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

[nirvana]

16 minutes ago, M S E Refugee said:

When David Hunter talks about up to 80% correction in stocks I can see it happening for the likes of Tesla but not really for the Oil stocks.

to be fair, RDSB went from sub £9 to £15......so a £6 rise or 66.666666666666666666666666666666666666666666666667% or thereabouts 

or maybe he's talking about the coming crash? crystal ball gazing again lol 

[Calcutta]

15 minutes ago, M S E Refugee said:

When David Hunter talks about up to 80% correction in stocks I can see it happening for the likes of Tesla but not really for the Oil stocks.

I look at something like Shell, bounced around about 2000 for the best part of 20 years, now it's at 1500, maybe a few dips along the road but long term it's not going to crash for any length of time where I can't just ladder in and not worry about it. 

[Noallegiance]

24 minutes ago, nirvana said:

to be fair, RDSB went from sub £9 to £15......so a £6 rise or 66.666666666666666666666666666666666666666666666667% or thereabouts 

You missed a 6.

[Yadda yadda yadda]

2 minutes ago, Harley said:

On what time period do you do that - daily, weekly, or monthly?

I set them on price points based on monthlies. It takes one or two days for a trade to complete and prices to be confirmed. Therefore it isn't sensible to try and trade it on small movements. Primary aim is to avoid losing tens of thousands in a rapid crash. Secondary is to increase the number of units I own. I have international, UK and Japanese funds. The DC pension is going to be enough to retire on at pension age unless I do something stupid or it gets blown up by a market crash. If it does well then it may bring retirement forward by a few years. Primary motivation though is not to lose out in a crash.

My SIPP and ISA are much more actively managed. They're the real opportunity to retire early.

[nirvana]

1 minute ago, Noallegiance said:

You missed a 6.

I decided to round it up 

[Yadda yadda yadda]

57 minutes ago, M S E Refugee said:

This is what is at the back of my mind.

The BK may just be for the Tech stocks and may not really affect commodity stocks.

Those of us with DC pensions cannot avoid having exposure to tech (unless going fully cash and/or transferring). I'm not selling anything in my SIPP or ISA.

[C-gull]

1 hour ago, AWW said:

I can't see there being a meaningful crash in equities now, outside the overbought tech names. Governments are well aware that anything negatively impacting their economies in the next five years will be pinned squarely on their Covid response. They will want to be seen to provide unprecedented support. The buying opportunity was last year.

All IMHO of course.

Don't you think there's still plenty of life to beat out of the "due to these unprecedented circumstances yada yada" horse yet? I'd have expected (assuming that there's any desire to take some heat out of a market) that they'd be keen to do it sooner rather than later so that they can hand wave it away under "pandemic impacts"; we've still got furlough unwind to go, as well as their other variuous schemes, which will undoubtedly have an impact

[Bricormortis]

Re above musings on Big meltdown, personally I would like to have more invested but as said sit in 50% cash atm as I dont want to wake up one morning and realise I lost my life savings in some apocalyptic melt down. We are living in strange times with the most overheated S and P in history iirc, and those savings.... well there's no replacing them for me.

Having said that, would I be right in thinking there have never been 2 meltdowns in a 12 month period ?

Is there a point where waiting on a big meltdown starts to look stupid, if so what are the markers is part of what I am considering atm.

My own guess, which you will recognise as the thoughts of DH and others, is a sugar rush high with post lockdown spending and stimulation from central government, melt up, bust, deflation which has to hit commodities for some months and if its a biggie maybe some years, untill the printing restores jobs and an economy.  Then serious inflation probably. 

 

[AWW]

28 minutes ago, C-gull said:

Don't you think there's still plenty of life to beat out of the "due to these unprecedented circumstances yada yada" horse yet? I'd have expected (assuming that there's any desire to take some heat out of a market) that they'd be keen to do it sooner rather than later so that they can hand wave it away under "pandemic impacts"; we've still got furlough unwind to go, as well as their other variuous schemes, which will undoubtedly have an impact

There's a fine line between "pandemic impacts" and "government response to the pandemic impacts" which governments won't want to tread. Think about it from the perspective of those who want to stay in power. What would you rather get the blame for? Inflation which reduces the value of people's debts, or a deflationary catastrophe that puts millions out of work and benefits the cash-rich?

