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

[BurntBread]

9 minutes ago, wherebee said:

So is the hivemind now saying we bail out of the oilies when $80 reached?  I thought it was all 120+ and hold for five years for divvies/!  But the bloke about is saying down to 10?

I think DH is making a call oil, not oilies. I'm guessing that the big co's will happily weather a brief excursion down o $10 WTI, without their own prices getting pummelled. If oil stays at $10 for any length of time, and the BK is accompanied by a prolonged downturn in industry, then I'm sure it'll be a different story.

[Don Coglione]

10 minutes ago, wherebee said:

I was more thinking of Australia, where numbers haven't grown massively

Australia's population has trebled since 1950, in line with the global total.

[feed]

8 minutes ago, wherebee said:

I was more thinking of Australia, where numbers haven't grown massively

I think the problem is the standard of living differential between the west and the 1.4 Billion Indians and 1.4 Billion Chinese.
If we go back to the ‘50’s they go back to the stone age. And if that happens, I don’t fancy our chances much.  
 

[Don Coglione]

1 minute ago, feed said:

I think the problem is the standard of living differential between the west and the 1.4 Billion Indians and 1.4 Billion Chinese.
If we go back to the ‘50’s they go back to the stone age. And if that happens, I don’t fancy our chances much.  
 

Indeed. Imagine telling 3 billion Chindians that their recent taste of a first-world, middle-class lifestyle was no longer on the menu.

[feed]

2 minutes ago, Cattle Prod said:

The answer to that is that they're not going to stop using fossil fuels. I'm sure they'll be quite happy for the West to put themselves back in the 1950s mind you.

i imagine that's were we end up.  I don't see how the disparity in lifestyle and productivity is maintainable.   

Which kind of leads me to the overwhelming problem I'm having with the great reset at the moment, it may be the least bad option for a lot of people in the west.  

 

[janch]

28 minutes ago, Cattle Prod said:

The answer to that is that they're not going to stop using fossil fuels. I'm sure they'll be quite happy for the West to put themselves back in the 1950s mind you.

Perhaps we'll overcome our hatred of nuclear and that will be the game-changer in the west.  I don't think it'll work while "woke" is the western mindset unless it can be done behind the scenes without any fanfare.  Boris might have to ditch Carrie first

[Bobthebuilder]

1 hour ago, Cattle Prod said:

I see DH has finally aligned with our $80 Brent / $75 WTI call. I'm always a little uncomfortable when his call is different. Now both DBs and DHs macro roadmaps are aligned with what I see on the supply side, niiicee.

Also here is an excellent graph to show anyone banging on about the energy transition:

Only three outcomes are possible from understanding this graphic:

1. We will transition to renewables, and return to a 1950s standard of living.

2. Fossil fuel use will continue to grow along with renewables in a broad energy mix.

3. We discover or tame a new and effectively free source of energy like nuclear fusion.

Any of the three is possible, but I'd put the probabilities at 1. 15%, 2. 80%, 3. 5%. I've increased the probability of #1 happening since last year as world governments genuinely seem to be willing to destroy society and standards of living. However going back to a 1950s standard of living with the current world population does't mean a modest house and one car (the 1950s looked quite nice to me!), it means mass starvation and war. People are alseep.

The governments own estimate on natural gas usage to 2050 is the same level as current usage, with renewables taking up the extra demand going forward. Mainly electric and hydrogen for the extra demand. There was a nice graph in our industry magazine a few months ago showing this, but I have recycled the magazine so cannot post up a pic of it.

[jamtomorrow]

1 hour ago, Cattle Prod said:

Only three outcomes are possible from understanding this graphic:

CP I was surprised there wasn't a:

4. World realises it probably needs nuclear after all

Do you think that's a non-starter?

I realise there's still a huge lag (at least a decade) between wising up and building enough generating capacity to move the needle, so maybe we just make out like bandits during that decade or so?

