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

[DurhamBorn]

2 hours ago, planit said:

The best incentive for the move to green energy will be a sky high price of fossil fuels. Suddenly makes loads of projects worthwhile.

 

On the downside a high oil price will trash the economy and therefore the ability to invest huge sums into green energy.

Looks like an oil price of $100-$130 would be a target for policy makers. Unfortunately I think they have baked in an oil price way above this level already.

In 3-4 years the lack of exploration supercharged by growth in the developing world, infrastructure spending to develop renewable energy and the public's refusal for anything fossil fuels related to survive, will cause a squeeze of biblical proportions.

 

My LNG roadmap gives prices in around 4 years that look so high i keep thinking i must be way off with something.The only thing though i can think is that as those prices explode coal will remain in the mix and expand again.

The oilies are playing the best diversion iv ever seen.Nuclear is the real threat to them,full baseload everywhere would kill them,yet they have helped convince the world its windmills.

Best thing is this will mean much higher gas prices for them so they can buy up the windmills.Once they own them they can dictate the gas price as the coldest weeks of the year etc those windmills suddenly need maintenance 

Behind closed doors the execs are rolling around laughing because they get to gain from both sides.

I wouldnt be surprised if im able to use butter soon in my pies instead of lard and cooking margarine.

[Harley]

6 hours ago, jamtomorrow said:

Shame there's no way to get exposure to this new Gammon Bros TV. I think they'll do OK, especially if they can close on Piers after the extraordinary coincidence of his suddenly becoming a free agent.

I'm thinking JHB moves to GB TV, Graham takes her slot, and Piers finally gets a lie in to do Graham's old 10am.

[Harley]

6 hours ago, Hancock said:

Go woke, go broke may well be applicable here, that and the fact youngsters watch internet videos and more pensioners are cancelling their TV licence.

I heard on the radio that the new(?) Chief Exec came from the Guardian. 

[Harley]

3 hours ago, MrXxxx said:

Philistines! :-)

Regionalist! 

[Hancock]

11 minutes ago, Harley said:

Alas, no TV tax to hide behind like with the BBC.  I also heard on the radio that the new(?) Chief Exec came from the Guardian. 

https://www.theguardian.com/business/2017/jul/17/carolyn-mccall-itv-chief-executive-easyjet-adam-crozier

Would seem so, been there a while though.

Like any socialist of worth she is a Dame - Dame Carolyn McCall DBE. 

[MrXxxx]

2 hours ago, Lightscribe said:

We’ll have more competition in everything as the avid watchers hang on our every word. Yellow stickers freebie farm and bin raiding will eventually trend on Twitter and you’ll have everyone at it.

Well they'll certainly 'learn their lesson' when his trading tips appear in MoneyWeek! :-)

[ThoughtCriminal]

 

[sancho panza]

 

On 11/03/2021 at 18:55, Castlevania said:

They cut their dividend by at least half. Chevron; Exxon and ConocoPhillips all held theirs.

I thought that CV but Equinor cut theirs and they've had a super run.Evn the highest of our inital ladders are in the money.

It msut have ahd a dampening effect.

On 11/03/2021 at 19:33, Cattle Prod said:

My position is that I've held my options and bought short term puts on USO to cover a correction. So I'm relaxed about it going either direction. If it breaks up, close the puts, and put the loss of premium down to caution insurance. If it breaks down, I gradually sell my puts and add to longs. We had a quick 7% correction which was about half way there, but I really don't see the juice for another big leg up unless we get another drop. Higher from here, we could see $75 maybe.

I think BPs underperformance is because of it's strategy, I think they are throwing the baby out with the bathwater. Getting rid of their explorers is a bad sign, because at higher prices the only way you can grow your resource base it through exploration as acquisitions are too expensive. At low prices, aquisitions are good value, and exploration hides down the back and tries not to spend any money or get noticed (working for me so far...). Shell, I don't know, but like said above that divi was as good as gold, and considered a bond by the retired UK middle classes. They were playing with fire, as I said at the time.

Edit: 

Again I should stress I'm just fiddling around with leveraged oil positions. I wouldn't (and haven't) bother fiddling with stocks owned outright for a 15% correction. I'd just take it as a healthy sign. XLE holding up very well against the underlying, could well be insto money coming in.

