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

[wherebee]

1 hour ago, Cattle Prod said:

I'm beginning to think that Saudi Arabia is a very large player in the futures market. No real evidence, but from a game theory pov it makes a lot of sense. There are rumours of a large spec 'whale' too, interesting times.

If you were a Saudi Royal, there is no way you wouldn't front run the oil market using insider trading knowledge.  Zero chance of ever being punished in the kingdom.  In fact, less than zero as anyone that criticised you would go to jail.

[RickyBacker]

7 hours ago, Funn3r said:

Does buying physical silver even make sense when you have to pay 20% VAT on top? Unless it goes to the moon and you don't care?

In Taiwan I can buy with zero tax. Tax is added if I sell back to the dealer at 6 percent. Happy times.

[Mr X]

6 hours ago, Mapper said:

What makes this expontentially more tragic is that the only entity that seems to realise this is the Chinese Communist Party. 

Check your premise. The Satanist elite running Western Europe and North America want it destroyed and depopulated. It's been long planned for

[sleepwello'nights]

7 hours ago, Funn3r said:

Have they been delivered yet? Their FAQ says you don't pay VAT when you order, but the delivery company wants the VAT off you plus some collection fee. A bit like when you get the sodding RM card through your door saying that will be £0.73 VAT plus 8 quid fee.

They've been delivered, that's how I can say so categorically that I haven't paid VAT. Could be that the low value meant a customs declaration wasn't required. Order value was less than €1000 Delivery was by UPS. Who messed up the delivery address but that's irrelevant.

The only fly in the ointment is that the price has fallen since I purchased them. No biggie as it was a small number of coins.

The price I paid was the invoice price per coin plus delivery and a credit card surcharge. I could have paid using an alternative method if I didn't want to incur that surcharge.

[jamtomorrow]

11 hours ago, Errol said:

This is utterly insane. If you are in the theatre the fire has already started. Run for your life.

You want insane, try being on the other side of the trade. Here's how it's been for me -

April 2020: 4.5% of AUM (SIPP, ISA, the lot) in BTC, 35% in PMs

Added even more BTC in Dec 2020

Today: 28% BTC, 27% PMs

Entire portfolio up 28% due to BTC alone (there's quite a bit more from oilies and miners I haven't bothered accounting for yet)

This just seems nuts if you bear in mind I'm notionally running a permanent portfolio (but with practically zero allocation to bonds).

Now I've said before, the position in BTC is there for me as a hedge against the tail risk of hyperbitcoinization, not as an investment, but this does look like it needs trimming back soon before it debalances the entire portfolio (even to me, being the self-proclaimed world's laziest "gardener").

On the other hand, what kind of householder reduces their cover for a juicy refund when they see a bush fire approaching?

Decisions, decisions.

[Fully Detached]

@Harley thought you might appreciate an update on the index linkers that we discussed a few pages back. I checked our accounts and we each have three different issues, two 5 year and one 3 year. The 3 years rolled over at the end of Feb and are now CPI linked rather than RPI - given the comedy inflation basket this morning, we will take as much out of those as we can and stuff the stocks and shares ISAs before this year's deadlines.

The 5 years are still RPI linked - one expires n 2024 so that's a keeper, but the other expires in May, so we will again get as much as we can into next year's ISA limit and then see what we're left with. Timing wise it seems almost perfect - we can safely say we got the maximum benefit out of all three issues.

[Lightscribe]

2 hours ago, sleepwello'nights said:

They've been delivered, that's how I can say so categorically that I haven't paid VAT. Could be that the low value meant a customs declaration wasn't required. Order value was less than €1000 Delivery was by UPS. Who messed up the delivery address but that's irrelevant.

The only fly in the ointment is that the price has fallen since I purchased them. No biggie as it was a small number of coins.

The price I paid was the invoice price per coin plus delivery and a credit card surcharge. I could have paid using an alternative method if I didn't want to incur that surcharge.

