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

[sancho panza]

On 30/05/2021 at 18:39, DurhamBorn said:

The CBs have put in about 70% of what i expected,so looking good there.The question on  BK is how it develops.If its derivative counterparties blowing up it would likely be everything going down a lot.However it could be we see hot sectors blowing up mostly and the areas of interest to us holding up well.They arent exactly well owned.Take Imperial,who actually owns that now,not many of these young ones gambling on pet digital rocks.Not the big passive funds.Big oil another.Telcos,market caps are nothing compared to bubble areas.10% of Amazon would buy most of the European telco sector.

The thing is,you can only buy what you think is value ,and will be a certain price in the future.The only real worry i have on some of the areas im holding is derivative risk on their big debts.However part of the investment thesis on those areas is inflation is about to see free cash shoot up and cut those debts.Imperial for instance paid down £3 billion over the covid year.Thats some performance,yet the market ignores them.They will be buying back 6% of their equity a year from about 12 months time.Even if they can only hold profits level with a slow 3% decline in smoking use and 3% price increases,they should still be able to grow the divi above inflation over the cycle.

Free cash flow is going to be king this cycle,and price increases above depreciating assets the key to outperforming.

 

My personal view is that buying some of the big oil/comms/potash/goldies at the right price and you can hold through the dip,jsut likem you say add some if they dip.If I can foresee a BK then we'll trade it but it may not be possible.

 

tehre's precedent for some stocks barely moving or going up during major downturns as you say.a few below.Particualryl pertitnent this time in a tech blow out are the 2000 risers

[sancho panza]

@Cattle Prod 70 handle today for Brent.buidling nicely.

 

[Democorruptcy]

40 minutes ago, sancho panza said:

Here's the msot recent batch of coma scores Bob,as ever dyodd.I haven't really been that interested in them because of other things that have been happening and available but will defo build our positons up.Since the last time when the coma scores flagged BT at around 21 iirc(they were near a quid),they've pulledback now to a more mdoerate 17 score.I've added some colour to the balance sheet figures to indicate those where the goodwill is 50% of the equity(green) and thsoe where it's 75% or above(red)-lessons from the Scottish play.

one of the big issues with filtering the ETF's is that some of them are entertianment companies nowadays as much as telecoms.

it doens't take much to relaise the balance sheets are battered but as @DurhamBorn and @Democorruptcy et al have pointed out,they've levered up on some eye wtaeringly low coupons.

I think I posted some low coupons that VOD had but they also have some higher.

https://investors.vodafone.com/debt-investors/bonds-outstanding-eu-and-us

I don't own any shares at the moment.

[DurhamBorn]

14 minutes ago, Democorruptcy said:

I think I posted some low coupons that VOD had but they also have some higher.

https://investors.vodafone.com/debt-investors/bonds-outstanding-eu-and-us

I don't own any shares at the moment.

2037 at 1.2% ,interesting they have some high rate ones coming off the next two years,4.65,5.37,so hopefully they simply clear them off.They have a few higher rate ones mostly on the dollar shelf and some of them come off over the next few years.

Needs to be remembered as well,that at the moment bonds paying 5% will be trading way above par,but we might get a situation mid cycle where companies with free cash can buy them back below par if inflation is really running hot by then.Free cash is going to be critical for all kinds of reasons.

[Bobthebuilder]

1 hour ago, sancho panza said:

Here's the msot recent batch of coma scores Bob,as ever dyodd

Thanks for posting that, Sancho. @Harley said the same as you regarding ETFs holding entertainment companies. I really appreciate the heads-up guys as I don't want to be holding the likes of faceache.