Agreed in bold.Looking at thw weeklies,it's jsut been green since start of nov 20.I'd feel more confidetn heading higher if we were running up from $60 on brent to shake out the momos.otherwise it jsut feels like we're riding a Tesla equivalent.

Thanks for the thoughts on BP,As I said to @Castlevania I think divi cuts play a part but the strategy explanation explains BP but not RDSB who've tracked in line with BP in terms of undeperformance of the big US/Euro oilies since Nov.Ever since you and DB started talking months back about the diposals Looney has been makingI've been a little nervous about BP.The optiosn expiry offers us achance to excercise RDSB at good value and keep them,maybe drop some BP which I think we'll do.But on the run since the OCt 28th bottom,both BP and RDSb outperformed XOM in the initial phases before XOM ran with a vengeance.

Like you,I'm not dropping exposure but I'm thinking we'll use the expiry to shuffle the holdings around.

With the options moeny to reinvest,I may jsut lever some more on BP rather than XOM.

Briefly looked at rotating some of the risk on money into some PM calls but the risk/reward isn't great.

 

On 12/03/2021 at 09:35, Majorpain said:

It is potentially misleading however, the low central bank interest rates on offer at the minute mean banks profitability has been seriously squeezed, a bank at 5% interest rate in 2007 makes at lot more than one lending at 2% in 2020.  If these external factors are not adjusted for it will make things like worse than they actually are.

Still not going near a bank with a bargepole though!

I take your point on margins but this is where I'd side with Dowd and Buckner in that I think you have to factor the low rates into the equation and let's be honest they've been in place for a decade.It could last antoher decade.

their solution in terms of using market cap for a 'no BS' leverage ratio make a lot more sense than risk weighted capital ratios that are heavily gamed.Very much in the spirit of the simplest solution being the best,

It mya make things look worse than they are but the fact that an expereinced investor like yourself MP is using the word 'bargepole' says a lot.Im clearly not the only one with that view.

There are no perfect ways to truly measure leverage in the banking system given that accounts are backward looking at best,but there are some ways that are btter than others imho.

On 12/03/2021 at 10:38, moneyscam said:

I'm betting the latter too. Since GFC we've had asset inflation driven by monetary policy that is now going into overdrive. Now we have massive fiscal intervention coming as well which I expect to feed into general prices. At some point the rubber band will be stretched beyond its breaking point and snap. 

I have no clue as to the exact timing of this point, but the more fiscal intervention I see the more I know we are approaching this point.

A useful proxy for inflation expectations is to subtract the US treasury TIPS yield from the US treasury nominal yield (you can also do this for other countries that have inflation linked bonds). This is known as the 'break even rate'. This chart shows inflation expectations rising rapidly.

For more charts and the source of the above chart see here : https://www.yardeni.com/pub/nomrealyield.pdf

Thnaks for your earlier answer on the CCP stuff MS.Very illuminating.

I've laoed the stuff onto a St louis fed chart.Makes a fascianting picture alongside the yiedls.ALso consdiering how badly inflation is measured ie they don't include hosue prices/cost of buying £1 of pension income etc and don't weight to income demogrpahics ie poorer people spend more on food,duel.

[sancho panza]

apologies to the LPP but this one is relevant given the importance of inflation measurement going forwardPosibly one of the best laymens expalanations of how inaccurate inflation is.

If you want to read up on the nuances,I really do recccomend Shaun Richrads as linked who goes super deep on detail.If you jsut want to know what you need to know,the followign is pretty damned good.

Inflation mismeasurement as @DurhamBorn has always said(or something very similar),is the way they steal from the working and future generations.Key thing here is highlighting the use of rental equivalcen rather than the cost of buying a hosue.I know msot on here will know it but some newer readers kight find it useufl

interesting as well to see the methodology for the base figures for imputed rents-which appear in GDP calcs to be explained.

 

highlights mine.

https://wolfstreet.com/2021/03/11/house-price-inflation-in-cpi-is-of-course-baloney-but-it-accounts-for-1-4-of-total-cpi/

House Price Inflation in CPI is of Course Complete Baloney, but it Accounts for 1/4 of Total CPI

With actual house price inflation based on market data, overall CPI would have jumped by 3.7%. Lifting the cover on the deception to keep CPI low.

