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

[Loki]

17 minutes ago, Lightscribe said:

Im also feeling uneasy, like something big is about to happen

Same here but I'm never sure if it's just general anxiety with everything going on.

[nirvana]

Just now, Loki said:

Same here but I'm never sure if it's just general anxiety with everything going on.

it be dem whales bros....dey be flapping around in da water and causing a few ripples for us ickle bitty tadpoles...

 

[Harley]

6 hours ago, JMD said:

Interesting link. But I think im happy constructing my own low risk pension portfolio. However I would in near future like to start a options trading account as I'd also like to put some capital at risk in return for capital gains/profits and see where that takes me. I've mentioned before that the £12300 capital gains free tax threshold is something I'd like to have a  bite at!!                                                                                                               A few weeks back you posted a link for a guy in the US who offered a subscription service for his hybrid momentum and options trading service. That would be my ideal and really wish there was a similar offering from a UK based individual. I'd certainly pay good money for that type of system guidance whilst learning the ropes at least, but unfortunately all we seem to have over here are some momentum trade offerings. The yanks probably don't know how lucky they are in the investment choices they have, but certainly puts the so called EU 'single market' to shame, boasting twice the population but providing only half the choice!

Did I?  Must have been Big Picture Trading.  I'm currently trying their 14 day free trial.  The nice thing about options is eligibility is based on what you know rather than where you live.

[jamtomorrow]

32 minutes ago, Lightscribe said:

Something very strange is happening with BTC. Some of the big alts pumped yesterday without it (in relation to BTC). BTC is not recovering merely holding and dropping.

one of two conclusions

1) The big funds are shaking the tree (violently) and sweeping up cheap BTC.

2) This is the start of the unwind which will gradually transfer into the FAANG and tech sell off (and maybe the BK). I think gold and silver is about to explode very soon especially with Basel III next month.

3) we're witnessing an acrimonious divorce where Elon and TSLA are getting custody of the froth (BTC is now at the price where TSLA bought in Feb ... )

[Harley]

43 minutes ago, ThoughtCriminal said:

@Cattle Prod

 

Feel free to blow me out of the water, but am I wrong to think that Russia and China are highly unlikely to give a flying fig about the woke pressures to end oil exploration and thus they're basically going to end up cornering the oil and gas market as the wests share of the market declines? 

 

To my non expert mind that makes the Chinese and Russian companies a great play on oil and gas prices in the longer term.

 

Or am I talking utter shite? 

I hope not!

[Harley]

BTCGBP down 34% MTD.  Will be a good test of my technicals to see if it goes lower still.

[Harley]

46 minutes ago, Lightscribe said:

Nikkei down 2% then recovered slightly. Futures down 1%, and BTC down 14%.

My spider senses are tingling.

Something very strange is happening with BTC. Some of the big alts pumped yesterday without it (in relation to BTC). BTC is not recovering merely holding and dropping.

one of two conclusions

1) The big funds are shaking the tree (violently) and sweeping up cheap BTC.

2) This is the start of the unwind which will gradually transfer into the FAANG and tech sell off (and maybe the BK). I think gold and silver is about to explode very soon especially with Basel III next month.

Im also feeling uneasy, like something big is about to happen. Interesting times.

Nikkei has been signalling a top/pull back and has confirmed it to me (DYOR).  I expected it earlier.  Sad for now, it's been fun.  Most of my stocks are down today and I have a number of sells.  HK has compensated and I have a number of buys given its pull back but a buy signal overall there too.  Asia the canary?

[nirvana]

24 minutes ago, Harley said:

BTCGBP down 34% MTD.  Will be a good test of my technicals to see if it goes lower still.

just a bit more down and you can grab 2 of em for £50k 

didn't think you were into this 'crypto crap'?  good luck!

[planit]

6 hours ago, goldbug9999 said:

My answer to the question "is bitcoin worth the energy use ?" is this ...

