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

[Castlevania]

7 hours ago, Cattle Prod said:

Is inflation an element here, sancho? I remember food riots in poorer countries in 2007/8 when the oil price was spiking. Inflation is a ballache for us when our food bill goes up 10% from say 10% to 11% of your take home. When you spend 60% of your take home on food, and it goes up to 66%, its a life threatening problem. I noticed they were looting food stores etc.

This is why I say the woke/esg policy of "defund oil and gas" will cause people to starve. But I guess its not a problem in Islington or Westminster.

I think Cuba is food related. 

[Castlevania]

7 hours ago, Boon said:

I think unemployment is more of a problem there - it was something like 32%, and that was only the official measure - it may be worse than that.

That's a hell of a lot of people that may be poor and have nothing to lose. But there must be another political dimension as it seems it hasn't spread all over the country, or maybe it's not being reported like that, I don't know.

But I remember the London riots here and this somehow inspired other cities to do their own riots.

 

 

The London riots were quite interesting. They were largely non-violent (I did see someone get punched in the back of the head for no reason, but that was it) and mainly kids out on the rob. No police present. 

The response was to use CCTV to arrest absolutely everyone they could identify stealing, be it as little as a bag of rice from Tesco, and put them in prison. It was very heavy handed, but a really good deterrent.

[Hardhat]

Can't say I understand a lot of the price action in the market recently... gold stocks down on higher inflation, oilies down on higher oil prices...

I guess it takes time for these things to filter through.

[JMD]

43 minutes ago, DurhamBorn said:

I dont think China will nuke anyone unless nuked first.They plan over 1000 years and wouldnt want to ruin the planet for when they take it over.They are winning a fantastic war already though,because surely this woke and cancel culture stuff must be coming direct from their agents and plants across the west.Its incredible how much damage it is doing.Every lockdown,every stupid rule,every footballer who can get more money for scroungers in welfare means less for weapons,and a society slowly falling apart.

Instead of dealing with the hard political choices,the west,and Japan,who are actually leading this are merging more and more the monetary CBs with the fiscal governments.That is why you see governments throwing money at anything and everything rather than debateas the CBs buy the debt and monetise it all.

China is close to the point where it can use its own population to consume more,and that will force up prices in the west even more because western currency will fall in value relative.

I sometimes used to look at the reflation ahead and think the outcomes expected were maybe outliers,but if anything my models are likely underscoring the inflation and dislocation ahead.

For ordinary people, they are walking directly into a distribution cycle that would be difficult at it is.If you add one the insane energy transition costs and maybe tax increases on things like council tax,its going to very nasty.

Very interesting DB. But why do you say that it is China behind our woke/identitarian stuff and existential nonsense, and not rather the usual (current?) bogeyman of the West, Russia?                                                         Also very interested in your inflation comment, I think your model says approx. 69% over this cycle, but that your more and more seeing that this may turn out to be in the low end figure range. But i'm assuming the 69% figure is the very suspect official CPI/RPI, and that the real inflation hit for us is/was always going to be much more painful? Not asking for specifics of course, it's just that I have always personally interpreted the 69% as a base increase, from which I can/should add my own spending commitments onto? 

[JMD]

27 minutes ago, Castlevania said:

The London riots were quite interesting. They were largely non-violent (I did see someone get punched in the back of the head for no reason, but that was it) and mainly kids out on the rob. No police present. 

The response was to use CCTV to arrest absolutely everyone they could identify stealing, be it as little as a bag of rice from Tesco, and put them in prison. It was very heavy handed, but a really good deterrent.

 I remember that that 'bag of rice' was of truly epic proportions!! ...didn't he need a warehouse trolly or something to transport it? 

[Lightscribe]

1 hour ago, JMD said:

Hmm, you point out that in future there may be 'no money to fix' the NHS, plus you mention flu this winter potentially crippling the NHS. Interestind as i've actually been thinking recently on such things and what may play out near term this winter. Especially given health chiefs are estimating 60,000 flu deaths this coming year, are we being softened up?... I wonder, is a clumsy cataclysm within the NHS being engineered? Off topic thoughts, not meant as a  discussion point.