[Barnsey]

41 minutes ago, AWW said:

There's a fine line between "pandemic impacts" and "government response to the pandemic impacts" which governments won't want to tread. Think about it from the perspective of those who want to stay in power. What would you rather get the blame for? Inflation which reduces the value of people's debts, or a deflationary catastrophe that puts millions out of work and benefits the cash-rich?

Bingo! This ain't ending once the virus is largely gone from the daily news.

They'll try (or not) to reign things in, and we'll get our BK (or not). The question now we must all ask and come to some conclusion about is: under what circumstances can they start to hint at withdrawing support? After this much predicted wave of inflation in the spring, and it settles back down, will that be enough? Or will the inflation target ask for more action? The yanks are scaring us all, how dare they export their stimmy inflation upon us. Can we follow, should we follow? The boss of John Lewis calling for UBI the other day...

Sunak's premature tax hike plans suggest we're not yet at the point of panic, and it'll take another scare for us to get to the point of throwing much more at the fire. Let's face it, pre virus our economy was absolute tosh, is that good enough coming out of this? Or should they do so much more to have any chance of success in 2024?

[MrXxxx]

2 hours ago, Wheeler said:

I want to know if I can still use them to light my cigars.

No, but you could probably use them to wipe your bottom! :-)...bit shiny though, like that toilet paper they used to have in Public Conveniences [Izal?]

[nirvana]

51 minutes ago, Bricormortis said:

We are living in strange times with the most overheated S and P in history iirc

overheated compared to what?

Kraut stock market hit an all time high overnight, plenty of punters going short up here, I'm watching closely like a twt....or is that time will tell 

this looks like a good definition of 'overheated' to me or is it a case of you can never have too many vaccines or print enough money to 'save us all' 

[Barnsey]

Well there goes the Euro...

Do we follow?

[No One]

2 minutes ago, Barnsey said:

Well there goes the Euro...

Do we follow?

[No One]

[reformed nice guy]

1 hour ago, Bricormortis said:

My own guess, which you will recognise as the thoughts of DH and others, is a sugar rush high with post lockdown spending and stimulation from central government, melt up, bust, deflation which has to hit commodities for some months and if its a biggie maybe some years, untill the printing restores jobs and an economy.  Then serious inflation probably.

Another big risk is a black swan event

One that I have in the back of my mind is the collapse of North Korea. That would suck in tons of investment world wide as laying cable, building roads etc to get it to South Korea standard would be a relatively safe bet.

Just talking bollocks obviously, but crazy things like that can come out the blue and change a lot of things

[Loki]

K + S looking healthier today.

For the record, when I ask stuff like this it's not in any way questioning this thread or the knowledge of people who post here.

 

It's because I have faith in my ability to buy utter dogs.  I'm not quite confident enough yet to load up on BIG drops.

[Fully Detached]

3 hours ago, Bricormortis said:

Re above musings on Big meltdown, personally I would like to have more invested but as said sit in 50% cash atm as I dont want to wake up one morning and realise I lost my life savings in some apocalyptic melt down. We are living in strange times with the most overheated S and P in history iirc, and those savings.... well there's no replacing them for me.

Having said that, would I be right in thinking there have never been 2 meltdowns in a 12 month period ?

Is there a point where waiting on a big meltdown starts to look stupid, if so what are the markers is part of what I am considering atm.

My own guess, which you will recognise as the thoughts of DH and others, is a sugar rush high with post lockdown spending and stimulation from central government, melt up, bust, deflation which has to hit commodities for some months and if its a biggie maybe some years, untill the printing restores jobs and an economy.  Then serious inflation probably. 