 

[DurhamBorn]

Another deal from BP

https://www.bp.com/en/global/corporate/news-and-insights/press-releases/bp-boosts-its-renewables-business-in-the-us-with-9gw-solar-acquisition-from-7x-energy.html

While the woke hate them and funds mostly all sold out oilies like BP can buy up these projects for loose change with Brent at $70.What the green lobby and MSM also miss is that there is going to be the mother of all feedback loops coming for energy.For instance i reckon electricity will have to treble in price minimum to fund the net zero targets and those sorts of increases are hugely regressive .That also assumes governments dont see rates increase to counter the inflation,mostly coming from energy.If governments/CBs do increase rates then pure play renewable companies wont be able to fund projects without much higher prices,forcing inflation and then rates even higher.There is no way out of this loop.Unless CBs direct fund projects,or governments do,but governments will be seeing costs going up everywhere.

The risk of course is that they force the oilies to pay through much higher taxes,carbon taxes etc,but again that will simply force up prices during the transition.

The only entities who can really gain from this are the companies selling the oil and gas they have already discovered.

The cycle will see politicians suddenly facing this massive inflation feedback loop,and likely the mother of all energy bull markets.

During this BP will develop its solar etc,but it will also have its gas for baseload as it explodes higher,pure play solar companies will just have electric to offer to the grid during sunlight hours and debt that needs rolling over as rates increase.

Maybe i should hedge the above with some $ass

[Democorruptcy]

On 27/05/2021 at 08:45, DoINeedOne said:

Thoughts 

https://www.wsj.com/articles/shell-ordered-by-dutch-court-to-cut-carbon-emissions-11622038961?reflink=desktopwebshare_twitter

Amerman has done a piece on it:

Climate Change & Court-Ordered Inflation

[Loki]

Ag news

[Castlevania]

27 minutes ago, Loki said:

Ag news

Not that surprising given the below

 

[Don Coglione]

Just to close the circle on CRUD, I sold out today at 100% gain, after fees, charges and FX changes.

Still holding all my positions in big oil; doubtless I will join the debate on holding/selling through BK in due course.

[Don Coglione]

7 minutes ago, Cattle Prod said:

Well done, DC, delighted for you. Calling a big upleg from the correction to $35 in Nov was a no brainer. But I didn't have enough exposure in the underlying. I had options in XLE, XOP and OIH, but they didn't leverage the underlying that much (yet). I probably averaged a 3x on those, but If I'd gone for options on the futures themselves, I'd be retired, on a boat, ignoring the internet. I have a better mix now.

So full credit to you! 

Back at you, CP - your priceless insights into the world of oil helped give me the courage to go balls-deep.

Long may we all prosper.

[Noallegiance]

My, my. Days like today give me an itchy trigger finger.

[DurhamBorn]

2 hours ago, Cattle Prod said:

Thanks for that, DB. If I recall, a while back, when CBs had only printed about 40% of what was needed, you saw the deflationary bust as necessary to kick them into another big liquidity surge. If they've now reached 70%, do you see the odds of the BK dropping? I don't mean to pin you down on specifics, you've just said it's still fuzzy and I get that. But do you think they've produced...almost enough liquidity to avoid it? And if they do manage that, what about all the zombies @sancho panza needs clearing out?!

Its really difficult because a lot of capital will be pulled from the financial system for spending and investment as things open.With the repo situation its crucial the governments keep fiscal injections going for a good few months yet.I think a BK that takes everything down is getting less likely,so it could be a quick 15% off some areas as others crash and a rebound in inflation sectors.However if the BK came from flaws in the derivative markets it could still take everything down.

Im trying to look at my roadmap across sectors and where i see them in 2028/30 and for that i see a treble including divis as likely in most of our areas.

The banks balance sheets in the US and UK are fine,Europe is a problem.I think a reflation is certain now though,and looking at the structure of the recovery and the political situation the energy complex and inflation are now in a feedback loop.Higher energy prices,higher inflation,higher rates,less green investment,oil and gas higher and higher.Im not sure of the structure of green projects debt and if it needs rolling over or if it amoratises over the loan,but if much needs rolling over they will be loss making mid cycle.

It needs remembering as well inflation and more energy inflation means building renewables is going to get a lot more expensive,apart from for big oilies.They will have exploding cash flow.