Fiat currency debasement is the single most destructive force on earth given the wars it funds and the poverty and general economic strife it creates in various degrees. Hence if bitcoin manages to curtail that by even a modest amount then its worth the current energy consumption 100 times over.

Your word equation simplifies down really nicely to 

 "central banks will go to war with Bitcoin"

[Barnsey]

 

[ThoughtCriminal]

46 minutes ago, Harley said:

I hope not!

Well Orwell said if theres any hope it lies with the paroles. The 2021 version is if there's any hope it lies with the east. 

 

Because to quote Han solo, I've got a very bad feeling about where we end up if this green fantasy bullshit is pursued to its logical conclusion. 

[M S E Refugee]

Just now, ThoughtCriminal said:

Well Orwell said if theres any hope it lies with the paroles. The 2021 version is if there's any hope it lies with the east. 

 

Because to quote Han solo, I've got a very bad feeling about where we end up if this green fantasy bullshit is pursued to its logical conclusion. 

I have same thoughts as you, I have been investing in the JP Morgan Russian Securities Investment Trust as it holds Russian Oil and Gas companies.

It looks like the West is going to virtue signal itself into poverty.

[Harley]

1 hour ago, nirvana said:

....

didn't think you were into this 'crypto crap'?  good luck!

 

Cheers!  What?  It's not a religion either way but no one got rich wasting money!  I hold a few testers but hope to accumulate more at a coming bottom.  BTC is legit to me as much as anything that has a market.  I probably should buy others as well as the supporting companies.   More the standard old fashioned stuff such as risk reward and optimal allocations.

PS:. The most annoying thing is I bought all the wallets back in 2019/20 but never got round to it!

 

[Harley]

37 minutes ago, M S E Refugee said:

I have same thoughts as you, I have been investing in the JP Morgan Russian Securities Investment Trust as it holds Russian Oil and Gas companies.

It looks like the West is going to virtue signal itself into poverty.

My Russian picks have done nicely, very nicely, but I didn't get in hard enough and are now toppy.  One to watch.

PS:. Like the two alerts I just received: Gazp at a 52w high and Lkoh volume 55% higher than its 30d average.

[ThoughtCriminal]

47 minutes ago, Cattle Prod said:

I think you're right that they don't care about woke and see it as a msssive opportunity. Just look how Gazprom is increasing it's market share into Europe. But there is a difference between them and neither will corner the market.

Russia is a producer, China is s consumer. Russia will do very very well in the coming years. No debt, lots of gold, oil and gas. Europe should have been a much better partner to Russia since the fall of communism, they'd be much less belligerent now. China is strategically exposed, having to import over 14m barrels of oil every single day. They tried to quietly buy up assets around the world over the last 20 years (including the most important field in the UK, Buzzard), now, no one will sell to them. So they are doing deals with Iran and trying to get into Saudi.

The Wests share of the oil market is relatively small: the major integrated companies only control about 15% of the worlds oil. US production is still important, but will decline. The fight over resources will be in non woke places like Saudi, Kuwait, Venezuela, UAE, Iraq, Iran. BP has a large share of Rosneft in Russia for example. 

Securing resources in the middle east has always come down to who has the biggest gun, and that's still the USA. China has one military bsse there, the US probably has 20, and a Naval fleet. The UK stupidly walked away from theirs. 

Short answer: Russia will benefit from this woke nonsense. China doesn't have many friends, has a smaller gun and is strategically exposed. They'll need to break out a gold backed yuan to secure resources, I think. OPEC will control the market for many years yet 

Incidentally a deal with Iran is very bad for China. No more heavily discounted oil and a purchasing monopoly. That's what's behind it, to weaken China. The Iranians would prefer to be paid full price, and in dollars I think.

Edit:

I've recommended Russian oil and gas companies here many times, and BP is a play on Russia too. I wouldn't invest in Chinese companies in general, and I don't see what advantage their E&P companies have. No competitive advantage to my mind.