Edit to add: effectively, it'll be mostly "2" while they try everything else before admitting they need "4"

[planit]

Completely agree that number 4 nuclear fission was missing. Fusion still produces nuclear waste in it's current experiments so it's no different in that respect.

I would have suggested adding fission and fusion together but Cattle Prod made a point in labelling 3 as "low cost" which Fission (and fusion) currently is not.

 

World might come to it's senses regarding Fission but too late (probably when we are actually at a real Climate Crisis!)

 

[SpectrumFX]

58 minutes ago, planit said:

Completely agrit'lthat number 4 nuclear fission was missing. Fusion still produces nuclear waste in it's current experiments so it's no different in that respect.

I would have suggested adding fission and fusion together but Cattle Prod made a point in labelling 3 as "low cost" which Fission (and fusion) currently is not.

 

World might come to it's senses regarding Fission but too late (probably when we are actually at a real Climate Crisis!)

 

I don't understand why we haven't gone the molten salt route.

On the face of it, it would seem to be nuclear power without all the risks and waste.

https://en.m.wikipedia.org/wiki/Molten_salt_reactor

 

[planit]

1 minute ago, SpectrumFX said:

I don't understand why we haven't gone the molten salt route.

On the face of it, it would seem to be nuclear power without all the risks and waste.

https://en.m.wikipedia.org/wiki/Molten_salt_reactor

 

Agreed, if the huge resources put into renewable energy over the last 5 years had been directed towards this we would be close to having Thorium reactors producing very little nuclear waste by now.

 

Unfortunately the Green pressure groups have been working with the fossil fuel advocates to suppress progress over the last 20 years.

 

As I have posted on here before, if we truly are in a climate crisis then the only answer to quickly reduce the CO2 emissions we currently have is nuclear (and as Cattle Prod mentions, this will need to be Thorium powered)

[DurhamBorn]

3 hours ago, wherebee said:

I'm not so sure about 1 being unreachable.  Think about it.  If you cut holiday travel, food miles, personal cars, commuter miles, and waste out of the modern life, 1950's style living wouldn't be that impossible.  Energy efficiency has grown massively in terms of housing and electric items (if houses are built properly).  

The key challenges would be getting the british public used to no holidays and no eating out.

 

HANG ON!

LNG prices will be up 100%+ if every family in India get a fridge/freezer.Fridge/Freezers are more important on my roadmap than Dems in the white house.Nothing else.Just a fridge.

 

[Transistor Man]

1 hour ago, planit said:

Completely agree that number 4 nuclear fission was missing. Fusion still produces nuclear waste in it's current experiments so it's no different in that respect.

You are right, but a small advantage is that Fusion wouldn’t produce long-lived waste.

The sort of stuff which requires geological storage. It’s not massive, but there would be an advantage there. 

(Fusion is still nowhere near being an economic, usable source of clean electricity imo.) 

[Transistor Man]

1 hour ago, Cattle Prod said:

Depends on the nuclear, fusion was option 3. Thorium could work. But fission is limited by uranium supply and lead time to build out. Going full fission nuclear, like France, isn't going to work for the whole world.

The old plan: thermal fission reactors and breeder reactors, could, I guess, have covered everyone using known uranium resources.

There’s the “Energy Amplifier”, which would work. But is a paper design.

Thorium cycle would work, but it’s basically a breeder.

In a thorium reactor, the fissile material is still uranium (233)! It’s just bred from thorium.

All of this stuff is possible, but messy. It’s not going to happen (soon), imo.

[Transistor Man]

55 minutes ago, SpectrumFX said:

I don't understand why we haven't gone the molten salt route.

On the face of it, it would seem to be nuclear power without all the risks and waste.

https://en.m.wikipedia.org/wiki/Molten_salt_reactor

 

It’s a complex design. You end up with a combined nuclear and chemical plant! 

Lots of advantages in theory. The reality is..... probably difficult to do.

[Harley]

I just ran screens for Precious Metal value stocks as it looks like a monthly turn might be on the cards. 