By Wolf Richter for WOLF STREET.

For most Americans, housing costs are the largest item in their budget, ranging from 30% to 60% of their total monthly spending. In its Consumer Price Index (CPI) for February, released yesterday, the Bureau of Labor Statistics reported that the costs of homeownership (which the BLS calls “Owner’s equivalent rent of residence”) have increased by just 2.0% from a year ago, and that rents (“rent of primary residence”) have increased by 2.0%. They’re the biggest items among the 211 items in the CPI basket and together account for about one-third of overall CPI. They play a huge role in CPI. So…

Rent inflation of 2.0% year-over-year on average across the US might be roughly on target, from what I can see in other rental data. But homeowner’s inflation of just 2.0%, given the skyrocketing home prices? Ludicrous. In its latest release, the Case-Shiller National Home Price index jumped by 10.4%.

This discrepancy between home price increases and the CPI for homeowners – which has for years contributed to understating the overall CPI – is depicted in the chart of the Case-Shiller National Home Price Index (red line) and the CPI for “owner’s equivalent rent of residence” (black line). I set the homeowners CPI at 100 for January 2000 to match the Case-Shiller index, which is set by default at 100 for January 2000. This allows you to see the progression of both indices on the same axis.

The thus corrected CPI increases by 3.7%.

The “owner’s equivalent rent of residence” accounts for 24.2% of CPI. If it had increased by 10.4%, in line with the Case-Shiller index, instead of 2.0%, the overall CPI would have increased by 2.03 percentage points more. So add the 2.03 percentage points to the reported overall CPI increase of 1.7%. And the thus corrected overall CPI would have shot up by 3.7%!

During the Housing Bust, after five years of dropping, the Case-Shiller Index briefly joined the CPI for homeowners before taking off again – and there is a reason for that we’ll get into in a moment.

The S&P Case-Shiller Home Price index is a good measure of house price inflation because it is based on the “sales pairs” method, comparing the price of a house when it was sold in the current month, to the price of the same house in prior transactions years ago. It also accounts for improvements and removes outliers. In other words, it measures how many dollars it takes to buy the same house over time – and thereby it measures house-price inflation.

This discrepancy – in reality, a form of purposeful deception – between actual home price increases and the CPI for homeownership has been bemoaned before and is not a secret. But it’s not broadly discussed in the media so that everyone knows by just how much the homeownership component in the CPI understates the actual homeownership inflation that Americans confront.

To its credit, the BLS includes homeownership costs in the CPI basket. By contrast, the EU does not include homeownership costs at all in its basket underlying its Harmonised Index of Consumer Prices (HICP). It only includes rent. And thereby housing costs are woefully underrepresented in the EU’s inflation data.

The rationalization put forth by the BLS for this discrepancy is that it doesn’t actually consider house prices relevant for inflation. It considers houses an “investment,” and investments don’t enter into the CPI. What it does try to put a price on is the cost of “shelter,” which is a service. This makes sense with rent. A renter pays for a service. But the BLS extrapolates this rent-as-a-service to homeownership. And that’s where the logic croaks.

The BLS housing inflation data is based on the “Consumer Expenditure Survey” sent to consumers, rather than market data for prices and rents. It’s up to the homeowner to decide what their primary residence would rent for it they tried to rent it out.

This is the question in the survey: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?” So homeowners have to come up with some figure.

For the CPI, the BLS says, the cost of shelter of the owner-occupied home “is the implicit rent that owner occupants would have to pay if they were renting their homes.”

This explains the black line in the chart above that is completely out of tune with the reality of home prices: It tracks rent inflation, not house price inflation, and it essentially represents what homeowners think rents would be. So the rent CPI, which accounts for 7.8% of total CPI, and the homeowner CPI, which accounts for 24.2% of CPI, measure roughly the same thing: rents. And this thereby neatly and purposefully excludes rampant house price inflation from the index. And it also turns CPI into the sad joke that it is.

[Noallegiance]

https://www.bbc.co.uk/news/business-56395526

"As part of the plan, the government has promised to deliver 4,000 new electric or hydrogen buses that will be built in the UK by the end of this parliament."

