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

[Castlevania]

4 minutes ago, leonardratso said:

enbridge divi came in

$0.56 a share, so i got $0.12 - perfect for my budget(low)

Don’t spend it all at once

[Loki]

@Cattle Prod  Excellent post thank you

[Yadda yadda yadda]

2 hours ago, JMD said:

Ok, as requested, some more feedback then!! ... But I'm going 'full pedant' on yer Yadda!! Saving and Investing are two different things, there is no overlap despite what the financial institutions would have us all believe. It is a glaring failing that today ordinary people cannot earn a decent yield on their savings, so are encouraged to risk their capitol by using investments. For example I am not of course knocking pension products, etc, but terminology is important. So yes people save for their retirement but pensions (defined contribution ones) are not saving schemes, ie there is risk and no guarantees. Not patronising you Yada - as I know you know this stuff already - but it's a pet hate of mine because for me it symbolises at an everyday level how unstable our modern economy is and how unfairly skewed it is against the ordinary person.

Understood. Nothing wrong with a bit of well placed pedantry.

[DoINeedOne]

interesting article https://traderferg.com/coals-moat/

 

[DurhamBorn]

16 minutes ago, Cattle Prod said:

He's very very light on the supply side there, it's not all about US gas temporarily displacing coal. People will demand gas over coal for pollution reasons, outside of ESG. I'm not into coal as I see no supply problem, there are hundreds of years of the stuff left. It's just a matter of wanting to dig it up or not. So the whole coal thesis is political, and as such, I'm nae gonna invest, I'm oot.

Coal is basically compressed swamps and wooded deltas from way back, so covered a relatively large % of the worlds surface. The coal seams you get up @DurhamBorns way continue down under the sea, right across to the Netherlands, Germany, Poland, then back up to surface again so coal beds run for hundreds of thousands of square km (incidentally the southern north sea gas comes from this coal, it's gets buried down below around 3000m under the sea where it gets hot and gives off gas, but I digress...) You just need to find it near the surface, and we know where it all is now. What I like about oil and gas (apart from being politically more favourable) is that the deposits are much rarer, more energy dense, and the easy ones are depleted. Humans don't tend to go backwards on the whole in terms of fuel use (though personally I prefer my woodburner to my gas boiler!).

 

The Durham coalfield actually comes to the surface just behind my house.There are old drift mines capped off 20 yards from my back fence.Iv got the plans as anyone who buys a house here has to get a coal search on the old mines.One reason i bought this house was i knew it was highly unlikely anyone would build houses behind mine as its riddled with drifts,but they all head east and north east,nothing west as im right on the edge.Over at a place called Cockfield just down the road you can find coal on the surface where the seams come up and there are lots of pits that date back maybe thousands of years where people burned it.

Its incredible to think,but the area from Witton Park,over to Eldon maybe 20 square miles once produced as much profit as Google does now.Like you say the seams slowly drop deeper as you towards the coast hence them going to deep mines instead of drifts.When we were kids you could still access some of the old drifts if you knew where to go where the old brick buildings that had the wheels in that sucked air out of the drifts to suck fresh air in.

When i was 8 at school we heard a massive rumble like a bomb blowing up a building.It was actually the school yard collapsing down a massive sink hole.It was about 30 foot across, and 60 foot deep.They filled it with soil and planted rose bushes on it.It still like that now and when i pass and see the kids playing in the yard i always think how lucky we were not to be on our break when it happened.

 

[Barnsey]

Cause

Effect

 

[Loki]

Is anyone buying IBTL, with TLT having just gone under $140?

[Loki]

3 minutes ago, Cattle Prod said:

I suppose the great thing with this fiscal injection business is that this $150 odd billion dollars you're looking at here spent today is that it's newly printed money. So the $400bn that came out of Telsa in recent weeks, and hopefully into some of our favourite stocks, doesn't have to come back out again to re-buy Tesla. They can have XOM or whatever and Tesla, because the government keeps handing them money.

That is a great point.

Yup, stimmy days are here again!

[Noallegiance]

1 hour ago, Barnsey said:

Cause

Effect

 

The existence of this tweet is pure tragic comedy.