I had delivery under €1000 for x2 10oz queens beasts via silver-to-go (sister company of coin invest) via UPS. No email or anything, but when I looked up the tracking after it had taken awhile, they required the VAT payment which I paid for online. No biggie as the Queens Beast series have a collector value also that sends them way above spot. In fact it’s seems the VAT is now reflected on the Ebay prices for them already. 
I’ve done most of my silver purchasing in the last few years anyway, it’ll only be Ebay for anything below spot other than any future Queens Beast series.

[Castlevania]

2 hours ago, sleepwello'nights said:

They've been delivered, that's how I can say so categorically that I haven't paid VAT. Could be that the low value meant a customs declaration wasn't required. Order value was less than €1000 Delivery was by UPS. Who messed up the delivery address but that's irrelevant.

The only fly in the ointment is that the price has fallen since I purchased them. No biggie as it was a small number of coins.

The price I paid was the invoice price per coin plus delivery and a credit card surcharge. I could have paid using an alternative method if I didn't want to incur that surcharge.

What value did they put on the customs form? 

[sancho panza]

Dr Tim with one we missed but very relevant in terms of the reflation thesis and pretty much everything @DurhamBorn has been talking of since day one.

It also directly points the root problem as being the mismeasurement of inflation as per Shaun Richards long time complaint and that price inflation and debt deflation aren't mutually exclusive.

Highlights mine to enable skim reading.

 

https://surplusenergyeconomics.wordpress.com/2021/03/03/192-the-great-dilemma/

#192 The Great Dilemma.

Posted on March 3, 2021

135

MAPPING THE STAGFLATION TRAP

Governments in general – and finance ministries in particular – face a tricky dilemma.

Simply stated, the dilemma runs like this. If governments don’t keep pouring liquidity into the economy, activity will slump, numerous businesses will collapse and voters will face extreme hardship.

But if they do carry on with gargantuan financial largesse they risk, not just a surge in inflation but, quite possibly, an associated rise in interest rates.

The only practicable line for finance ministers (and central bankers) to try to walk is a “Goldilocks” one, avoiding the extremes both of an overheating financial system and of an excessive cooling of the economy.

The theory is that, if they can tread this course adroitly, economies will enjoy the benefits of a return to growth, with inflation in due course falling back into a preferred range somewhere between 1% and 2%. If achieved, this would amount to a return to what was, in the 1990s, sometimes called “the great moderation”, describing a combination of solid growth and subdued inflation.

If conventional, ‘money-only’ economic interpretations were valid, it might just about be possible for them to walk this line – in reality more like a tightrope – and find solid ground on the other side of the crevasse opened up by the coronavirus crisis.

But energy-based interpretation reveals that no such solid ground exists. Rather, something not unlike stagflation has long been hard-wired into the system. Whilst global GDP expanded at a trend rate of 3.4% between 1999 and 2019, growth in underlying prosperity trended at only 1.25%, and has now ceased to grow at all. This disparity of itself suggests that broad inflation has long been far higher than reported levels. 

None of this should really come as too much of a surprise. After all, pouring cheap credit and cheaper money into the system has been going on for more than twenty-five years, and energy-referenced analysis, as provided by the SEEDS model, reveals that this has done no more than disguise the reality that relentless rises in ECoEs (the Energy Costs of Energy) have put prior growth in material prosperity into reverse.

The aim here is to start by explaining the fiscal and monetary dilemma as it appears on the surface before moving on to use SEEDS analysis to explain why the problems are in fact both structural and insurmountable. In doing so, we need to refer to market expectations, which makes it appropriate to remind readers that this site does not provide investment advice, and must not be used for this purpose     

Loaded for inflation

We should be clear that the balance right now is heavily tilted towards inflation. Throughout the coronavirus crisis, governments have been able to replace the incomes but not the output of idled workers and businesses.

This amounts to supporting demand at a time of extreme contraction in supply.

