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

[sancho panza]

3 hours ago, Cattle Prod said:

Hilarious bit of antics from India over the last few weeks. They've been crying about higher oil prices, imploring Saudi to increase production. They then got themselves on a narrative that they have an "oil weapon" with their growing demand, and they'd just look elsewhere. Halfway around the world like Guyana or the North Sea. Saudi released their May OSPs today. These are their prices, either above or below Brent. Different prices for different market. So Europe is getting about a $2.50 discount, recognising demand problems. Asia has been robust as discussed here, paying about a $1.40 premium. So what was Saudis response to the Indian oil weapon? Another 40c please. Thats what the Asian market is paying, so cough up or stop growing.

Indians are often very naiive in my experience. When the finally realise they have to get in and compete for ME oil, especially against China, it's gonna get spicy. As DB said they will have to cosy up to US, the D7 or whatever it is is the start of it. Which will be fine till the US needs to buy it too.

The pendulum has swung. It's been a buyers market for the last 6 years, but now the producers have the oil weapon, as India has just learned.

Increasing OSPs to Asia is bullish. OPEC+ increasing oil to the market is bullish: it means they think they can sell it. I'd have loved to have seen $54 WTI, but that might be it. I think there's another leg up in store, could be tasty. US production is due to start dropping any week now which the market has not priced in...

CP,Any chance you could give us your view on where we stand in terms of supply?WHat are your views on where US shale is ie how long before they have a price that makes it competitive to drill new wells and how long before that supply that was still being drilled in Feb last year runs dry and needs replacing.

iirc you said roughly you were expecting a 3mn to 4mn bpd shortfall in US shale alone and were expecting end Q1 for that to be apparent.

In terms of demand are we back up to pre covid levels.I remember you psoting that CHina/India were exceeding last year demand wise back in tail end Q1 iirc.

No pressure and dyodd for us all as ever

Decl:I'm about to begin mvoing some call otpiosn around.My very simple chart set up says we're near the tail end of the drop in the oilies we're trading.I'm going to have another run as I'm with DH and don't think this is the BK.I think we still need to see a fuller sector rotation into oils and away from Big Tech and with QQQ around $320 we're not there yet.

[sancho panza]

35 minutes ago, DurhamBorn said:

Id really advise people to listen hard to what David says about liquidity.We said on this thread last March that as the CBs print it first enters the financial pipes before entering the economy,and thats exactly what he is saying in the video.He is also saying that a big part of a BK could be people selling to do things in the real economy.Thats why markets move the opposite to what people expect because they dont understand leads and lags on liquidity.

DB,again no pressure but you quite correctly predicted a sub 90(possibility 87 iirc) on DXY last year sometime when DXY was higher ,do you think that's it for DXY weakness this side of teh Sept/Oct timeframe?or is there scope for some more?

dyodd natch.

[Harley]

A bit of the old money saving spirit today with better results - more for less.  Learnt how to temper chocolate and make our own chocolate assortment with marzipan, strawberry, banana, etc.  Cheap, fun, and better than shop bought (used sugar free real chocolate).  Healthier too.  Kids ought to like it too.  Must buy a neoprene mould.

[DurhamBorn]

48 minutes ago, sancho panza said:

DB,again no pressure but you quite correctly predicted a sub 90(possibility 87 iirc) on DXY last year sometime when DXY was higher ,do you think that's it for DXY weakness this side of teh Sept/Oct timeframe?or is there scope for some more?

dyodd natch.

I see dollar down sharp from here to 87 again,i know thats opposite to what almost everyone expects.It will send oil over $70 i think,roadmap cross market from the dollar is actually saying $73/74 Brent.It could be we get $70+ oil at the same time as 87 DXY bang on,if so its highly likely il sell a lot in that area.

Im trying to work out how to play this as running through my portfolio its reflation defensive and im not prepared to be out of equity BK or not,so im thinking maybe 40% cash and Treasuries if those dollar/oil targets hit.

One worry i have is derivative exposure from the debts of big blue chips.Massive interest rate and currency swings could hole a lot of balance sheets if counterparties fail.