The liquidity is fast approaching the level where it will eat away government and private debt,so if we do see big falls in some areas its likely a direct transfer to something else.

 

[Harley]

@DurhamBorn viv and timb got the bid today!

[Castlevania]

11 minutes ago, Harley said:

@DurhamBorn viv and timb got the bid today!

Brazilian GDP was better than expected. Real was bid. A good day if you did what this chap’s banging on about.

 

[DurhamBorn]

32 minutes ago, Harley said:

@DurhamBorn viv and timb got the bid today!

I re-pointed my wall today Harley,nice job as well,

Lovely,and we will get double the affect now as the Real recovers alongside the telcos,they are going to get a  Landslide of Love ,

 

[wherebee]

@DurhamBorn - year to year, I am up 52% on my total portfolio, thanks largely to this thread.  Thank you for bringing together such an awesome range of information, arguments, and viewpoints.

If we ever meet in real life, I'll owe you several beers.  And a wet kangaroo.

 

[Barnsey]

More inflation signals...

Consumer credit risk outlook in US still looking minimal, quite the opposite to GFC...

And in opposition to the tweet I posted the other day about China's credit impulse turning downwards...

 

[Mapper]

12 hours ago, Democorruptcy said:

Amerman has done a piece on it:

Climate Change & Court-Ordered Inflation

Good read. Legally mandated inflation spiral nicely explained.

Quote

What will happen when businesses, consumers and workers don't just anticipate likely price increases next year and the year after, but are reading in the media about the judicial decrees that mandate steadily increasing supply shortages that will stretch out many years into the future? We can't say for sure at this point, new textbooks will be written about it (if it happens), but based on what we do know from the past, the changes in behavior could set off a self-reinforcing inflationary cycle that could make the 1970s and 1980s look like a walk in the park in comparison.

But, will these kinds of court orders be worldwide?

Will the big future energy consumes of Asia kneel at Greta's altar?

[ThoughtCriminal]

1 hour ago, Mapper said:

Good read. Legally mandated inflation spiral nicely explained.

But, will these kinds of court orders be worldwide?

Will the big future energy consumes of Asia kneel at Greta's altar?

No chance 

Inflation? I see no inflation........... 

[DurhamBorn]

3 hours ago, Barnsey said:

More inflation signals...

Consumer credit risk outlook in US still looking minimal, quite the opposite to GFC...

And in opposition to the tweet I posted the other day about China's credit impulse turning downwards...

 

China is already exporting inflation now,if i was still selling in my business the prices would be up 40%Thts why i said back  a year ago Royal Mail would outperform Amazon,a statement 99.9% of people would think the ramblings of a lunatic.

On the jobs front iv never seen anything like it.Im turning down jobs almost every day.The are trawling through CVs on Jobsites etc and ringing direct.Only yesterday i was offered a job with PPG, a Fortune 500 company.Iv turned almost every one down saying not enough money.That one actually was enough money,but i said 5 rigid shifts didnt suit my work life balance.Of course im retired,but i think it only right to tell them the truth.

Companies treat people like utter shit and corporates are horrid places now.Diversity training and constant crap.

They are all going to have to pay a lot more,plus thats before people feel the inflation pulse as they are starting to,then they will factor that in as well.

Thats why we want to be in sectors forcing the inflation,not having to try to pass it on.

[Castlevania]

I found this article by the former spokesperson for Extinction Rebellion interesting and her conversion to being a champion of nuclear energy. It highlights a lot of themes that have been discussed here in that people won’t give up their use of energy and thus their lifestyles for the environment; how most of the green lobby’s policies are self defeating; and how renewables are fine but you need baseload. 

https://quillette.com/2021/05/31/the-sad-truth-about-traditional-environmentalism/

[M S E Refugee]

 

[NogintheNog]

15 hours ago, Cattle Prod said:

Seen a few posts here about 'wish I didn't put so much in oil, potash did better' etc, and that's fair enough. But its also hindsight. @DurhamBorn was at pains to tell us that there was no way to know which sector will run, so have a few of them. Even us here are hating on oil a bit which as a contrarian makes me all warm and fuzzy. A bit like yhe March 2020 lows.