As I said back in 2020 when all this first kicked off, I expect the NHS will be allowed to buckle. Then a separate NHS tax on top of NI can be introduced (we can call it ‘clap tax’) to directly fund it from all those ‘well off’ people that work. 

Eventually we’ll all be paying for private healthcare through taxation essentially, only without the ‘private’ bit as we’ll all be paying for the rest of the country instead.

[Animal Spirits]

53 minutes ago, DurhamBorn said:

I dont think China will nuke anyone unless nuked first.They plan over 1000 years and wouldnt want to ruin the planet for when they take it over.They are winning a fantastic war already though,because surely this woke and cancel culture stuff must be coming direct from their agents and plants across the west.Its incredible how much damage it is doing.Every lockdown,every stupid rule,every footballer who can get more money for scroungers in welfare means less for weapons,and a society slowly falling apart.

Instead of dealing with the hard political choices,the west,and Japan,who are actually leading this are merging more and more the monetary CBs with the fiscal governments.That is why you see governments throwing money at anything and everything rather than debateas the CBs buy the debt and monetise it all.

China is close to the point where it can use its own population to consume more,and that will force up prices in the west even more because western currency will fall in value relative.

I sometimes used to look at the reflation ahead and think the outcomes expected were maybe outliers,but if anything my models are likely underscoring the inflation and dislocation ahead.

For ordinary people, they are walking directly into a distribution cycle that would be difficult at it is.If you add one the insane energy transition costs and maybe tax increases on things like council tax,its going to very nasty.

A stronger Renminbi and more capital inflows into China. That would also depend on how much control the CCP is willing to release in its efforts to become less reliant on the USD.

It should also mean they are less able to implement mercantilist trade policy reflected in the large trade imbalance with the USA where as we know, it is mostly recycled into USD assets. Large surpluses are usually the result of supressed wages/domestic consumption relative to the productive output of the economy.

The Chinese economy also has the same problems as other countries, its built on near 300% debt to gdp.

Check out the channels episodes on the history of Afghanistan as well, The Graveyard Of Empires.

[Castlevania]

37 minutes ago, JMD said:

 I remember that that 'bag of rice' was of truly epic proportions!! ...didn't he need a warehouse trolly or something to transport it? 

 

[Castlevania]

Uh oh

 

[planit]

5 hours ago, Cattle Prod said:

My favourite chart this morning, TIPS at all time highs and breaking up:

Gold in purple. Very tight correlation since 2018. So are TIPS signalling gold should be 2100? Maybe, and as I'm invested in gold it's tempting. But if I check my bias, I think gold is smarter than bonds. Gold front runs almost everything. So why are these 'jaws' opening up? Are TIPS wrong?

...

Few hours have passed, and I made this:

It's real rates (10y yield minus 10 year breakevens) with gold inverted. The 'jaws' are not as wide now, so I like that. Similar to Lyn Alden's measure, I think. What I see is a close correlation, with periods of gold lagging. So real rates do seem to lead. Thoughts?

What next? Real rates have been bouncing off a -1.1 level since gold topped in August 2020. Will it break lower and give us another leg in gold? Assuming the 10y yield stays between 1.2-1.5 or whatever, the second part of the equation is more interesting. 10y breakeven definition:

So market participants currently think inflation is going to average 2.32% over the next 10 years. Strongly implying that they believe the current spike is transitory. But then I saw our friend Larry Fink, who controls $10 trillion dollars worth of funds giving his staff an 8% payrise because he doesn't think inflation is transitory. So is he buying gold, or bonds?!