Its the most difficult call i can remember on if its a BK or straight to inflation.Im trying to see through the fog.What if its both a BK and inflation etc.

[Harley]

7 hours ago, Loki said:

New David Hunter vid

 

One of the most important things I took from this (if I have understood correctly) is that the economy will be doing fine when the BK hits, as the money leaving stocks will be needed for economic activity elsewhere.

Well worth a watch even if you've seen the others.

In case people aren't aware, most of these video channels (e.g. this one) have podcasts too.  I find these great through Bluetooth headphones while working, etc.  I use thd free AntennaPod to be a great podcast app (others available!).

[Harley]

2 hours ago, DurhamBorn said:

...im thinking maybe 40% cash and Treasuries if those dollar/oil targets hit.

So your thinking moving to the old 60:40 portfolio when your Brent $70 and DXY $87 targets are hit! 

PS:  Would you not be buying bonds now given DH said this could be the start of a bond run?  Or are you waiting for a DXY fall first?  And when you do buy, just USTs, not Uk or others?

[Harley]

2 hours ago, DurhamBorn said:

One worry i have is derivative exposure from the debts of big blue chips.Massive interest rate and currency swings could hole a lot of balance sheets if counterparties fail.

A lot of blue chip balance sheets are basket cases.  Several have very little solid net equity and it's way way below their share price valuations.  Everyone has been looking exclusively at the E*'s (P&L) for too long.  The Titanic got hit below the water line while the band played on.

[wherebee]

2 hours ago, Harley said:

A lot of blue chip balance sheets are basket cases.  Several have very little solid net equity and it's way way below their share price valuations.  Everyone has been looking exclusively at the E*'s (P&L) for too long.  The Titanic got hit below the water line while the band played on.

That's one thing I have to remind myself of  - that I do not have the time, or ability, to analyse debt loads myself for such investments and thus this thread (and other online commentators) are golden for stopping bad decisions based on other positive factors.

 

[BurntBread]

8 hours ago, DurhamBorn said:

Id really advise people to listen hard to what David says about liquidity.We said on this thread last March that as the CBs print it first enters the financial pipes before entering the economy,and thats exactly what he is saying in the video.He is also saying that a big part of a BK could be people selling to do things in the real economy.Thats why markets move the opposite to what people expect because they dont understand leads and lags on liquidity.

His words reminded me very strongly of Jens Parsson (Ronald Marcks) "The dying of money", posted up-thread, and the idea you have to consider the financial markets and real markets as two different (but interlinked) things. So, on a short time-frame, when the overall money supply is constant, money can move back & forth, but that means price levels in the two markets move oppositely.

I am thinking that means that if the money which has recently bloated the equity markets starts moving into real goods, and pushing price inflation there, then the oil stocks could take a big hit on their prices. However, there is no reason to suppose it will negatively affect their profitability, or dividends. In that sense, holding through a BK would be a hit to portfolio value, and a missed opportunity to buy more at the new lows, but would not put you at risk of catastrophic loss. The capital losses should only be temporary, maybe for a year or two?

Has anyone engaged with DH on twitter to ask his views on the energy sector, since he seems happy to make calls about PMs?

[jamtomorrow]

7 hours ago, DurhamBorn said:

Its the most difficult call i can remember on if its a BK or straight to inflation.Im trying to see through the fog.What if its both a BK and inflation etc.

I wouldn't know how to construct a liquidity model at all, but I'm very familiar with modelling generally and simply observing the divergence of opinion (between deflationists and inflationists) is telling - there's always a range of opinions, but this really is something else.

It means: either everyone's instruments and/or models have gone haywire at the same time (unlikely) or (more likely) the system has become truly unstable and is currently on a knife-edge where it could go either way. Even if we know the final destination, there's effectively no way anyone can have enough information about initial conditions to tell us with any certainty what path we'll take there. This is true mathematical chaos.

So I quite like the "both" theory for this reason - if the system has reached a point of maximum sensitivity to small changes in liquidity flows, a slight uptick in demand for liquidity from a slight uptick in real economic activity could easily tip us off the knife edge.

But who can know for sure. Careful out there.