Who are you telling, Joe? The people the US government prevented from working? The rest of your party and donors so they all know what you're doing (which is what they've told you to do)? The people who pull the money levers and let it rain (the other people who've told you what to do)?

Purpose devoid of purpose.

Humanity is getting a bit too dark for my liking. It's like watching the first 20 minutes of Running Man.

[Loki]

3 minutes ago, Noallegiance said:

The people the US government prevented from working?

That's the part that made me spit.  Don't ruin peoples finances then come in playing the hero.

[Bricks & Mortar]

20 minutes ago, Loki said:

Is anyone buying IBTL, with TLT having just gone under $140?

I got a 5% (of my stock trading ISA) position a week or so back.  The rest is in gold & silver miners, (mostly silver). 
I'm glued to the DXY, and silver & gold spot charts.  Hard to get any bloody work done for checking them so often.
Those charts were looking good today.  But you've reminded me to keep an eye on the 10yr as well.

I'm holding on in the miners, for Hunter's thesis.  But ready to bail to IBTL if it doesn't come off soon.

 

[Loki]

Just now, Bricks & Mortar said:

I got a 5% (of my stock trading ISA) position a week or so back.  The rest is in gold & silver miners, (mostly silver). 
I'm glued to the DXY, and silver & gold spot charts.  Hard to get any bloody work done for checking them so often.
Those charts were looking good today.  But you've reminded me to keep an eye on the 10yr as well.

I'm holding on in the miners, for Hunter's thesis.  But ready to bail to IBTL if it doesn't come off soon.

 

I've given up on gold and silver for now, in the sense I don't bother checking the price for a cheeky dopamine hit  

 

I haven't sold any physical or miner shares (HOC, tiny bit of NGD)

[MrXxxx]

11 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.

Just remember...cheap (their) advice, expensive (your) mistake.

[Fully Detached]

Sorry for the dumbass question, can anyone point me to a concise guide on ladders? I get the idea but not the execution, and have just searched through every mention of the word in this thread without finding a clear explanation.

A link would be great if someone has one to hand.

[Bobthebuilder]

30 minutes ago, Fully Detached said:

Sorry for the dumbass question, can anyone point me to a concise guide on ladders? I get the idea but not the execution, and have just searched through every mention of the word in this thread without finding a clear explanation.

A link would be great if someone has one to hand.

Say 3 ladders into a stock. Ladder 1 at £3.00 a share. 2nd ladder at say £2.50 a share, third at £2.00 and so on. Sorry if that's not helpful, its just the way I look at it. It has worked well for me with the oils, messing with PM minors at the moment.

[Don Coglione]

7 minutes ago, Bobthebuilder said:

Say 3 ladders into a stock. Ladder 1 at £3.00 a share. 2nd ladder at say £2.50 a share, third at £2.00 and so on. Sorry if that's not helpful, its just the way I look at it. It has worked well for me with the oils, messing with PM minors at the moment.

Them's some bearish ladder rungs!

8 minutes ago, Bobthebuilder said:

Say 3 ladders into a stock. Ladder 1 at £3.00 a share. 2nd ladder at say £2.50 a share, third at £2.00 and so on. Sorry if that's not helpful, its just the way I look at it. It has worked well for me with the oils, messing with PM minors at the moment.

Also, messing with "minors" is likely to get you arrested!

[Fully Detached]

13 minutes ago, Bobthebuilder said:

Say 3 ladders into a stock. Ladder 1 at £3.00 a share. 2nd ladder at say £2.50 a share, third at £2.00 and so on. Sorry if that's not helpful, its just the way I look at it. It has worked well for me with the oils, messing with PM minors at the moment.

Thanks Bob -  that's different to what I was expecting - looking online I could only see the term used in reference to treasuries or bonds, the idea being to spread risk by rolling maturing bonds over into the next nearest issue.

[wherebee]

Well, just sold 10k into a falling XOM price.  That's av. 4k profit banked on that wedge, more if I mark against my lowest XOM buy in.