There is a little table added there showing the % change in gold is remarkably consistent with a bps change in real rates. An average of 4.32 bps per % increase in gold. So to get to David Hunter's $2500, and the 10y stays roughly where it is, you would meed market participants to think inflation is going to average 3.94% over 10 years. Seems like a reasonable rate to us basement dwellers, but do you think CBs would have to act before it gets there? Perhaps that would just push down the 10y and have the same result. Thoughts?

I think you should be thinking more with regards to sentiment when weighing up real rates vs gold-1. The gold movements look much more emotional (sentiment driven). Thinking about it, I doubt you could get anything less sentiment driven than the real rate measure used in the graph. The best computer algorithms and mathematical minds will be at work in multiple dimensions, trading all the debt instruments interrelated to give that figure. Gold investors try to front-run the figures but half the time they get it wrong  which is why you can't see a pattern.

 

Regarding Larry Fink, I don't think you can ask what he is buying. Anyone with $10T under management has hardly any choice with what they invest in. Look at Buffett's face light up when he is asked whether his investment return would be higher if he was starting out with $1m. 

On the last point the CB's are just trying to manage people's expectations. They will manipulate the bond market whilst fiddling CPI so the masses think it's 2.5% . This seems to be what has happened the last 10 years. (Governments will just be making sure their tax intake is growing at the 3.94% rate). They will have to 'act' loads of times in the next 10 years.

 

Great work on the graph BTW, I have saved it, are you using a standard pro licence  on TradingView?

[sancho panza]

8 hours ago, Cattle Prod said:

Is inflation an element here, sancho? I remember food riots in poorer countries in 2007/8 when the oil price was spiking. Inflation is a ballache for us when our food bill goes up 10% from say 10% to 11% of your take home. When you spend 60% of your take home on food, and it goes up to 66%, its a life threatening problem. I noticed they were looting food stores etc.

This is why I say the woke/esg policy of "defund oil and gas" will cause people to starve. But I guess its not a problem in Islington or Westminster.

Absolutely.And this is something we've discussed before ie that we should be measuring inflation and then comparing income deciles given that lower income deciles will spend a higher amount proportionately on the essentaisl eg food n fuel and less on supplymentaries like sofas.

The basement is one of the few places besides Shaun Richards or Wolf St where you'll read any genuinely open minded discussions on inflation measures.The silence from the MSM is positively deafening imho.

If we go back to the Arab Spring which ran mainly from Dec 2010 to Dec 2012 plus ran on elsewhere for years,it's worth looking at it with regard to wheat prices in dollars(I'm not claiming food prices are the sole cause but a  contributory factor).I've marked the rough start and end of the Arab spring with lines.But prima facie,it does look like the AS started after a period of rising food prices and dollar strength

Coindicental that as it subsided 2012/13 on,so did wheat prices.

I've dated the charts to include 2008.ALso included as some of the currencies I could get charts for,for the same period USD vs...

Wheat futures

 

USD  v Tunisian Dinar

USD v Algerian Dinar

 

 

 

7 hours ago, Harley said:

A possibly enlightening piece on TimesRadio this morning about there being a state within a state now feeling threatened by the action against Zuma.  They're potentially agitating things as many of the serious stuff (attacks against infrastructure rather than looting) is co-ordinated and needs the right resources.  However, also plenty of kindling with a long running failure to deliver to the masses and a very harsh lockdown.  I expect Africa to receive a lot of attention going forward as a Geo-political play with financial interests getting their cut.

The ANC have had 30 years to develop the economy,educate people and to start redressing some historical inequalities.The reality is that there's power cuts all the time,so no businesses are keen to invest there,the education system still doesn't make anywhere near the best of the talent and teh govt has embraced crony capitalism rather than real capitalism which possibly explains why Zuma is so well off and the people are so poor.

For some reason,I think of matt hancock when I write that.

 

2 hours ago, JMD said:

But rioting did happen here in London summer 2011, 10 years ago, time certainly flies!! Not trying to correct you SP - for me the lesson here is the scary reminder of how useless the police were at that time; moreover the very next year the G4S Olympic security contract was removed due to company incompetence, and of course a complete lack of government oversight given it was such a high profile event... these examples show I think how we cannot hope to rely on the state to protect us if/when things really do turn?!    (Deck: I'm not a prepper... But more fool me maybe?!)