This is why we’re already seeing inflation spiking in a number of categories, affecting anything that might be in short supply during a vaccine-driven economic rebound. We can infer that official expectations are that this is a transitional effect, likely to ease as capacity is restored, and demand-side stimulus fades. Be that as it may, significant inflationary pressures are showing up across the board.

This perception may have influenced asset market participants, who have bought in to the “Goldilocks” plan but with a distinct bias towards the inflationary side of the equation.

If investors were to factor higher inflation into their calculations, we would expect them to favour those asset classes (such as equities and property) which could be counted on to – at the least – ride the rising inflationary tide. They would steer clear of cash, and be wary of bonds, because, in an inflationary climate, interest rates might rise enough to drive bond yields upwards (though not by enough to make cash a viable preference). They might look favourably on assets such as cryptocurrencies and precious metals which could be perceived as hedges against inflation.  

This, by and large, is what has been happening. Markets, it seems, are expecting policymakers to ‘talk hard and act soft’, combining hawkish homilies about debt and inflation with a continuation of generous support for households and businesses.

This stance echoes the prayer of St. Augustine, who called on the deity to make him virtuous – “but not yet”.

Furthermore, investors, no less than the authorities, must be aware of the delayed price-tags attached to some of governments’ covid response initiatives. For instance, granting interest and rent “holidays” has inflicted substantial losses on counterparties such as lenders and landlords, and these costs must in due course be made good, unless we’re prepared to accept failures in counterparty sectors.

We should, then, anticipate some virtue-signalling tax rises which, in sum, amount to little more than small down-payments on the enormous costs of combating the pandemic.  Not for nothing has inflation been called “the hard drug of the capitalist system” – it offers a beguiling short-term alternative to painful and unpopular adjustment to economic stresses.

The energy point meets the expectation bubble

Guided by conventional interpretation – whose faith in ‘perpetual growth’ is, as yet, unshaken by events or anomalies – governments and investors alike believe that there exists a ‘promised land’ which, if we can once reach it, combines real growth of at least 3% with inflation of less than 2%.

The fatal error on which this supposed nirvana is based is the belief that economics is nothing more than ‘the study of money’, such that energy and broader resource limits to material prosperity do not exist.

The reality, of course, is that everything (including other natural resources) which constitutes economic output is a product of the use of energy, whilst money is nothing more than a medium for the exchange of energy-enabled economic goods and services. The fly in this ointment isn’t that we might ‘run out of’ any form of primary energy, but that energy supply costs (measured as ECoEs) might undermine the dynamic by which energy is translated into economic value. 

As regular readers know, the undermining of this energy dynamic is exactly what we’ve been experiencing over a protracted period. Global trend ECoE has risen from 2.6% in 1990 to 9.2% now. Along the way, this pushed prior prosperity growth in the advanced economies of the West into reverse from 2006 (at an ECoE of 5.7%), and is now doing the same to less complex, less ECoE-sensitive EM countries. There’s a whole raft of flaws in the thesis that we can transition, seamlessly and painlessly, from increasingly costly (and climate-harming) fossil fuels to renewable sources of energy.   

The weakening energy dynamic is precisely why, globally, we’ve spent two decades borrowing $3 in order to deliver $1 of “growth”, and why the ratio of borrowing to GDP has averaged 9.6% to support “growth” of just over 3%.

We’re at the point now where, if they wish to sustain a simulacrum of ‘growth as usual’, the authorities will find it necessary to pour ever-increasing amounts of liquidity into the system. In so doing, they will be creating financial ‘claims’ on economic output that the economy of the future will be unable to meet at value.

At the point at which the ‘real’ economy of energy can no longer support even the illusory sustainability of the ‘financial’ economy of money and credit, the value supposedly contained in these financial “excess claims” will have to be destroyed. Whilst “hard” defaults cannot be ruled out, the balance of probability favours the “soft” default of rampant inflation.

Optimistic investors might, if they were aware of this, think that ‘real’ assets, like equities and property, can still maintain their real value by rising by at least as rapidly as inflation destroys the purchasing power of money.