I set a mental ladder out at 60, then 80, then 100.  Not because I don't think it will eventually get to 100 or near to it, but because I do feel the world is on the edge of something bizarre re the markets, and I would rather have some money out, moved out of the broker, and into an account elsewhere.  I can move it back in in 24 hours if the BK comes and I see some bargains.

Greensill has actually made me a bit twitchy.  One of the big insurers here dropped 10% yesterday on the rumour they were exposed (since back up).  Gamestop back up a lot.  The physical vs paper gold and silver still stupidly different. It just feels like it might be a bit 2007-8.  Hopefully I am wrong. 

[DurhamBorn]

1 hour ago, Fully Detached said:

Sorry for the dumbass question, can anyone point me to a concise guide on ladders? I get the idea but not the execution, and have just searched through every mention of the word in this thread without finding a clear explanation.

A link would be great if someone has one to hand.

I tend to use percentages.So say you wanted to start buying Bp and its say £3.15 and you have £5000 for the stock,you could set 5 ladders of £1000 at 8% fall points,so £3.15,£2.90,£2.64.£2.42,£2.22.If Bp only hit £2.50 you would end up with £3000 at an average of £2.89.

Ladders remove emotion from buying.You can also remove ladders if the stock moves ahead and re-deploy in other areas.

I used them to position as i turned my portfolio around,though last March i was lucky in that i managed to buy several ladders together because the markets fell that quickly.

[SpectrumFX]

6 hours ago, moneyscam said:

I really respect and admire Sowell, he was calling out as you say the current bullshit long before a millennial or Gen Z were even a glint in their father's eye. One his memorable points for me was how only 22% IIRC of black kids grew up in a single parent household before the civil rights movement and how this shot up to 67% after with the attendant growth of the welfare state. A similar magnitude of rise was also found in white families with the same results of less than optimal outcomes for the offspring of this cohort. He blames culture rather than any sort of systemic or structural racism. He cites how the black offspring of German women and US soldiers during and after WW2 performed equally as well in IQ / academic tests as their white counterparts due to the fact they grew up in a very different culture that had much higher expectations of them than found in the US. Don't want to derail this thread any further but I highly recommend watching his youtube videos to anyone here for his brilliant insights.

Most people reading this thread are probably already a bit beyond it, but his Basic Economics book is very good.

https://www.abebooks.co.uk/9780465060733/Basic-Economics-Common-Sense-Guide-0465060730/plp

 

[sancho panza]

11 hours ago, moneyscam said:

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.

 

10 hours ago, moneyscam said:

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.

Thanks for these informative posts MS with all the subtle nuances of the market.If I'd had time to read them earlier today,I'd have replied with my questions rather try and answer CP.

Whilst I get what you're driving at,it's interesting to see that you also don't know if things ill hold up ina BK .I think @Castlevania has hit the nail on the head with regards to bank solvency.I don't know if you can remember psots covering a research piece by Prof Kevin Dowd and Dean Buckner on the solvency of the UK banks in a psot covid world.It didn't inspire confidence.

The paper's here;summed up in short by the graphic.Dowd measures solvency using market cap/total assets rather than the array of 'risk weighted' measures the CB's prefer.

https://iea.org.uk/wp-content/uploads/2020/07/How-reslient-are-UK-banks-3.pdf

 

I have some questions I'd love to know the answer to if you have time.

1) Gvien the dominance of the big banks and the fact that they're the main players,doesn't their solvency effectively underpin the solvency of the CCP.Say the LCH is at the centre of a default problem and given they trade an disproportionately large amount of derviatives given the size of the country,then the implicit gurantee of the BoE is effectively being called on to bail out players that they don't necessarily have a huge amount of insight into.Hence could we possibly see a large player like Deutsche build up risk out of sight of UK regulators?

Also,with reference to this,big banks use the IRB approach  to risk weighting which is based on their own data(unlike the standardized approach used by smaller banks),isn't their a risk that the oversight that the regulators think they have isn't the oversight they actually have.

2) I'd presume the swaps market is less volatile than say equity options markets,are the margin rates different between those two markets and aslo do they vary margin rates depending on the quality of the the cashflows that are being swapped?

