade, which I made money off. I note that Raoul has not written off gold here, in fact he highlights it is at major major support which I agree with. I think I mentioned those 1680/1690 fibb levels here before. Everyone is watching them. If it goes below here on a closing monthly basis I think that negates the Gold bull market and something different is happening. I have low conviction in this.

I think you are sniffing in the right direction with the permanent stimmy regime. Henrik has zero clue what that is going to do to his models, as he only using Elliot Wave. Hunter does. Raoul does too, he just thinks Btc is going to suck it all up.

Dyodd of course, these are just my views. 

Edit:

Here he is. Not slating the guy, he seems very nice and family oriented, and fair play to him for working hard. He has a decent looking job there, not sure why he needs the side hustle, maybe ego too. However his sales skills have him a bunch of followers that have believed many of his crazy calls over the years, and have undoubtedly lost a lot of money. I don't know how someone can do this with good conscience. If I offer anything here, it is only from within my area of expertise, and you'll notice I don't push companies or calls etc.. In short, I'm not selling anything, and I'm wary of those who are. Hunter is selling a newsletter, but bizzarley hardly ever mentions it! I very much doubt he's doing it for that reason. I think it's more like Dalio giving away free books on his  'principles'. End of career ego, and and urgent need to get whats in your head out there as you look on aghast at the stupidity of governments and markets. That's a good enough reason for me.

Great Post CP, definitely Raoul is always talking up his book which for him is bitcoin. Hunter is a strange one as you mention he hardly mentions his newsletter. Interesting point you make in that he probably is doing it to get what's in his head out there along with the end of career ego aspect. I just can't see the gold much lower from here view some commentators have. However I'm not so sure about Hunter's view that gold won't revisit these lows in a BK as the melt up will give it a huge buffer, I think in that scenario it could go a fair bit lower than where it is today if only for a brief period. 

[Loki]

13 minutes ago, Barnsey said:

Current working theory, bitcoin and tech stocks are acting as the perfect truck run off ramp for indiscriminate much needed stimulus.

I like this. I'd thought bitcoin was to divert currency from the PMs but i like your idea of the sacrificial lamb more

[Loki]

1 minute ago, Talking Monkey said:

Hunter is a strange one as you mention he hardly mentions his newsletter. Interesting point you make in that he probably is doing it to get what's in his head out there along with the end of career ego aspect.

Fairly normal after a lifetime of doing it professionally i think. Maybe 'giving something back' too

[DurhamBorn]

David is a liquidity guy really in that he understands how much the economy pulls and pushes on the Fed.He knows the channels the Fed uses to get liquidity out there.He also knows the leads and lags on what this money does.Certain sectors do best at different stages of the money cycle.

His BK call is because he knows there arent enough dollars out there for the incredible derivative trades.However,if the Fed doesnt tighten at all from here and stays loose and if the governments keep spending,there will be no BK,there will be events,flash crashes in sectors etc and lots of rotation.

That wouldnt say David was wrong,because where we are now is exactly where he said we would be and some areas will crash,and wipe many people out.

The main worry i have if a BK happens is what is its structure.If its derivative based and counterparties fail everywhere thats very dangerous indeed.Even something like BAT has big debts with derivatives agains the interest rates and currencies.What happens if they all fail?

That is why i want to see debt structures that are safe,even if high.BAT could repay its debts as they come due with free cash,but would have to cancel the dividend.So could VOD,so could Imperial etc.

These companies have done a lot of work the last few years  structuring their debt in this way.That says to me,they know inflation is coming and they want to be able to redeem the debt each year without rolling over if needed.

[Loki]

1 minute ago, DurhamBorn said:

That is why i want to see debt structures that are safe,even if high.

Could you explain more about how ascertain this when you have time please?

[JMD]

2 hours ago, ThoughtCriminal said:

I keep say it but does anyone else recall such widely held divergent views? 

 

On a daily basis I'm seeing "experts" calling for gold to the moon/lower than a snakes belly, bonds to explode/crash through the earth's core etc etc

 

My conclusion is that it indicates how finely balanced things are. I'd be interested to hear any other thoughts. 

I'll defer to the more knowledgeable thread sages for a more definitive answer - ie please do correct me where I am wrong - but my simple take is that so much (stimulus etc) is driven centrally by the Fed, meaning only the inner circle there really know the next chess moves, and therefore how long the 'game' can be prolonged.                                                                                                                                                                                  However, even the economics are broken, meaning the experts can't accurately model or call things intra-market like gold prices, etc, because even basic economic indicators such as price discovery don't work anymore. I believe this is mainly because since the 1990s the economy has been 'financialised' - where instead of allowing boom-bust cycles, governments have encouraged the explosion of risk markets such as hedge funds, derivatives, and products like mb's, cdo's, and even etf's for us retail investors which themselves carry counter party risk, liquidity risk, etc. This type of casino economics bakes in perverse incentives such as favouring debt over saving (social ills like rampant consumerism), and ultimately the layering of risk upon risk leads to systemic failure... and the collapse of this unstable economic edifice/'Tower of Babel'.