2011 was a taster.The police have even less officers than then especially if you go to the provinces.The political class will always keep themselves safe first,proles second.

[dnb24]

2 hours ago, Animal Spirits said:

A stronger Renminbi and more capital inflows into China. That would also depend on how much control the CCP is willing to release in its efforts to become less reliant on the USD.

It should also mean they are less able to implement mercantilist trade policy reflected in the large trade imbalance with the USA where as we know, it is mostly recycled into USD assets. Large surpluses are usually the result of supressed wages/domestic consumption relative to the productive output of the economy.

The Chinese economy also has the same problems as other countries, its built on near 300% debt to gdp.

Check out the channels episodes on the history of Afghanistan as well, The Graveyard Of Empires.

Also need to remember that China have significant issues with water, food and energy. As @DurhamBorn says, they've done an amazing job infiltrating the west’s education and political system with this woke influence but they know they’re in a scrap now. I personally don’t see China doing well out of this, maybe if it was the old PRC, with the old Chinese ways they would be looking at a full swing to the east- with the CCP leading the way- I think the problems will be too much for them to handle.

I can see a scrap though and I think it’ll be a scrap to the bottom, and the winner will be the one coming out the least broke. So not pretty times.

[DurhamBorn]

3 hours ago, JMD said:

Very interesting DB. But why do you say that it is China behind our woke/identitarian stuff and existential nonsense, and not rather the usual (current?) bogeyman of the West, Russia?                                                         Also very interested in your inflation comment, I think your model says approx. 69% over this cycle, but that your more and more seeing that this may turn out to be in the low end figure range. But i'm assuming the 69% figure is the very suspect official CPI/RPI, and that the real inflation hit for us is/was always going to be much more painful? Not asking for specifics of course, it's just that I have always personally interpreted the 69% as a base increase, from which I can/should add my own spending commitments onto? 

Inflation is RPI ish and yes a base increase.I got that from my best guess about how much dis-inflation there had been below trend.If they push ahead with the energy transition though i think it might be higher .I think China and Russia,but China has many more friendly actors in unis etc and a lot of this woke crap is coming from that area.I see very few woke people who arent on the government payroll ,employed or welfare.Its doing massive damage,but also the fact the government roll over on almost everything.The worry is that the BOE keeps printing to fund government even with high inflation.

[sancho panza]

9 hours ago, Cattle Prod said:

My favourite chart this morning, TIPS at all time highs and breaking up:

Gold in purple. Very tight correlation since 2018. So are TIPS signalling gold should be 2100? Maybe, and as I'm invested in gold it's tempting. But if I check my bias, I think gold is smarter than bonds. Gold front runs almost everything. So why are these 'jaws' opening up? Are TIPS wrong?

...

Few hours have passed, and I made this:

It's real rates (10y yield minus 10 year breakevens) with gold inverted. The 'jaws' are not as wide now, so I like that. Similar to Lyn Alden's measure, I think. What I see is a close correlation, with periods of gold lagging. So real rates do seem to lead. Thoughts?

What next? Real rates have been bouncing off a -1.1 level since gold topped in August 2020. Will it break lower and give us another leg in gold? Assuming the 10y yield stays between 1.2-1.5 or whatever, the second part of the equation is more interesting. 10y breakeven definition:

So market participants currently think inflation is going to average 2.32% over the next 10 years. Strongly implying that they believe the current spike is transitory. But then I saw our friend Larry Fink, who controls $10 trillion dollars worth of funds giving his staff an 8% payrise because he doesn't think inflation is transitory. So is he buying gold, or bonds?!