3) Roughly what are the margin rates? I do wonder how they'd cope in a systemic event if there's only been 25% posted say.

3) What sort of collateral is allowed to be used?Is it mainly govt bonds and cash for say swaps trade or does the CCP hold the the two sources of cashflows allowing the cashflows to be swapped? If they are allowed to psot other collateral,can they use collateral that's been used elsewhere ie rehypothecated?

4) WIth reference to CDS issuers,is it possible for a parent group,say Deutsche Bank to unwittingly own the CDS issuer as well as the company purcahsing the CDS.I've read variously that the purchase of CDS/other hedging mechanisms allows companies to carry underperforming loans at par even if they're underperforming?

 

Appreciate the posts MS.Learned a lot from thsoe.

[Talking Monkey]

5 minutes ago, sancho panza said:

 

Thanks for these informative posts MS with all the subtle nuances of the market.If I'd had time to read them earlier today,I'd have replied with my questions rather try and answer CP.

Whilst I get what you're driving at,it's interesting to see that you also don't know if things ill hold up ina BK .I think @Castlevania has hit the nail on the head with regards to bank solvency.I don't know if you can remember psots covering a research piece by Prof Kevin Dowd and Dean Buckner on the solvency of the UK banks in a psot covid world.It didn't inspire confidence.

The paper's here;summed up in short by the graphic.Dowd measures solvency using market cap/total assets rather than the array of 'risk weighted' measures the CB's prefer.

https://iea.org.uk/wp-content/uploads/2020/07/How-reslient-are-UK-banks-3.pdf

 

I have some questions I'd love to know the answer to if you have time.

1) Gvien the dominance of the big banks and the fact that they're the main players,doesn't their solvency effectively underpin the solvency of the CCP.Say the LCH is at the centre of a default problem and given they trade an disproportionately large amount of derviatives given the size of the country,then the implicit gurantee of the BoE is effectively being called on to bail out players that they don't necessarily have a huge amount of insight into.Hence could we possibly see a large player like Deutsche build up risk out of sight of UK regulators?

Also,with reference to this,big banks use the IRB approach  to risk weighting which is based on their own data(unlike the standardized approach used by smaller banks),isn't their a risk that the oversight that the regulators think they have isn't the oversight they actually have.

2) I'd presume the swaps market is less volatile than say equity options markets,are the margin rates different between those two markets and aslo do they vary margin rates depending on the quality of the the cashflows that are being swapped?

3) Roughly what are the margin rates? I do wonder how they'd cope in a systemic event if there's only been 25% posted say.

3) What sort of collateral is allowed to be used?Is it mainly govt bonds and cash for say swaps trade or does the CCP hold the the two sources of cashflows allowing the cashflows to be swapped? If they are allowed to psot other collateral,can they use collateral that's been used elsewhere ie rehypothecated?

4) WIth reference to CDS issuers,is it possible for a parent group,say Deutsche Bank to unwittingly own the CDS issuer as well as the company purcahsing the CDS.I've read variously that the purchase of CDS/other hedging mechanisms allows companies to carry underperforming loans at par even if they're underperforming?

 

Appreciate the posts MS.Learned a lot from thsoe.

On market risk the massive capital charge associated with the standardised approach for the big banks means they'll probably have pulled all sorts of stunts with their internal models to get the numbers down. Then with all the banks coming to the regulators to approve their internal models I wonder how much scrutiny has been done by the regulators. The whole Fundemental review of the trading book thing may come unstuck in a BK and be shown to have been bollocks. Some banks spent close to 100mill pissing about with the IMA to avoid going on the standardised approach.

[wherebee]

11 minutes ago, Talking Monkey said:

On market risk the massive capital charge associated with the standardised approach for the big banks means they'll probably have pulled all sorts of stunts with their internal models to get the numbers down. Then with all the banks coming to the regulators to approve their internal models I wonder how much scrutiny has been done by the regulators. The whole Fundemental review of the trading book thing may come unstuck in a BK and be shown to have been bollocks. Some banks spent close to 100mill pissing about with the IMA to avoid going on the standardised approach.