PM stocks as value stocks!  Why not, some relatively stonking good fundamentals!

Parameters:

. In the Precious Metals Industry per TradingView

. Yield over 2% (before WHT)

. Market cap over 1B in local currency(!)

. Debt to Equity ratio of 75% or below

. Current Ratio of 0.9 or above

. Price to Book ratio of 3 or below

Results (any surprises?):

. Kirkland Lake Gold (NYE, TSX)

. B2Gold (NYSE, TSX)

. Yamana Gold (NYSE, LSE, TSX)

. St Barbara (ASX)

. Centamin (LSE, TSX)

. Royal Bafokeng (JSE)

. Fresnillo (LSE)

. Newmont (NYSE, TSX)

. Agnico Eagle Mines (NYSE, TSX)

. Evolution Mining (ASX)

. Gold Fields (JSE)

. Anglogold Ashanti (JSE)

. Sibanye Stillwater (JSE)

[sancho panza]

On 05/04/2021 at 10:26, Cattle Prod said:

Globally its a bit murky, as the physical market has been a bit weak (reluctant to pay above these prices due to perception of supply and spare capacity, India being the example) though recent moves by the saudis suggest that is passing. A price aqueeze this year was dependent on demamd getting back to 2019 levles of around 100mbpd. In Asia it has, but I never thought Western governments would be this totalitarian or screw up vaccines so badly in the case of Europe. So I think we might get to 98 or 99 this year. The US might make up for it though, going crazy this summer.

US production never recovered, it is still flat at 2mbpd down from peak, as marginal wells were abandoned, most of them in shale. The wells drilled to Feb 2020 are now declining, and there is not enough activity to offset, so will show up in the numbers soon enough (is probably happening now but reporting lags) . Another 1.5 or 2m maybe. It's the trajectory that is important though as the market believes us shale is the marginal supplier, and won't pay more than ~$65 for it. I think if you have a declining rather than increasing trajectory, that perception of supply gets shaken, and market could panic. Investment is still below replacement, they are not chucking money down holes this year. The big shale companies have not budgeted for growth in 2021 so it won't happen. They can't hedge either with the backwardation. I still think $80 brent will be tested, glad to see DBs cross market work isnt too far away.

Edit:

A comment on inventory. It's the most visible data, and drives price. Novak said this week that world is currently undersupplied by 2mbpd. This tallies with other sources. Spare capacity to come back from OPEC is about 5.5m (not the 7.1 reported). They are releasing 2.5m back by July, leaving three. Canada is fully producing. The US is still thought of spare capacity, but it has permanently lost two and will lose at least another 1. So it's very likely that by July the world will be at the same spare capacity level as 2019 (3 still held off market offset by 3 lost in the US). But the net supply level be at least 3mbpd lower than 2019. So if demand ramps up over the summer, inventories are going to be hit hard. 

Thanks for the update.It's strange how on thsi thread the conversation is so lively that we sometimes don't catch our breath and jsut establish where we are.

Seems like your -3 or 4 mbpd call from mid summer last year hasn't aged too badly at all CP.I do wonder how much worse the problem will get as the current wells age and decline.

I think your assessmetn about demand is true too.I'm surprised at how subdued the West has been coming out of lockdown.My more robust hopes of $80++ look off but the more realsitic $80 peak for the summer doesn't from where I'm sat.Saudi's and Russians will love $80 oil,Chinese/Indians won't but will have to pay it.But I'm jsut using basic charts.

That supply/inventory squeeze does looked primed for the US driving season.

On 05/04/2021 at 00:54, DurhamBorn said:

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.

It's interesting to see your USD rroadmap coinciding with CP's anticpated supply/inventory squeeze this summer.

Sometimes I think we're that busy chatting,we don't jsut take a breath, stand back and reassess where we are.kudos to you for that dollar call,as I remember DXY was over 100 when you made it.