 

I'm exactly the same as you regards my savings, the idea of waking up one morning to find I'd lost years of effort would kill me. Hence my slowly forming plan to buy a place in France, so at least I would have somewhere to live if I needed it. If I get that in place then I'll feel a whole lot happier about risking the rest of it in shares.

Mind you, saying that I am coming to the conclusion that your wealth is much the same as your social status - you're better off either having absolutely nothing or having so much that the rules don't apply to you. The man in the middle with something to lose is the one who gets paralysed and ends up taking one up the jacksie.

[Noallegiance]

[DurhamBorn]

1 hour ago, Barnsey said:

Well there goes the Euro...

Do we follow?

Yes,they need to print probably £300 billion more for the government,the window is closing,cable will hit $1.50 if they dont,everyone will print until the Fed stops.Governments are stuffed as soon as inflation stays over 3% because CBs will slow and then stop easing.West has huge structural deficits.

M1 is stuffed with cash in the US,they need to get it moving,those dollars will circulate soon.Commod fall off in China is because they will be stocked to finish build out,mostly energy,hence copper,expect power use to follow now with the lag should be about to head higher.China will push consumption now.

[BurntBread]

6 minutes ago, DurhamBorn said:

Commod fall off in China is because they will be stocked to finish build out,mostly energy,hence copper,expect power use to follow now with the lag should be about to head higher.China will push consumption now.

I think you have said before, DB, that China has already built out its power network, so will consume less copper from now on, but will be generating more electricity, so will soon be buying more oil, gas and coal. Am I reading your post correctly in that regard?

If so, do you think this a fairly temporary thing, so China will be buying more commodities as the "belt and road" initiative proceeds; or is this a long-term change in what China will be drawing in from the international commodity markets? Also, do you expect the West to be picking up the slack in terms of buying copper and other base metals?

Sorry to bombard you with questions, but I have a trivial one, too: I notice that David Hunter talked about the next "market cycle" being bullish for commodities and industrials. When he uses that term, is he referring to the kind of ten-year cycle we talk about here, or is his tweet above another short-term market call of a year of so (or perhaps both)?

[sancho panza]

On 10/03/2021 at 01:25, moneyscam said:

It's getting late but I'll answer the easier ones first and the rest tomorrow. I don't have all the answers to your questions but I'll answer those I can.

The first thing to bear in mind is that in terms of risk, the CCP is the only counterparty to say Deutsche even though Deutsche in reality is trading with all other market participants who also clear when initiating the trade. The CCP exists to shift Deutsche's counterparty risk to and from other participants entirely under the silo of the CCP. Hence my concentration of risk comment earlier and why CCP's are deemed to be SIFI's.

1) In essence yes the solvency of the CCP is dependant on the solvency of the entire market of participants. However they weren't created to deal with the scenario of the entire banking sector becoming insolvent but rather to mitigate against a large market participant failing and triggering and transmitting a cascade effect a la Lehman's 2008. If Deutsche wants to trade, it has to clear and currently LCH is the preferred venue for European based banks. When clearing first started the larger dealer banks would quote the price as 'LCH clear only'. There were a few smaller European banks that wanted to clear Eurex but soon found themselves shut out of the majority of the market as they could only trade with the few other banks that insisted on Eurex. Needless to say all these banks eventually had to fold and clear LCH if they wanted to trade with anyone. So it is not possible for a Deutsche to build up risk positions outside the purview of the UK regulator at least for the trades it is clearing in Europe.

I can't speak to the specifics of IRB but I do know that the banks are incentivised to clear by being deemed to have set aside sufficient capital via initial and variation margin at the CCP for clearing the trade in the first place. The fact that they are mandated by law to clear anyway is neither here or there!