Depends on the regulators.  Some are pretty good and have employed some very smart people to challenge (and reject) in some cases the capital models used.  USA being a good example.  Some are a bunch of smily cunts who probably read the information given to them by the banks and nod and pass the port (UK).  Some are hard nosed machiavellian who will do whatever is good for their country first, facts second (Singapore, Switzerland).

In short, some models are probably very very shit, some are probably very very strong.  We'll only know when the tide goes out.

[sancho panza]

9 hours ago, DurhamBorn said:

@moneyscam thanks for the posts,really interesting.I think the question is how quickly the CBs could backstop the big banks etc.Its a bit fuzzy in my mind,but i think the risks are perhaps where the liquidity is pulled from.It could be derivatives themselves dont actually take down the markets into a crash,but if there is a huge unwind,perhaps an interest rate shock,or currency swaps in the big trades then the liquidity pulled could take down other areas.I know they pair off etc.

Its possible the CBs panic inbetween any unwind,so although the trades air off,the CBs inject massive liquidity during the process.

All roads seem to lead to inflation/reflation of course,the risk being it takes a whacking great deflation to ge there.

Having read @moneyscams psots I think this is where my minds headed now.How would the BoE backstop London if the banks that were pulling it under were from other parts of the world.I don't know how easy it is to move bad loans across borders so they don't appear on the UK balance sheet? I'm intrigued to know whether the BoE has the firepower to backstop the derivatives that reside here?

7 hours ago, Cattle Prod said:

Here's an updated on the XLE/oil ratio I posted before. It's consolidated its breakout, and is I think showing that XLE is likely to hold up better than the underlying during this correction. Which is what I hope this is. Looking back at previous bull runs, if we want another leg, we need a 15%, maybe even 20% correction to clear out the bandwagon jumpers and reset the energy levels. It can happen in as quickly as three weeks, or drag out for longer. I'm looking for about a month. We're 5% in so far. 

 

The timing for a pullback is now, as there are going to be a couple of ropey inventory reports inbound because of the storm, and the physical market is a bit weak. I think Chinese buyers are holding off at these prices as they rightly think they are the marginal buyer. But they won't be for long if the US opens up fully into summer with production dropping, they'd be bididng for cargoes against the Chinese, while India continues screaming for cheaper oil. OPEC will have to act, but it's delicate trying to time it. A sudden, steep drawdown in US stocks could very well give us a WTI blowoff just in time to trigger an autumn BK.

Not advice, dyodd. 

I like that ratio CP.I'll have day for investing tmrw(kids at nrusery) so I'll have a look at it if I can work out how to do it.

I was lookign at a chart yesterday,weeklies show the problem you highlight nicely.I've psoted some research a while back showing that from market peaks,oil outperforms in bull markets and the oilies the bears.I'm usnure how that holds up under shorter timefraems.we'll see I guess.Decentish sell off in XOM for the price action.

Apprecaite your thoguths on the incoming inventroy reports and the US opening up>Makes a lot of sense.

 

 

[sancho panza]

39 minutes ago, Talking Monkey said:

On market risk the massive capital charge associated with the standardised approach for the big banks means they'll probably have pulled all sorts of stunts with their internal models to get the numbers down. Then with all the banks coming to the regulators to approve their internal models I wonder how much scrutiny has been done by the regulators. The whole Fundemental review of the trading book thing may come unstuck in a BK and be shown to have been bollocks. Some banks spent close to 100mill pissing about with the IMA to avoid going on the standardised approach.

Very much as per what @Castlevaniawas saying about banks balance sheets being backward looking by necessity.I think what worries me-and I say that as someone who sees a BK type deflationary event as an inevitable prelude to a reflation-is that using reasonable metrics provided by Kevin Dowd,it doesn't seem as if British Banks learned their lesson from 2008.

But then why would they?I remember reading WIlliam White some years back saying the best way to regulate banks was to let one go bust once in a while.

It's going to be interesting tosee what failsafes work and which ones don't come a BK type deflationary wave and where the defaults cause the msot damage.As CV says bad loans are probably going to be the precursor for some wider derivative event,personaly,I think CRE will eb the epeicentre thsi time but there's still an epic bubble in resi too.