This, though, is to ignore the effects of the involuntary de-growth induced by the decay of the energy dynamic. As prosperity recedes, consumers will be forced to choose between sinking into a quagmire of debt or adapting to the rising real cost of necessities by cutting back on discretionary purchases.

Whole sectors will suffer utilization rate erosion as prior gains from economies of scale go into reverse. De-complexification of the system will strip some sectors of critical mass, whilst simplification of products and processes will de-layer entire sub-sectors out of existence. Even the Fed cannot sustain the stock prices of businesses whose profitability has ebbed away. 

It was once famously said that inflation is “always and everywhere a monetary phenomenon”. In our current situation, inflation is likelier to be a ‘denial phenomenon’, if we insist on trying, financially, to engineer “growth” when the critical energy equation is heading in the opposite direction.     

 

[Harley]

1 hour ago, Fully Detached said:

@Harley thought you might appreciate an update on the index linkers that we discussed a few pages back. I checked our accounts and we each have three different issues, two 5 year and one 3 year. The 3 years rolled over at the end of Feb and are now CPI linked rather than RPI - given the comedy inflation basket this morning, we will take as much out of those as we can and stuff the stocks and shares ISAs before this year's deadlines.

The 5 years are still RPI linked - one expires n 2024 so that's a keeper, but the other expires in May, so we will again get as much as we can into next year's ISA limit and then see what we're left with. Timing wise it seems almost perfect - we can safely say we got the maximum benefit out of all three issues.

RPI on the 5 year?  Jolly good.  I'm keeping mine for now, as part (the part) of my "bond" allocation.

[Harley]

Not much/nothing on yesterday's tax day.  A few bullets on holiday lets and self employed but no detail.  Was it a nothing burger?

PS:  Yep, a nothing burger (the bit on holiday lets apparently being pointless).  Been called a "damp squib".

[sancho panza]

On 23/03/2021 at 10:02, Cattle Prod said:

For what it's worth, I'm very much pro police. I'm anti 'woke' police though (especially the senior police who are forcing the front line to humiliate themselves), or police that can't defend themselves vigorously. If you're not going to arm them, make sure they have to pass strict physical tests, and self defence classes. 2 months of Krav Maga would do most of them the world of good. Police have to be a deterrent, otherwise there will be anarchy. They are rapidly losing the public trust, and there will be far reaching consequences. We joke anecdotally about the coppers taking half an hour to turn up to a burglary, if at all, but what if it was you? Can you deal with a burglar yourself? Even things like bikes being nicked, they won't even register it unless you have a video. Despite the broken windows theory cleaning up New York. No more foot patrols, why not? Whose idea was that? And yet I get a nice breakdown of my council tax every year telling me how much more I'm paying toward police pensions.

Your point about ex military types is concerning. I can understand why they don't want to drive around in a rainbow coloured car kneeling at protests, but the forces will much poorer without that backbone. That said, my uncle was a copper in the borderlands of Ireland through the 70s and 80s. He had to deal with the IRA and the UVF etc armed with military grade weapons, while unarmed. He wasn't ex military, just a farm boy, but there was a height minimum etc in those days, and the training was quasi-military. There was a lot of prestige to being a cop then, respect in the community, and it attracted such men. Of course we are told now that masculinity is toxic, I think we can see how that's working out for the police.

As @MrXxxx said, get yourself into a good community and make yourself useful before you get too old. 

I think you're hitting the central problem nail on the head and that's how the senior echelons of the police have become very politicized in that they prioritize the concerns of the political class above the concerns of the 'working' class.

As you say,if you get burgled,how many people could actually deal with an intruder? If you get burgled,you'd like the police to attend,not just give you a crime number.And yet at the same time as people have likely never been as insecure on a societal level due to police numbers,Derbyshire Police have the manpower to harass dog walkers/poison pools/fine outdoor coffee drinkers or Essex Police have 16 officers spare to go and shut a gym that's opened in breech of Covid rules.

It's these higher echelons of the Police that have made diversity issues their driving concern rather than securing the public.