[desertorchid]

10 hours ago, sancho panza said:

BM and @Loki.Thanks for posting.This was superb.This really does reemphasize what a decent run of macro calls DH has had.It's also a reiteration of his very stark warnings that you need to be careful out there.

I've done a written precy for a couple of family members,reprinted below,because I think this is an important vid raising a lot of key issues.Weaves in nicely with what @DurhamBorn has been predicting for a few years.

One of the best things I think David Hunter says in this vid is that he'll be happy if gets the top within a few months either side of it.Says a lot that that's his measure of success and a timely reminder that anyone taking daily calls from anyone too seriously is playing with fire.

 

from David Hunter video

sees 4600 S&P,Nasdaq 17,000,driven by covid recovery and FOMO

top in Q2 or Q3,but this top has been coming for 39 years since 1982 when disinflation process started,will be happy if he gets within a few months of it.

cyclical and secualr bulls will peak at same time then drop up to 80%.His 80% call is a guess based on hsitory.

lot of leverage particualrly with derivatives which may exacerabte the market's moves.

Fed will be caught between rock and a hard place.Inflation will force Fed to tightenSays infaltion measures are out but they're what we sue.Doesn't see US inflation beyond 3% this year but that will be enough due to the recent money pritning.Market will push up rates to 2.5% on ten year.

DH thinks bond market rally is starting right now.Marekts don't move in straight lines.UST's have run up to 1.75% from 0.6% in 6 months.We're due a rally in bonds.

Previously said next price points for PM's gold $2500 and silver $45-$50.Could come in Q3,admits his timing is best guess.Points out that if you use unoffical numbers tehn real rates then gold goes higher but using govt figures,algo's won't push it higher.

Long term forecasts gold $10,000,silver $300.All assets will get pummelled in BK except UST's and $,but PM's will only drop 30%.

Has seen a lot of stress on twitter from the recent moves down in gold/silver,says that if that hruts them,then a bust will be hard.

Gold will be a huge winner in the recovery cycle after the BK.

Makes these market calls becuase we're approaching the end of a super cycle.A super cycle is defined by DH as the cycle between two depressions.Sees next Dperession in 2030's.Volatility gets huge at the end of a super cycle.

Says people need to really reassess their risk profile approaching BK.

Sees bull market top followed by worst bear market in 80 years.Best professionals can't call it precisely.

Time wise we're at the high end of the risk scale.

Will enter period of very high downside volatility shortly.

We will see euphoria in next few months.

Fed is printing money because the economy is bad.

 

 

 

 

The trouble is these kind of predictions are as old as the hills and stories of supercycles starting/ ending etc are more common than ever. To argue a scenario will unfold which causes more harm to the financial system than either the Great Recession (global banking collapse) or Covid (Global pandemic locking down economies)  is a very brave call. FWIW I think he will likely be miles out like all that have come before. 

It is true that volatility will likely remain elevated in some/ many markets, but thats what happens when there is an overflow of liquidity and cheap credit, but this has pretty much already been going on in financial markets for a decade or more.

[DurhamBorn]

8 hours ago, Harley said:

So your thinking moving to the old 60:40 portfolio when your Brent $70 and DXY $87 targets are hit! 

PS:  Would you not be buying bonds now given DH said this could be the start of a bond run?  Or are you waiting for a DXY fall first?  And when you do buy, just USTs, not Uk or others?

Im not sure yet Harley,but im waiting until the dollar falls to buy the bonds,if i do.Im not aiming here to  make as much as i can,im more concerned with navigation.The problem is,im very happy with the equities i have and the prices i paid.My actions so far have been to slice tops of ones that were up over 100%+.

David is very right though on how liquidity works in the markets.It goes into capital markets first,then the economy.There could be a very big liquidation of assets coming other reasons.Of course a lot of the areas we are in have very little hot money in them.Its very difficult to navigate.

[Noallegiance]

27 minutes ago, DurhamBorn said:

Im not sure yet Harley,but im waiting until the dollar falls to buy the bonds,if i do.Im not aiming here to  make as much as i can,im more concerned with navigation.The problem is,im very happy with the equities i have and the prices i paid.My actions so far have been to slice tops of ones that were up over 100%+.