2) Yes different initial margins and variation margins have to be posted depending on the instrument being traded. Interest rate derivatives are certainly less volatile than some of the exotic options. It's not about 'quality of the cashflows' but rather the inherent volatility of the instrument being traded. Bear in mind a big benefit of managing this risk for the regulator and the CCP is the netting of positions so Deutsche for simplicity's sake could be long 5bn with CCP and short 4bn with CCP so margin will be based on their net 1bn position with CCP. This was another reason the bigger dealers forced everyone else to LCH as they wouldn't benefit as much from netting if their trades were cleared at 3 different CCP's for example. It may have changed (I doubt it) but there was no cross netting allowed from CCP to CCP when I last worked.

3) I left the market 5 years ago so can't remember precise percentages by instrument but will look it up if I can find it published else I can always ask some of my old chums still in the market.

3) The market participants pay the cashflows they would have paid to their counterparty to the CCP and receive the cashflows from the CCP they would have received from their counterparty. These are just the inherent cashflows of the trade and are not considered collateral. They can post cash as collateral for initial and variation margin but primarily post sovereign govt bonds with a de minimis rating of (I can't remember the exact rating and of course this could have changed since I left) but I'm quite confident they would have to be at least a single A rating. Your question about rehypothecation is actually a very good one and not one I thought of before and don't know the answer to. But I would imagine it would be pointless to construct such market infrastructure and not address this potential issue from the perspective of the market regulator given it depends to a great extent on the ability to use the collateral to settle the default process. I will have to look into this for a proper answer but I would guess there is some mechanism under the terms of the CCP that the collateral 'belongs' to the CCP as it bears the risk and tough shit to any financial entity that lent it to the defaulting member of the CCP. They are compensated for this risk by the interest (repo) rate they receive for lending the bond out in the first place.

4) It definitely is possible and definitely does happen if you are looking at it from a parent group point of view. Take Deutsche for example. Deutsche London legal entity can write a CDS on say GE while at the same time Deutsche Frankfurt legal entity can purchase the same CDS from Deutsche London or any other market participant for that matter. Whether it is unwitting or witting I would argue it's possible at the group level they don't know what each legal entity is getting up to on a day to day individual trade basis as the scenario outlined above but then it doesn't really matter from the group perspective as even in a default the cash flows would remain within the group. That is not to say the risk management function at group level is not looking at these at all (they are) but they are not vetoing or approving trades on a trade by trade basis between legal entities on a daily basis. It was rare but occasionally Deutsche London would trade a swap with Deutsche Frankfurt through us even though they could go direct and avoid our brokerage fee.

As for loans, it depends what you mean by loans. There are Loan Credit Default Swaps but these only apply to syndicated secured loans and not typical loans made from a bank to a corporate entity. Plain vanilla CDS either reference a govt or corporate bond as the instrument protection (insurance) which has been written on.

That's all I can answer for tonight but will come back on what I couldn't answer eventually when I get the chance to pick my old friend's brains who are still working in this market on some of these details.

 

MS,thanks for that full answer at a late hour.Absolutely fascinating and your honesty is much appreciated.

When you put it that the CCP system is designed to deal with one large entity going under rather than a systemic collapse,it makes a lot of sense.

You can see how the system as they now have it gives comfort to regulators especailly compared to pre 2008.I find it reassuring that when assessing margin rerquirements they are looking at the volatility of the underlying rather than the nominal sum involved.It's also interesting to learn how London kept such an abundance of the market(see Wolf St psot below).

Just a couple of points with my BK hat on.

1) In a systemic event-let's use Deutsche as an example(no reason)-if they were to go bust,then despite the inital+variation margin,the counterparty would not be made whole if the sinking fund wasn't big enough.I presume then it would be a system of mutual haircuts.

2) It's possible for banks eg Deutsche to build disproportionately large positions via the netting off process that rely on it's solvency

3) The BoE is overseeing a disproportionately large market given the size of the UK economy.Would there be guaranteed mutual aid from the ECB if a systemic event occurred or could the ECB just sit back and leave it to the UK to sort out.I'm sure they wouldn't from a contagion point of view but is there a legal framework in place if they're unwilling?