This rot started many years ago.I remember talking to a fellow reservist whose full time job was with Special Branch about the then Home Secretary Jacqui Smith claiming her sister's front bedroom was her main home,meaning that her hosue in Solihull was a second home that she could spend taxpayers money maintaining.I asked him why she hadn't been charged by the Police for what appeared prima facie to be a fraud? He told me he couldn't understand it either.

https://www.theguardian.com/politics/2009/oct/12/smith-expenses-breach

Between June 2007 and March 2009 Smith was actually spending more nights at her constituency home than in London, the committee said. This contradicts claims made by Smith when the complaints about her claims were first raised.

[sancho panza]

19 hours ago, ThoughtCriminal said:

This was one of the main factors behind me leaving the prison service. 

 

I joined in 2003 and I learned the ropes from ex squaddies and NCOs, every prison was staffed by around 80% ex forces. They'd been around and seen a thing or two, all solid blokes you'd want next you in a tight spot. 

 

Then around 2010 they started recruiting more and more women and it became an absolute joke. 

 

Because I'm a big unit I always had to get kitted up and man the shield when a prisoner smashed a cell up and armed himself. 

 

One day my old school boss said "Fuck this, pointed at three female officers and said 'you get paid the same as him, get kitted up for a cell extraction, you're the three man team today'. 

 

Two of them started crying. My boss insisted though so in they went and in cartoon style the prison threw them out of the cell one at a time and they went sliding along the floor with this bewildered look on their faces. 

 

I just wanted to make the point that there are so many institutions in this country that once led the world: we really did have the best police, army prison service etc, but theyre now hollowed out, living on the reputations earned by better men who are long gone. 

 

Most people havent realised this yet and the destruction of our liberties without a whimper due to covid hysteria is just the first in a series of shocks coming down the line. 

 

We live in a giant potemkin village called Britain. 

 

Way off topic I know, so I'll leave it there. 

I think this issue is on topic because it relates to the sort of institutional decay that normally precedes some seismic changes.With reference to the Western powers that means a decline in their power and influence and aslo most likely some susbtantial societal instability that they won't have the tools at their disposal to deal with or the moral courage to face head on..

Overall,you do get the feeling we're going into a cold war with China with one hand tied behind our backs and our leaders are aware of neither fact.

For what it's worth,I believe women have a vital role to play in our national security and have no problems with a female leader(especially Thatcher) but I'm also aware women generally don't have the capacity for brute force generally that men do.Good leaders would use their resources judiciously not sacrifice them to please the Woke types in parliament

I got sent the following by an ex para mate,also ex copper.Imagine being that lass.

 

 

 

[sleepwello'nights]

38 minutes ago, Castlevania said:

What value did they put on the customs form? 

No idea, I've not seen a customs form. 

[sancho panza]

12 hours ago, Cattle Prod said:

I watched the action on XLE closely today. Opened over 2% down following the underlying before being bought up quickly. Kaplan 101: weak retail sell orders before the bell, smarter money picking up their shares. It spent most of the day at par while WTI went below 6% down, finishing at 1.46% down. Or it outperformed the underlying by 4x. Dyodd guys but I like that action. 

LSE stocks were different. Got knocked down more than their US cousins before close, and will probably open down tomorrow, on a day when the dollar was up strongly. What I think it was was what was discussed on here about institutional money. None other than Marko Kolanovic signalled that this is the week that XLE would see big inflows, basically because its a year since the crash and their trend following algos will track the upswing. Dumbest of dumb money? Let's watch.

That's all a bit micro. On the macro I'm pretty happy with this pullback so far. Bears are already doing victory laps about demand because of 3 week lockdown extensions in the Netherlands and other zoomed in pointless data. A lot of people thick the Chinese stocked up last year and will now flood the market at will, without noticing the extra they stocked only covers a month or two demand growth. 