Cheers CP! 👍

 

Yeah, billions of Chinese and Indians etc don't care less about Co2 fantasies when they all want what we have. 

 

As you say, we're largely an irrelevance going forward: windmills and solar panels and a shrinking birthrate.

 

Goodbye Western civilisation, it was nice whilst it lasted. 

[Harley]

1 hour ago, Barnsey said:

 

Time to look at those NS&I index bonds to see if they are now CPI rather than RPI based.  CPI same as CPIY?  If so, not so good for HMG this month.  Glad I grabbed a few before they were pulled.  OK, based on the statistics of Mickey Mouse but at least something and "relatively" safe, for now.

[Harley]

1 hour ago, Cattle Prod said:

I wouldn't invest in Chinese companies in general,

I have, but just a little!  But yep, mixed results, not much movement, and I wondered what they actually own!

[Harley]

1 hour ago, Harley said:

Nikkei has been signalling a top/pull back and has confirmed it to me (DYOR).  I expected it earlier.  Sad for now, it's been fun.  Most of my stocks are down today and I have a number of sells.  HK has compensated and I have a number of buys given its pull back but a buy signal overall there too.  Asia the canary?

Correction: HK on an overall sell signal for me (DYOR) but I stock pick.

[Majorpain]

Quote

One steelwork contractor told the Enquirer: “This is now totally ridiculous. We are being advised structural steel is heading for a peak of over £1000 per tonne.

“We are passing costs to clients advising our prices are fixed on the day only and they are not happy to say the least.

“I know of one fabricator who took on a 1,800 tonne job at £460 per tonne with no way of going back to the client. It’s double that price now.”

 

Steelwork firms rocked by second big price hike this month | Construction Enquirer News

Its both hilarious and terrifying, the construction industry doesn't have the mindset and is not set up in a way that it can adjust for cost increases on a quarterly, never mind daily, basis.  Tenders for jobs can be up to a year in advance.  This is the danger of messing too much with the economy, the guts of it start to come apart and then the entire thing comes down because its all interconnected.

[Harley]

5 minutes ago, Cattle Prod said:

When I was there, there was the xiao-panza (sp.) phenomenon. It means 'little fat emperor'.

We have one of those phenomena here too, but I think it translates better!

[Nomad]

Form the BBC website ".. but Wednesday's figures for what manufacturers are paying for raw materials show a rise in input prices - what manufacturers pay for raw materials - of 9.9%."

Surely this will need to be passed onto consumers at some point?

and then we have this statement, from a analyst at AJ Bell,

"...the Bank of England has made it clear it will tolerate inflation above its 2% target without "pulling the trigger" on interest rate rises".

"However, if inflation looks like it's going to get a significant foothold, markets will take matters into their own hands and raise borrowing costs across the economy," he said.

Interesting times.

 

[Chewing Grass]

5 minutes ago, Majorpain said:

Steelwork firms rocked by second big price hike this month | Construction Enquirer News

Its both hilarious and terrifying, the construction industry doesn't have the mindset and is not set up in a way that it can adjust for cost increases on a quarterly, never mind daily, basis.  Tenders for jobs can be up to a year in advance.  This is the danger of messing too much with the economy, the guts of it start to come apart and then the entire thing comes down because its all interconnected.

We are buying fabrication steel for use over the next 3 years, the money boys are obsessed with fixed price contracts but take 6-12 months to issue them. Any cost & convenience benefits for the feckers will be launched out of the window as most of them (anyone under 60) has never been put in a situation of continually rocketing costs.

[Bricormortis]

 

This article addresses the confusion regarding the Basel 3 implementation of the Net Stable Funding Ratio which comes into force in Europe in June 2021 and what this means for gold.

( source is Miles Harris. )  I have used bold and some underlining for the nitty gritty.  Posters have said Basel 3 is negative for LBMA, this article would concur, but not for the reasons people may be thinking.

Dear Subscriber

After revisiting my sources on Basel 3 and cross checking everything against the BIS documents, I wanted to provide an update with what Basel 3 really means for gold because there is a lot of confusion out there.