We'll be selling top ladders and retaining some core equities or we may sell the lot and hedge with options to retian capital(although where you keep it is an issue.UST's msot likely.

The debt profile of a lot of companies is a worry as per hancock;s point below.UK banks are primed to blow imho.Hence I'd say that even if we go straight to pricve inflation,we could see a seismic debt deflation running alongside it.That would be the worst of both worlds for places like the UK ,overfed as the public has been on a fat currency.

On 05/04/2021 at 12:51, Hancock said:

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.

I think CRE will eb 2021's sub prime.Some of the loans being marked at par on loan books are below junk.

On 05/04/2021 at 15:08, 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?

I think mortgage demand will adjsut down as mortgage rates rise and I think mortgage rates will rise even if CB's run easy policy

[sancho panza]

On 05/04/2021 at 18:23, Cattle Prod said:

Anyone know the leads and lags on copper and oil? From what I can see, copper seems to lead oil by about 3-5 weeks. Has anyone ever seen a reference to this?

Here's a St Louis chart,Copper does seem to turn and lead oil since 2000 jsut looking at turning points.Correltaion is tight.

https://fred.stlouisfed.org/series/PCOPPUSDM

obviously this %age change chart depends where yuou start,this is roughly the 01 low for copper.key thing is copper peaks and bottoms before oil as you say.

A key part of anyone's check lsit here imho.

[JMD]

2 hours ago, Cattle Prod said:

Yes point 3 needs to be effectively free because the fossil fuels they would replace are.

Nuclear fusion is not part of the energy mix currently, as you say it is still experimental. If it can be 'tamed', as I said, you could make unlimited amounts of energy from seawater. That'd do it. Long shot though, as stated. Nuclear fission might as well be a totally different form of energy - the fuel is limited. I've no issue with it, and am well invested in uranium, but it's not going to add 150k twh of energy, ever.

CP, I know it wasn't your main point (great energy graph btw), but you mentioned that you are invested in some nuclear/uranium, as am I (approx 1% of my portfolio) - so I do find the nuclear topic intriguing. Anyway as you say above uranium fuel is limited, but even if world had only 100 year's supply left (estimate at current use rate), 'energy security' and the fact that nuclear is kinda carbon neutral will I think totally swing the argument. What I mean is I don't think there will be any political appology required for embarking upon a new nuclear future - after all the lead environmentalists themselves know the score (even James 'Gaia' Lovelock in later life said it was immoral not to utilise nuclear; he thought it a distraction, when the plight of the world's poor should always be the focus) - it's a mere bargaining chip for the environmental lobby, whilst they hold out for the bigger prize of a 'carbon free world'. I think the limited uranium supply will actually be sold to the public as a 'benefit', ie we have only a 100 year window, during which we will continue to store our shameful dirty nuclear waste... but when it's gone, it gone.                                                                                                                           In terms of the (impending!?) increasingly important energy security debate, It's also interesting that the (by far) biggest producer counties are also the same countries holding the (by far) biggest reserves, yes we have an old fashioned east/west face off between Kazakhstan/Russia and Canada/Australia, couldn't make it up!!

[Harley]

I'm looking to further add to my Oil & Gas holdings.  Apart from a few exceptions, the Oil & Gas industry value stocks I'm looking at are approaching overbought on their monthlies following thier move from oversold last November.  This is usually the best part of the price action, although further upside price action is quite common even at overbought levels and can last for several months.  It's just that the probability is reduced and/or volatility increased.  The one positive for such an outcome is that the MACDs have only recently crossed and it is somewhat unusal for a turn on price so soon.  OK, maybe a short term pullback as seems to be the theme month to date, but are people overall postive or are they not putting any more money in until a further pullback or BK?

A typical chart:

 

Look at 2010 onwards to see what I mean.

PS: Just noticed - see how the momentum and MACD were weakening on Chevron since 2018, but the price action was contrary to this until....Covid - i.e. one could argue a reasonably violent correction was overdue anyway given the divergence between price and the underlying technicals!  Have we now had a rebalancing purge!  Was this dynamic at play elsewhere?