Decl. I sliced a few weeks ago and I'm buying this as a dip. But be warned - this is not buying SPY or QQQ. We could easily go from here, a 15% correction to 30%, swing back violently and continue on up to $80, after you are shook out. I think a further 5% is most likely, fwiw. There has been a recent pattern of selling off before OPEC meetings, next one next week. Keeps the cheaters in line. I'm beginning to think that Saudi Arabia is a very large player in the futures market. No real evidence, but from a game theory pov it makes a lot of sense. There are rumours of a large spec 'whale' too, interesting times.

I had a pretty stresful week last week.Monday open,I looked at BP/RDSb and thought I had an age to get out of our options trades before the Friday.Sweated profusely for three days and got out at some decent prices Trhusday.Four horus later they got whacked.Hair of my chinny chin chin etc etc.

I think you've covered the important bits of the price action.I particualrly liked the kaplan reference and exemplifies one of his key stregnths in separating hyperbole from the data/newsflow.

ON the back of last weeks sales,we've got a decent size slush fund to redeploy back in and I'm working on timing re entry.We'd previously added some BP may/Junes when they were at £2.55 recently which was more of an arbitrage on the rest of the sector but now the whole sector has got whacked there's value appearing in a few places imho.

Remember you saying $56 on West Texas,it got down to $57.36 on the 15 min chart I'm looking at.Do you feel we've finished the down move in crude or there be another nudge down?I have no view or -let's be honest -much udnerstanding.My oilie charts as they are, aren't saying re entry yet.

When I saw that drop last night I thought you'd be happy then when you point out the drop into the open and reference kaplan it becomes even clearer what you and at @DurhamBorn were on about.

[Castlevania]

41 minutes ago, sleepwello'nights said:

No idea, I've not seen a customs form. 

One should have been on the parcel. 

[No One]

Why is oil down?

[Chewing Grass]

Just now, No One said:

Why is oil down?

Driving season has been cancelled.

[No One]

1 minute ago, Chewing Grass said:

Driving season has been cancelled.

Well, more opportunity to buy at low prices for me then. Don't get a paycheque until the 19th, so I'll have to sit tight and wait.

[Bobthebuilder]

1 hour ago, sancho panza said:

Remember you saying $56 on West Texas,it got down to $57.36 on the 15 min chart I'm looking at.Do you feel we've finished the down move in crude or there be another nudge down?I have no view or -let's be honest -much udnerstanding.My oilie charts as they are, aren't saying re entry yet.

I want to top up a few of my oil positions. It's a bit weird wanting to do so while some are still up 20% to 50%. I also fancy a few more pints of Guinness energy.

[Fully Detached]

9 minutes ago, Bobthebuilder said:

I want to top up a few of my oil positions. It's a bit weird wanting to do so while some are still up 20% to 50%. I also fancy a few more pints of Guinness energy.

Do you have the symbol for that fund Bob? The ones available to me on Eqi don't look like the one someone recommended a few pages back.

[Bobthebuilder]

12 minutes ago, Fully Detached said:

Do you have the symbol for that fund Bob? The ones available to me on Eqi don't look like the one someone recommended a few pages back.

It's the Guinness global energy fund. I can get it on HL, but it's not available in my Halifax ISA.

[Fully Detached]

1 minute ago, Bobthebuilder said:

It's the Guinness global energy fund. I can get it on HL, but it's not available in my Halifax ISA.

Yep, but a fe pages back someone recommended the X class, whereas I have C and Y on Eqi. Thanks anyway.

[RWJ]

4 minutes ago, Fully Detached said:

Yep, but a fe pages back someone recommended the X class, whereas I have C and Y on Eqi. Thanks anyway.

I don't see an X class.

https://www.guinnessfunds.com/global-energy-fund/  (fund facts)

Only Y was available to me on Fidelity.

[Fully Detached]

5 minutes ago, RWJ said:

I don't see an X class.

https://www.guinnessfunds.com/global-energy-fund/  (fund facts)

Only Y was available to me on Fidelity.

Ah thanks - maybe it was a typo on the post here then - cheers!