[DurhamBorn]

4 minutes ago, Loki said:

Could you explain more about how ascertain this when you have time please?

Look at the debt structure,when each bond comes due,and see how it changes over time.Vodafone for instance has slowly moved its debts to where they they can pay off almost all debt as it comes due from free cash flow.It means they wouldnt have to access the market in times of stress if they didnt want to.Of course if their cash flow went up in smoke that wouldnt work,hence why iv tried to stay to sectors where cash flow should hold up ok and where they can hold back CAPEX spending if needed.

[JMD]

2 hours ago, Yadda yadda yadda said:

Interesting that the 55+ age group is going to put the least into the stock market. You would expect them to have the highest propensity to save. Further stats showing what people expect to do with their windfalls would be interesting.

The case for a short boom and then crash is compelling.

Not sure why people are making such wild predictions about gold collapsing. I'd guess because they're trying to sell something else. Would be interesting to see the reasoning.

Definitely not having a go at you Yada yada yada, but putting money into the stock market is NOT the same as saving. I only point this out because - coincidentally - I have just posted something regarding the 'finacialisation' of our economy and the negatives that flow from this. And where it is government discouragment of things such as saving, but at same time encouraging debt, risk - both corporate and private - that have caused the economy to end up in the complete and utter mess it is in. 

[Loki]

30 minutes ago, DurhamBorn said:

Look at the debt structure,when each bond comes due,and see how it changes over time.Vodafone for instance has slowly moved its debts to where they they can pay off almost all debt as it comes due from free cash flow.It means they wouldnt have to access the market in times of stress if they didnt want to.Of course if their cash flow went up in smoke that wouldnt work,hence why iv tried to stay to sectors where cash flow should hold up ok and where they can hold back CAPEX spending if needed.

Thanks mate i will do some practice with this and see how I get on. I can use Vodafone as an example of how to do it right

30 minutes ago, DurhamBorn said:

 

 

[moneyscam]

1 hour ago, DurhamBorn said:

David is a liquidity guy really in that he understands how much the economy pulls and pushes on the Fed.He knows the channels the Fed uses to get liquidity out there.He also knows the leads and lags on what this money does.Certain sectors do best at different stages of the money cycle.

His BK call is because he knows there arent enough dollars out there for the incredible derivative trades.However,if the Fed doesnt tighten at all from here and stays loose and if the governments keep spending,there will be no BK,there will be events,flash crashes in sectors etc and lots of rotation.

That wouldnt say David was wrong,because where we are now is exactly where he said we would be and some areas will crash,and wipe many people out.

The main worry i have if a BK happens is what is its structure.If its derivative based and counterparties fail everywhere thats very dangerous indeed.Even something like BAT has big debts with derivatives agains the interest rates and currencies.What happens if they all fail?

That is why i want to see debt structures that are safe,even if high.BAT could repay its debts as they come due with free cash,but would have to cancel the dividend.So could VOD,so could Imperial etc.

These companies have done a lot of work the last few years  structuring their debt in this way.That says to me,they know inflation is coming and they want to be able to redeem the debt each year without rolling over if needed.

Whilst it was certainly true pre GFC, things have moved on significantly in the derivatives market.

Now all OTC derivative trades have to be centrally cleared in a CCP (Central counter-party). There are several in the major financial centres (LCH London, Eurex EU, CME US). The CCP becomes the buyer to every seller and the seller to every buyer. All participants have to pay into a default fund and post margin when their positions swing. CCP's allow for netting so not as significant as they would be if they were done on a counterparty to counterparty basis. All trades, net bank positions and CCP margin / liquidity positions must be reported daily to govt clearing repositories for reporting and oversight by the relevant financial regulator.

Also bear in mind the vast majority of derivative users are the global banks. They use them in two ways, 1) to manage their own interest / currency risk related to funding and mortgage lending (hence why interest rate swaps are circa 60% of the volume of derivatives traded) and 2)to make markets to their prime brokerage clients (hedge funds, asset managers, corporate treasury). So most but not all the risk inherently lay with the banks before clearing.