What's happening in oil re. ESG requirements is just astonishing, it's pretty much throwing petrol on the fire. I don't know when oil (and gas) will run, and I really don't care. My conviction that it will, seriously run, just gets stronger and stronger. I now see where DB was getting his $300 from, he was mapping in all this crap that I hadn't seen yet.

Example. Not alone is the likes of XOM going to be hamstrung in its own production. Its going to be restricted in its R&D. And the tech from the big companies is what grows the rest of the industry. As in, all of it. And not just including national oil companies like Aramco, but especially them. Hurt these supermajor companies, you hurt the entire complex.

Good luck when you really need the stuff, its going to cost you. 

Interesting, I've just had an email from certain research company which I used to subscribe to (not any more but I still get their emails!) and they have just sent me one on oil and how we reach net zero. It discusses how solar and wind needs to be ramped up;

Quote

So today, I’d like to briefly pick out three key points from the IEA’s Roadmap to Net Zero. Whether you are a government, a CEO or an investor reading this, it could pay to take note.

Firstly, that solar and wind installations need to go from 114GW and 134GW per year in 2020... to a whopping 390 and 640 gigawatts respectively by 2030.

In just nine years’ time, they will have to triple and quintuple for us to be on track to meet our net zero goals.

That's over 1,000GW of electricity generating capacity – the equivalent of China's operating coal fleet being built every year, for 20 years.
 

It then goes on to talk about oil and the demand going out to 2050;

Quote

Wherever oil production makes up a large part of national tax revenues, and crucially a large part of jobs, there is trouble ahead.

The forecast is for oil demand to fall from just under 100mbpd in 2020 to 24mbpd in 2050.

With so much oil available but so little to be sold, only the very lowest cost producers would be able to sell profitably, meaning a greater concentration of sales to OPEC nations like Saudi Arabia, where oil can be produced for very little.

This is a forecast for a long-term decline in the price of oil. If only the cheapest barrels are sold, the price may end up floating around the $10-$20 mark.

But it’s also an urgent appeal to other oil-producing countries to wake up and sense the danger.

Higher cost oil will be priced out, and the countries producing it will find themselves with no one to sell to.

The IEA’s prediction is that some such nations could see national oil revenues fall by 75% or more.

The consequences for those countries that fail to diversify their economies away from it will be dire, it said.

My belief is that oil prices will be quite volatile for some time yet.

Perhaps the undersupply from Covid-19 and from the IEA’s pressure will cause price spikes in the near term.

But the longer term direction is clear.

Oil prices are going to fall, and most companies won’t be able to sell or even half of what they’ve got.

It’s a hard place to be investing, because if you can catch a spike, the stocks are cheap and the dividends can be generous.

But it is becoming a dangerous place to put much long-term cash, it would seem.

These three things – renewables, efficiency, and the end of the oil age – were brought powerfully home to me by the IEA’s roadmap.

What are your thoughts CP. Personally I think the bit between will be the bit everyone is missing. The amount of fossil fuel needed to put all that infrastructure in place as pointed out in the excellent Dominic Frisby video above!

[DurhamBorn]

Where people go wrong with a reflation cycle,is they think there is going to be a big recession and mass unemployment.However this isnt how inflation does its work.CBs and governments are doing everything they can to stop unempolyment with massive fiscal interventions.This isnt about 15% of the workforce losing their jobs,its about 50% of the workforce seeing their wages and savings inflated away.Reflation cycles favour assets over services and brain jobs.

So where the real damage will be done is to service industry workers spending power,and here i mean the middle class range of jobs upwards.

Employers in lots of sectors will have to pay much more,and service sector jobs will pay more,just not as much as inflation thats hitting them on every input cost.