[Harley]

7 hours ago, Noallegiance said:

https://www.bbc.co.uk/news/business-56395526

"As part of the plan, the government has promised to deliver 4,000 new electric or hydrogen buses that will be built in the UK by the end of this parliament."

Odd place to locate a bus fabrication plant.

[AWW]

1 hour ago, Harley said:

Odd place to locate a bus fabrication plant.

I'd say it's ideal, plentiful supply of hot air just next door for space heating.

[headrow]

What is the reason for the 10% rise in Drax today?

[DurhamBorn]

1 minute ago, headrow said:

What is the reason for the 10% rise in Drax today?

Can i add a bit on there and self congratulate for a wee second 

"what is the reason for the 10% rise in Drax today,making it now 200% up from the price us bottom dwellers were buying it"?

I think after the capacity market auctions the market is waking up to the fact the more wind there is the more Drax becomes a key player for base load.Their latest expansion looks good as well.

[DurhamBorn]

9 minutes ago, Cattle Prod said:

Well done that man. I stayed out of it as I just didn't like the idea of burning beautiful Canadian trees on an industrial scale, go woke go broke 

Well quite,crazy,though to be fair their pumped hydro assets are superb and gain from more free wind power,actually they get paid to run those turbines when there is too much power.

I havent fully gained though as iv been selling some on the way up and have now sold around half.

On LNG,who do you think the winners will be?

Im thinking Shell,BP,Repsol,what about others?

Im very close to buying in Brazil now,hat tip to Kaplan.

Im thinking Telefonica Brazil,TIMB,CIG and ELP for starters.Think il set ladders starting 5% down from here.Should add they are all ADRs in the US.

If anyone can check,is there any withholding tax on Brazilian ADRs in the US?

[sancho panza]

Not sure on the source,but I'd prefer a leffe index.

[sancho panza]

1 hour ago, Cattle Prod said:

Well done that man. I stayed out of it as I just didn't like the idea of burning beautiful Canadian trees on an industrial scale, go woke go broke 

If it's any consolation I managed to avoid the four bagger that is Royal mail as well as Drax depsite @DurhamBorn giving us plenty of heads up.

[sancho panza]

1 hour ago, DurhamBorn said:

If anyone can check,is there any withholding tax on Brazilian ADRs in the US?

All ADR's get taxed in my experience

[AWW]

7 minutes ago, sancho panza said:

If it's any consolation I managed to avoid the four bagger that is Royal mail as well as Drax depsite @DurhamBorn giving us plenty of heads up.

Also missed Royal Mail, even though it fit perfectly with my own advice, which is - if you ever pay a premium to use a service because its competitors are so bad, buy the stock.

[kibuc]

On 12/03/2021 at 14:21, Lightscribe said:

I know this isn’t the place for AIM and small cap miners (with debt, takeovers etc some of the mid-caps may struggle etc) but I thought I may allow a very small calculated punt for any melt up some speculative high risk miners.

Channeling @kibuc have any of these come on your radar? Appreciate any views you may have, as I’ve seen them been mentioned in a few places now.

Nicola mining

https://www.juniorminingnetwork.com/market-data/stock-quote/nicola-mining.html

Aurcana Silver

https://www.juniorminingnetwork.com/market-data/stock-quote/aurcana-silver.html

Blue Lagoon resources

https://www.juniorminingnetwork.com/market-data/stock-quote/blue-lagoon-resources.html

Irving Resources

https://www.juniorminingnetwork.com/market-data/stock-quote/irving-resources.html

I came across Aurcana the other day and like it, but my portfolio is now set.

One word of caution about any small caps is that you should consider your exit strategy right from the get go. Liquidity in those names can be hard to come by on the best of days and it simply evaporates on the bad ones. An example: with Impact Silver, on a typical day I can get an instant quote for about £1k worth of shares, anything larger requires a fill or kill. Last March however, I couldn't get a quote regardless of volume. If you're planning on dealing in large sums, plan your espace route well.

[Castlevania]

1 hour ago, DurhamBorn said:

Well quite,crazy,though to be fair their pumped hydro assets are superb and gain from more free wind power,actually they get paid to run those turbines when there is too much power.