Does this eliminate the risk of derivatives in a market dislocation? No, instead it concentrates it in the CCP's. The difference is that you no longer have the chained counterparty cascade if one significant player (i.e Lehmans or Bear Stearns) goes tits up as in 2008. There is a sinking fund and margin funds to cover settlement in the event of defaults. Rather than a disorderly liquidation and settlement process as in 2008 this can now be managed albeit this is a function of how widespread the defaults are occurring. Also the financial regulator and govt are not flying blind as they were before 2008 where they didn't have a fecking clue what was going on. Now they have the regulatory and legal oversight (don't forget the imposition of bank living wills as well) and should have a better grip on the systemic and individual bank risk now they have the oversight and data.

Most of Lehman's and Bear Stearns outstanding positions were settled years after 2008 in these CCPs as an example of an orderly liquidation when it works.

Will these CCP's hold up in a BK? That is the quadrillion (notional) question, we will only find out when it happens. However just wanted to update on how things have evolved.

[moneyscam]

1 hour ago, Cattle Prod said:

I need to learn more about derivatives. I use options for leverage, and when I buy one, I have to wait a little bit for the counterparty to take my offer. So our two options trades (call and put) net off. And I can't be margin called, I just lose my premium. Suits me. Futures are margin based, so I can see how those get messy to unwind in a March like event. And there is a bunch of weird and wonderful stuff out there like credit default swaps and stuff they've invented we've not yet heard of. Does anyone have any idea how much of this stuff doesn't net off like my simple trades?

Excellent and very helpful post btw.

You didn't have any margin requirement because you didn't write the options. If instead you wanted to sell a call or a put you would have to post some initial margin and then variation margin depending on how out of the money you ended up. Your call and put trades would only net off if they were on the same underlying at the same strike price for the same term and written at the exact same time. If written at slightly different times (say an hour) then the premium (cost) of the option would be slightly different to allow for the change in market pricing of implied volatility. The only beneficiary of this no straddle straddle would be the option writer and certainly not the purchaser!

There are 2 types of derivative markets. The bulk of derivatives are in the OTC (over the counter) market also known as the dealer to dealer market. There are also dealer to client OTC markets but these are a fraction of the size of the dealer to dealer marker. OTC derivatives are primarily the preserve of the dealer banks and their prime brokerage clients. The rest are exchange traded and this is where most of the retail plain vanilla calls / puts on stocks and indices can be traded by retail users where if you want to write an option you will have to post some margin.

A credit default swap is a fancy name for an insurance contract. I can purchase protection on my underlying bond position by paying an (insurance) premium to a counterparty that will compensate me in the event of a default of that bond. The cashflow is from buyer to CDS seller on a yearly basis for however long they wish to insure the risk and one time from seller to buyer in the event of default. 

Pre CCP clearing the risk would lie with the CDS writer and it was left up to them whether they wanted to hedge this by shorting the underlying bond for example. Now they have to clear this trade at the CCP which means posting initial margin and variation margin net of any benefits of CCP netting.

[Castlevania]

1 hour ago, Cattle Prod said:

I need to learn more about derivatives. I use options for leverage, and when I buy one, I have to wait a little bit for the counterparty to take my offer. So our two options trades (call and put) net off. And I can't be margin called, I just lose my premium. Suits me. Futures are margin based, so I can see how those get messy to unwind in a March like event. And there is a bunch of weird and wonderful stuff out there like credit default swaps and stuff they've invented we've not yet heard of. Does anyone have any idea how much of this stuff doesn't net off like my simple trades?

Excellent and very helpful post btw.

They all net off. It’s just an exchange of cashflows between two counterparties. The problems arise if one of the counterparties can’t hold up their side of the bargain (credit risk) or as you saw with GameStop where option dealers had sold so many out of the money call options they’d have found it impossible to buy enough of the underlying stock to deliver.

[Castlevania]

1 hour ago, Loki said:

Thanks mate i will do some practice with this and see how I get on. I can use Vodafone as an example of how to do it right

 

If you look at the financial statements there’ll be a note to the accounts detailing the debt profile.

[JMD]

1 hour ago, Cattle Prod said:

Yep that's true. Even in mid career most of us mentor young geologists, and enjoy it. I don't get anything out of it other than remembering how hard it was for me to start out. I struggle to believe in altruism as humans are so bloody selfish, it's probably because you get some kind of warm fuzzy feeling out of it 

Your right it's not altruism. Instead you (not just 'you' of course!) are 'biologically wired' into helping protect/propogate your (work colleague) tribe member, in doing so you increase the prospects (profits!) for your (company) tribe.                                                                                                                                           Social anthropology is an interesting subject - and of course intersects with a favourite of this thread 'behavioural economics' (...just to steer the post back on topic!).    

[Loki]

2 minutes ago, Castlevania said:

If you look at the financial statements there’ll be a note to the accounts detailing the debt profile.

Thanks!