[JMD]

4 hours ago, janch said:

Perhaps we'll overcome our hatred of nuclear and that will be the game-changer in the west.  I don't think it'll work while "woke" is the western mindset unless it can be done behind the scenes without any fanfare.  Boris might have to ditch Carrie first

If James Lovelock can change his mind over such issues, I'm sure Princess (Carrie) nut-nut can also!

[JMD]

55 minutes ago, Harley said:

I just ran screens for Precious Metal value stocks as it looks like a monthly turn might be on the cards. 

PM stocks as value stocks!  Why not, some relatively stonking good fundamentals!

Parameters:

. In the Precious Metals Industry per TradingView

. Yield over 2% (before WHT)

. Market cap over 1B in local currency(!)

. Debt to Equity ratio of 75% or below

. Current Ratio of 0.9 or above

. Price to Book ratio of 3 or below

Results (any surprises?):

. Kirkland Lake Gold (NYE, TSX)

. B2Gold (NYSE, TSX)

. Yamana Gold (NYSE, LSE, TSX)

. St Barbara (ASX)

. Centamin (LSE, TSX)

. Royal Bafokeng (JSE)

. Fresnillo (LSE)

. Newmont (NYSE, TSX)

. Agnico Eagle Mines (NYSE, TSX)

. Evolution Mining (ASX)

. Gold Fields (JSE)

. Anglogold Ashanti (JSE)

. Sibanye Stillwater (JSE)

Very interesting Harley, are you tempted to buy any of those South Africans? Their charts make them look expensive to my simple uninformed eyes... but would be very happy to be corrected as I am underweight the South African miners, so could be my last chance to get me some! (am not of course seeking investment advise)

[Harley]

9 minutes ago, JMD said:

Very interesting Harley, are you tempted to buy any of those South Africans? Their charts make them look expensive to my simple uninformed eyes... but would be very happy to be corrected as I am underweight the South African miners, so could be my last chance to get me some! (am not of course seeking investment advise)

I agree.  Several on the list seem overbought atm plus some have yields below my likee 3% (but above 2%) which makes them a tough call.  But maybe these stocks have to start shedding more cash soon.  B2Gold, St Barbara, Centamin, Evolution, and Gold Fields are above 3% (before WHT) but I haven't looked at them more closely yet.  I was interested to see if the list surprised anyone, especially as some stocks (e.g. Royalties) may be classified under say "Financials".

[nirvana]

13 minutes ago, JMD said:

Very interesting Harley, are you tempted to buy any of those South Africans?

that'll be the ETF with humans in it then?

[MrXxxx]

3 hours ago, Harley said:

I just ran screens for Precious Metal value stocks as it looks like a monthly turn might be on the cards. 

PM stocks as value stocks!  Why not, some relatively stonking good fundamentals!

Parameters:

. In the Precious Metals Industry per TradingView

. Yield over 2% (before WHT)

. Market cap over 1B in local currency(!)

. Debt to Equity ratio of 75% or below

. Current Ratio of 0.9 or above

. Price to Book ratio of 3 or below

Results (any surprises?):

. Kirkland Lake Gold (NYE, TSX)

. B2Gold (NYSE, TSX)

. Yamana Gold (NYSE, LSE, TSX)

. St Barbara (ASX)

. Centamin (LSE, TSX)

. Royal Bafokeng (JSE)

. Fresnillo (LSE)

. Newmont (NYSE, TSX)

. Agnico Eagle Mines (NYSE, TSX)

. Evolution Mining (ASX)

. Gold Fields (JSE)

. Anglogold Ashanti (JSE)

. Sibanye Stillwater (JSE)

Quick question on this and WHT. It the shares are only on LSE then I assume tax is paid in UK so no WHT, but if they are on several markets including LSE is this still the case? I.e Yamana above or Wharton?