I havent fully gained though as iv been selling some on the way up and have now sold around half.

On LNG,who do you think the winners will be?

Im thinking Shell,BP,Repsol,what about others?

Im very close to buying in Brazil now,hat tip to Kaplan.

Im thinking Telefonica Brazil,TIMB,CIG and ELP for starters.Think il set ladders starting 5% down from here.Should add they are all ADRs in the US.

If anyone can check,is there any withholding tax on Brazilian ADRs in the US?

According to this https://taxsummaries.pwc.com/brazil/corporate/withholding-taxes Brazil doesn’t levy withholding taxes on dividends unless you live in a tax haven or there’s an agreed treaty. In addition my understanding is that the ADR is treated the same as the underlying share so there’s no double taxation with US withholding taxes. So, in theory there shouldn’t be anything to pay. In practice, HL for example will have residents of multiple jurisdictions as clients, so you’ll probably end up paying the higher rate. 

[sancho panza]

4 minutes ago, Castlevania said:

According to this https://taxsummaries.pwc.com/brazil/corporate/withholding-taxes Brazil doesn’t levy withholding taxes on dividends unless you live in a tax haven or there’s an agreed treaty. In addition my understanding is that the ADR is treated the same as the underlying share so there’s no double taxation with US withholding taxes. So, in theory there shouldn’t be anything to pay. In practice, HL for example will have residents of multiple jurisdictions as clients, so you’ll probably end up paying the higher rate. 

This is an important issue CV so happy to learn.We took a 25% or so hit on equinor divi the otehr day.That's one we can possibly buy on the Oslo exhcange.Are you saying the witholidng tax in the USA is the same as the witholding tax in Norway?

I'd love to know how to avoid it?

 

[Castlevania]

1 minute ago, sancho panza said:

This is an important issue CV so happy to learn.We took a 25% or so hit on equinor divi the otehr day.That's one we can possibly buy on the Oslo exhcange.Are you saying the witholidng tax in the USA is the same as the witholding tax in Norway?

I'd love to know how to avoid it?

 

No. I’m saying it doesn’t matter if you buy the stock on the Norway exchange or the ADR, they’re both subject to the same withholding tax.

Where it gets messy with nominee accounts is if residents of different countries are charged different rates of withholding tax. Invariably from my experience you end up paying the highest rate.

To add, the U.K. has double taxation treaties with most countries. Which means you should only pay the higher of the withholding tax or U.K. dividend taxation. So if you hold any foreign companies subject to withholding taxes outside of an ISA or SIPP you should be able to offset some of the tax already paid against your U.K. dividend tax bill.

[Wheeler]

1 hour ago, sancho panza said:

This is an important issue CV so happy to learn.We took a 25% or so hit on equinor divi the otehr day.That's one we can possibly buy on the Oslo exhcange.Are you saying the witholidng tax in the USA is the same as the witholding tax in Norway?

I'd love to know how to avoid it?

 

I've got some in my HL ISA that I bought on the Oslo exchange and some in the HL SIPP bought on the NYSE. There is no substantial difference in the dividend amount credited (i.e. after tax deducted) just a slight one that I put down to some currency effects. For example, last one was £0.0580 per share in the ISA and £0.0586 per share in the SIPP. Dividend before was £0.0518 ISA and £0.0502 SIPP.

I had hoped that the SIPP would have no withholding tax!

[headrow]

3 hours ago, DurhamBorn said:

Can i add a bit on there and self congratulate for a wee second 

"what is the reason for the 10% rise in Drax today,making it now 200% up from the price us bottom dwellers were buying it"?

I think after the capacity market auctions the market is waking up to the fact the more wind there is the more Drax becomes a key player for base load.Their latest expansion looks good as well.

Lowest i got in at  was 121.5 , i had 5 bites and still missed the bottom!

This time last year with the sell off and companies pulling their dividend i thought i was going to have to start looking at going back to work. 

I burnt through my cash  by investing it all in the markets leaving myself just 5k in cash . Just need to sit back now and enjoy the dividends coming in to build up a bit of a cash buffer. Hoping that i've managed to snag an extra 10k a year dividend income.