David is very right though on how liquidity works in the markets.It goes into capital markets first,then the economy.There could be a very big liquidation of assets coming other reasons.Of course a lot of the areas we are in have very little hot money in them.Its very difficult to navigate.

I'm staying with the KISS approach.

If it starts to look like a hockey stick that's had a run then I'll at a minimum be selling profits to have cash on the side, probably in all industries. Hockey sticks don't last.

I'm not clever enough to use detail to navigate, nor do I wish to wait for someone on here (even you!) to provide their detail. I'll only get more confused.

The Dreman book deals with investing over a time period that includes shit bits. This thread has helped position me for the long term. It will beat the market.

[Hancock]

https://www.telegraph.co.uk/business/2021/04/04/default-rate-corporate-loans-has-doubled/

A wave of companies across the UK and the rest of Europe are at risk of going under with new figures showing that the default rate on corporate loans has doubled.

Businesses across Europe, including the UK, face a €1.8 trillion (£1.5  trillion) wall of debt maturing in the next four years, including €290bn in 2021, according to S&P Global Ratings data provided to The Daily Telegraph. The threat of more corporate distress looms as state support winds down and bond yields rise.

S&P revealed that the default rate in the UK and Europe was at 5.4pc in February, more than double the levels seen a year earlier shortly before lockdowns became widespread across the region.

UK corporate defaults last year were also twice as high with department stores, cinemas and restaurants suffering the most pressure, S&P revealed.

Companies have looked to take advantage of ultra-low interest rates and government loan schemes to push out the risk of debt. But City analysts warned that high indebtedness could weigh on the economy’s recovery and predicted a pick-up in defaults if government support is withdrawn prematurely.

S&P said the amount of debt maturing in the UK this year was lower than usual as businesses have sought to refinance during the pandemic.

“Financing conditions have been so favourable that most companies have opportunistically termed out a lot of their debt at fixed rate,” it said.

Daniel Grosvenor, director of equity strategy at Oxford Economics, said there is “limited near-term risk” but warned that “many companies are likely to struggle if policy support is withdrawn too quickly”. “This issuance has added to already high debt levels, and is likely to have increased underlying vulnerabilities.” He said that corporate indebtedness is “well above historical averages in every region and solvency ratios are extremely weak”.

Business indebtedness could hold back the recovery if firms are forced to pay down their debt piles rather than invest and hire new staff.

While low interest rates have helped to prop up firms during the pandemic, the recent rise in bond yields also risks exposing debt woes.

“Vulnerabilities could come to the fore if corporate bond yields spike higher or credit conditions tighten,” said Mr Grosvenor.

He added that a high level of “zombie” firms could “weigh on economic growth because they tend to be less productive and invest less than their healthier counterparts”.

The rise of so-called zombie companies, usually defined by their ability to pay the interest bills on their debt pile, have been a major concern during the pandemic as global corporate debt swells.

Nick Hood, an insolvency veteran of 50 years, said these firms’ liabilities typically exceed their assets by at least £10,000 in their latest accounts.

Britain’s debt pile has soared during the pandemic. Public debt was at 97.5pc of GDP in February, the highest level since the early 1960s, while borrowing that month hit a record £19bn.

That’s a £17.6bn increase on the same period last year, with £4bn spent on propping up jobs alone.

A second year of heavy borrowing is expected in 2021-22 with restrictions not due to fully lift until June 21.

[Chewing Grass]

So government debt to gdp has hit its highest peak since Britain was swinging in the early 1960s.

Then they nationalised everything, staggered trough the early 1970s, joined the EEC in 1975, everything went to shit Industrially between 1975 & 1981 followed by urban dereliction and riots as the debt pile dropped to an all time low of 20% about 1990.

Can't help but think history will repeat itself and the next 20 years are going to get grimmer & grimmer.

[Fully Detached]

19 hours ago, Loki said:

New David Hunter vid

 

One of the most important things I took from this (if I have understood correctly) is that the economy will be doing fine when the BK hits, as the money leaving stocks will be needed for economic activity elsewhere.