So let’s back up and consider the aims of the Bank for International Settlements - the shady BIS. Ultimately, it’s control and complete monopoly power over currency. To that end, they will seek to ensure that their institutions remain in charge. And of course, gold and silver are enemies of the fiat currency system. 

Sowing the Seeds of the Great Financial Crisis

Previous Basel accords have had a dramatic impact upon economies globally. For instance, each previous round of the Basel Accord has deemed mortgage debt to be increasingly less risky. Where in Basel One, in 1992, 50 percent risk weightings were applied to mortgages. Basel 2 agreed in 2004, saw the risk weighting of mortgages being reduced to 35 percent. They then allowed banks to calculate their own internal risks. House prices took off throughout the western world, as credit flowed to real estate markets. Before a sudden contraction in credit took place. 

Of course, the consequence was the great financial crisis of 2008, and this provides us with a useful case study in understanding the Basel accord’s desires under the Net Stable Funding Ratio which is due to be introduced in Europe at the end of June this year. 

Back in September 2007, a British Bank, Northern Rock suddenly faced an enormous funding crisis. The bank had been providing mortgages for 25 to 30 year periods. Initially, these were financed via demand deposits - that is customer savings deposits. This was the capital or liability financing the bank's asset - the mortgages it offered. 

This is the conventional understanding of a banking system - that the bank takes a customer deposit - a liability to the bank which will need to be repaid upon demand - and relends that in the form of a loan - an asset to the banking system. But Northern Rock, in their desire to expand their business began lending from the interbank lending market to enable them to offer more mortgages. 

However, this posed a complete mismatch in the bank’s capital and its assets. Short term borrowing and longer term lending for 30 year mortgages - a recipe for disaster. In the good times, there was no problem, but as soon as banks trust in one another deteriorated it meant that Northern Rock could not meet its short term obligations to the interbank lending market. 

As news of their illiquidity spread, customers then sought to withdraw their currency from the bank. The lessons here were clear for the bankers that stable funding must be used to finance certain assets. 

This is particularly the case when it comes to mortgage products which may need to be fire-sold at a loss or could even go “no bid” in the event of an all out crisis. We saw just that with the demise of Lehmann Brothers under the weight of their collateralized debt obligations or CDOs. 

By requiring stable funding capital, the BIS is betting that it should help to avert the risks posed by a mismatch in assets and capital on the banks balance sheet.

So if we consider the most stable highest quality forms of capital: This includes the bank selling equity (or company stock) to raise capital, other core capital and disclosed reserves. Ultimately, long term capital is perceived as being less risky, and more costly for that matter, than low cost short term capital. Take demand deposits or interbank lending, they’re both cheap sources of capital but can be withdrawn at any time. This makes financing through these shorter term methods risky when markets are under stress. 

And so different risk weightings according to the percentage of required stable funding needed to finance by setting a Net Stable Funding ratio it requires banks to finance long term assets with long term money. This is meant to encourage banks to manage risks carefully. 

And on the spectrum of asset risk - those deemed most risky and therefore requiring the highest required stable funding ratio of 100 percent are equities and non performing loans. 50 percent for high quality liquid assets. While bank reserves, held at the Central Bank together with banknotes and coins have a zero Required Stable Funding requirement. 

Gold: The Original Risk Free Asset

And so what weighting should gold be given due to its available liquidity and lack of counterparty risk? Well, it has some price volatility so 15, 20, 30 percent? Well no. The BIS are never keen to promote the role of gold so it has an 85 percent Required Stable Funding ratio. Meaning financing gold as a bank asset must be done with 85 percent longer term, more expensive funding. To be clear, this is an increase in the risk weighting of gold - the original risk free asset. 