4) On the issue of rehypothecation-it must be a worry that either unwittingly or by design,some banks may inadvertently post collateral they they don't own.I read years ago that London allowed it but that may have been in the pre 08 era.Like you,it sort of goes without saying that any margin would be the property of the CCP but that might mean that come a systemic shock,the bank that has lent Deutsche (say) the bonds won't get them back and won't be able to use the assets when they might need to.

 

All in all,it sort of poitns towards a system that works for now but much like car crash,the initial controllable wobbles ,belie the severity of teh eventual rollover of teh car.

 

 

 

https://wolfstreet.com/2020/11/28/vast-euro-derivatives-market-centered-in-london-faces-fragmentation-end-of-brexit-transition-uncertainties-loom/

About 43% of the $9.4 trillion in daily global derivatives trades tracked by the Bank for International Settlements are executed in the U.K. A large chunk of them are euro-denominated, but some of those trades will soon have to be executed elsewhere, according to the Paris-based European Securities and Markets Authority (ESMA), which announced on Wednesday that once the Brexit transition period expires, on Dec. 31, trading in euro-denominated derivatives must remain within the EU’s jurisdiction or in a country with “equivalent” standards to the bloc.

On 10/03/2021 at 09:33, Majorpain said:

 

They have done relatively well over the past year, the turbulence was far worse than 2008 IMO, with not much to show for it. That is probably helped by governments learning from the past and acting fast, as well as anything else put in place.  The data on bank leverage reminds me of the pandemic stats, if you mess with statistics enough you can get the result you want!

I take your point but Dowd/Buckner broke some ground with their thinking in that paper by prefferring to use the market cap over total assets.Their thinking was that the market cap is teh markets best assessmetn of teh actual value of the business rather than using the array of leverage/capital ratios that can be gamed via shoddy risk weighting.The market(particualrly the insiders) have a much better understanding of the loan book of msot banks than investment analysts sat in London on final salary pension schemes.

I won't lie,I take a very similar view now when looking at companies part

[JMD]

2 hours ago, reformed nice guy said:

Another big risk is a black swan event

One that I have in the back of my mind is the collapse of North Korea. That would suck in tons of investment world wide as laying cable, building roads etc to get it to South Korea standard would be a relatively safe bet.

Just talking bollocks obviously, but crazy things like that can come out the blue and change a lot of things

Actually Reformed Nice Guy, I think your idea regarding the collapse of North Korea triggering the BK is a very interesting notion for a black swan event.                                                                                                                    Allow me (indulge me!) to develop it a bit further ...For me, the pantomime show coming from N Korea in recent years indicates that the regime there is well past its sell date. However if such regime collapse did happen, I think the clumsy, awkward, 'Kim family theatre' of the absurd we have been entreated to recently might turn out to be just the warm up act, with the main event 'starring roles' going to the US and China. The main feature would involve both countries combining their joint efforts to rebuild N Korea whilst actively seeking to reunite North and South Korea. Of course that plot is really just a sham and a convenient political ploy by both sides to try to take the heat out of the increasingly fractious relations between the two superpowers over global trade, human rights, etc. ...Whimsical and totally fantastical you say?? Perhaps, but then again something tells me that 'Covid 2020' has many sequels!!!

[Noallegiance]

Intrepid's off again!

[sancho panza]

6 hours ago, AWW said:

I can't see there being a meaningful crash in equities now, outside the overbought tech names. Governments are well aware that anything negatively impacting their economies in the next five years will be pinned squarely on their Covid response. They will want to be seen to provide unprecedented support. The buying opportunity was last year.

All IMHO of course.

I've psoted before about a fiar few stocks that actually went up during bear markets.In terms of structure we're more set up like 2000(tech/telecoms went pop) now than 2008(banks went pop),as the msot chronic over valuations are in tech names

2000 bear market ran from mar 2000-Oct 2002.S&P went from 1500 to 900(-40%),NDX from 4700 to 1300 (-72%)

Billiotn as it was then,BATs and Unilever as three examples of shares that rsoe through a bear.