Well worth a watch even if you've seen the others.

Interesting comment from him as well on this point (last couple of minutes of the video), that this economic activity which removes money from stocks will include people wanting to borrow money to buy a house.

I'm not quite sure what to make of that in relation to house prices in a BK scenario. Maybe it means higher house prices, maybe it means demand for mortgages but at higher rates, and perhaps lower loan to value. But if money is leaving stocks to fuel a revival in the real economy, then surely it would suggest high(er) employment, probably wage inflation, and resulting increased appetite for credit?

[Loki]

Just now, Fully Detached said:

Interesting comment from him as well on this point (last couple of minutes of the video), that this economic activity which removes money from stocks will include people wanting to borrow money to buy a house.

I'm not quite sure what to make of that in relation to house prices in a BK scenario. Maybe it means higher house prices, maybe it means demand for mortgages but at higher rates, and perhaps lower loan to value. But if money is leaving stocks to fuel a revival in the real economy, then surely it would suggest high(er) employment, probably wage inflation, and resulting increased appetite for credit?

Me neither.  He has said 'real estate' will get hit, so maybe it means demand for mortgages but at higher rates, and perhaps lower loan to value  seems close to the mark.

Higher wages will still be competing for high prices of everything but then everyone needs a home so that would get priority...

[Noallegiance]

1 minute ago, Loki said:

Me neither.  He has said 'real estate' will get hit, so maybe it means demand for mortgages but at higher rates, and perhaps lower loan to value  seems close to the mark.

Higher wages will still be competing for high prices of everything but then everyone needs a home so that would get priority...

But then if it's a bust that isn't limited to financial products - i.e. major job losses and lower living standards, then keeping house prices elevated would not seem to fit that paradigm. 

My 20-year-old self will be mortified to learn that his 40-year-old self will find this interesting.

[DurhamBorn]

1 minute ago, Fully Detached said:

Interesting comment from him as well on this point (last couple of minutes of the video), that this economic activity which removes money from stocks will include people wanting to borrow money to buy a house.

I'm not quite sure what to make of that in relation to house prices in a BK scenario. Maybe it means higher house prices, maybe it means demand for mortgages but at higher rates, and perhaps lower loan to value. But if money is leaving stocks to fuel a revival in the real economy, then surely it would suggest high(er) employment, probably wage inflation, and resulting increased appetite for credit?

He is saying what we have been saying all along and are positioned for.A distribution cycle.Some will sell assets to invest in a business,others though to supplement or provide an income.They key for us is that the areas we have been buying should be able to leverage inflation so should see profits increase .Once stimulus stops we could be in a situation of few buyers and lots of sellers in many sectors.

Companies with their debt profiles laid out well and who can produce free cash whatever the situation will be key.

[Loki]

Interestingly Gregory M just mentioned this too "as soon as we get good economic news the market will crater"

 

[Bricormortis]

Turkish inflation rises to 16.9%

[Loki]

DXY falling nicely 

[Funn3r]

14 hours ago, Harley said:

In case people aren't aware, most of these video channels (e.g. this one) have podcasts too.  I find these great through Bluetooth headphones while working, etc.  I use thd free AntennaPod to be a great podcast app (others available!).

I installed Antennapod, but how do I get it to play the Youtube David Hunter meltup ? As you say would be good to be able to listen to it with hands free while doing something else.

[Hancock]

39 minutes ago, Funn3r said:

I installed Antennapod, but how do I get it to play the Youtube David Hunter meltup ? As you say would be good to be able to listen to it with hands free while doing something else.

Play youtube on your wireless headset!

[Funn3r]

1 hour ago, Funn3r said:

I installed Antennapod, but how do I get it to play the Youtube David Hunter meltup ? As you say would be good to be able to listen to it with hands free while doing something else.

Ah sorry misunderstood, thought you were recommending Antennapod as a superior alternative to Youtube. Was wondering why I was getting nowhere typing "David Hunter" into Antennapod.

Youtube has a lot of deficiencies, like for example it wants to be in foreground on your phone. If you switch it to the background while you listen it just stops. Same if screensaver blanks screen.