But the BIS have also gone on to state that “at national discretion, gold bullion held in own vaults or on an allocated basis to the extent it is backed by bullion liabilities can be treated as cash and therefore risk-weighted at 0%.” Now, on the face of it this seems promising for allocated gold - risk-weighted at zero percent. However, it’s weighted as cash because “it is backed by bullion liabilities.” I.e. a short position against the future price of the metal. So on one hand the bank is long and on the other they are short leaving a net neutral position at zero risk as it is allocated gold. This would only offer a return if they perhaps lease the physical metal out. 

Impact on the LBMA

However, the LBMA have been fighting these changes tooth and nail. This is because most bullion in London is traded & settled on an unallocated account basis, where the customer does not own specific allocated bars and simply has a paper entitlement to metal. This is where clearly the LBMA are upset. As the costs to banks in ensuring a Required Stable Funding of 85 percent for unallocated bullion would significantly increase the cost of doing business. With Scotia Bank leaving the sector last year, there is the possibility that others may follow. 

Does it reduce the LBMA’s global authority? Judging by their fight, unquestionably so. And to that end, we must ask who is really driving such changes? For we know that a dramatic global shift is underway from west to east and China has, of course, been stockpiling gold. 

But all in all, gold is negatively treated under the Basel 3 arrangements. And this makes perfect sense when we consider that this is being driven by the BIS. Clearly, the banking sector does not wish to elevate the position of gold to rival their fiat currencies or even their CBDCs unless they truly have no choice. 

What does it mean for the gold price? Well, on the face of it, if there is less trading of unallocated gold, this may seem price supportive but it is tough to say. As any bank who wants to go long on gold, either allocated or unallocated, must finance this with 85 percent required stable funding, making it far less attractive to do so. Moreover, it remains to be seen how well enforced such rules will be. Given banks, in recent times, are hardly well regarded for their prudence. 

And after all, there are numerous other macroeconomic reasons to be long term bullish on gold in terms of our own wealth preservation.

Thanks for being here.

Miles

[Majorpain]

11 minutes ago, Chewing Grass said:

We are buying fabrication steel for use over the next 3 years, the money boys are obsessed with fixed price contracts but take 6-12 months to issue them. Any cost & convenience benefits for the feckers will be launched out of the window as most of them (anyone under 60) has never been put in a situation of continually rocketing costs.

Yeah, we have big job on at the minute (for Durham CC funnily enough) where they haven't picked a color yet, problem is we would like to get the material on order to guarantee the price, contract price is agreed so any cost increase is on us!  I have some sympathy that estimating for future cost prices (whether up/down/same and at different points in time) for the 1000+ items that go into the average job, whilst maintaining any profit margin, is going to become very difficult.  

[NogintheNog]

2 hours ago, planit said:

9 hours ago, goldbug9999 said:

My answer to the question "is bitcoin worth the energy use ?" is this ...

Fiat currency debasement is the single most destructive force on earth given the wars it funds and the poverty and general economic strife it creates in various degrees. Hence if bitcoin manages to curtail that by even a modest amount then its worth the current energy consumption 100 times over.

Your word equation simplifies down really nicely to 

 "central banks will go to war with Bitcoin"

Central banks will go to war with any system that undermines their control of their currency.

Gold and Silver have already been comprehensively undermined by the financialization of the assets. I believe it was J P Morgan who were fined for manipulating the precious metals markets, and they paid the fine with the money they made from manipulating the markets! Carrying around and using precious metals is quite difficult, which is partly why there are these huge paper markets for them, enabling said manipulations.

With Bitcoin things are very different, I could carry £100,000 on my mobile phone with the private key and transact with anyone inside the bitcoin universe. Bitcoin is divisible to 1 satoshi = 1/100,000,000 of a Bitcoin. At £25000 per Bitcoin that equals 0.025 pence! Does a penny buy anything these days or is it just there to make you feel better about spending £4.99 instead of £5.

One has to ask would Central Banks be looking at CBDC's if Bitcoin and the crypto system had not arrived back in 08/09? I suspect the answer is a firm not!

By the way I own a relatively small amount of Bitcoin and a lot more allocated Gold....