There is a little table added there showing the % change in gold is remarkably consistent with a bps change in real rates. An average of 4.32 bps per % increase in gold. So to get to David Hunter's $2500, and the 10y stays roughly where it is, you would meed market participants to think inflation is going to average 3.94% over 10 years. Seems like a reasonable rate to us basement dwellers, but do you think CBs would have to act before it gets there? Perhaps that would just push down the 10y and have the same result. Thoughts?

There are a couple of charts I'll post in reply.I've still got to take in some of the nuance here and it's late and I'm kankcered for this level of thinking.My instinct says it's about the trend rather than the nominal levels(although they appear to line up for periods qutie nicely.).

But please note with this first one that the key thing to note is the inflexion points where trends change line up quite well.Peaks and troughs etc.

May 06,Nov 08,Nov 09,Dec 13,Jul 16,Sep 18.Looking at this it does hint at gold heading higher(Decl:but then I'm positoned for that so dyodd).

The big issue for me is to remember that people own gold for different reasons at different times.Pre )* it was about speculation post 08 is more about hedging CB solvency.

 

next chart is an old one highlighting the close correlation between copper and oil and showing the strenght of the long term gold trend.Again,this portends higher prices to my untrained eye

And here's the problem for commodity bears.And I say that as someone who like Russel napier has become an inflationista of late.

 

 

 

[Loki]

1 hour ago, DurhamBorn said:

.I see very few woke people who arent on the government payroll ,employed or welfare.Its doing massive damage

ESG is also infesting the oilies, I know we hope it actually works in our favour, but no sector is immune from some form of it

1 hour ago, DurhamBorn said:

The worry is that the BOE keeps printing to fund government even with high inflation.

How would you see that playing out, I assume my initial thought of GBP hyperinflation is too simplistic 

[sancho panza]

7 hours ago, JMD said:

Hmm, you point out that in future there may be 'no money to fix' the NHS, plus you mention flu this winter potentially crippling the NHS. Interestind as i've actually been thinking recently on such things and what may play out near term this winter. Especially given health chiefs are estimating 60,000 flu covid deaths this coming year, are we being softened up?... I wonder, is a clumsy cataclysm within the NHS being engineered? Off topic thoughts, not meant as a  discussion point.

corrected for you.

NHS is crippled already.By the demand as much as the supply.

7 hours ago, DurhamBorn said:

Instead of dealing with the hard political choices,the west,and Japan,who are actually leading this are merging more and more the monetary CBs with the fiscal governments.That is why you see governments throwing money at anything and everything rather than debateas the CBs buy the debt and monetise it all.

China is close to the point where it can use its own population to consume more,and that will force up prices in the west even more because western currency will fall in value relative.

I sometimes used to look at the reflation ahead and think the outcomes expected were maybe outliers,but if anything my models are likely underscoring the inflation and dislocation ahead.

For ordinary people, they are walking directly into a distribution cycle that would be difficult at it is.If you add one the  insane energy transition costs and maybe tax increases on things like council tax,its going to very nasty.

If we refer back to your previous psots on every household in India getting a fridge,that spells doom long term for the lifestyles of many in the West.Persoanlly I think we're heading into a period where we'll be competing more directly for resources that we've taken for graned fro decades ,like say cheap oil.ALl these greenies  think that it's a choice not to use oil,what if they can't afford to buy it? Adn what will they do when they find they can't live without it?

 

One of the reasons the US indutrialized so capably in the 1900's was the size of it's domestic market.what happens when the chinese decide to keep all the cheap tat for their domestic markets?

As ever,besides the basement dwelling communtiy,msot people are looking west not east

[sancho panza]

6 hours ago, Castlevania said:

The London riots were quite interesting. They were largely non-violent (I did see someone get punched in the back of the head for no reason, but that was it) and mainly kids out on the rob. No police present. 

The response was to use CCTV to arrest absolutely everyone they could identify stealing, be it as little as a bag of rice from Tesco, and put them in prison. It was very heavy handed, but a really good deterrent.

They were very lucky some kids werent burned in their beds iirc

[MrXxxx]

https://www.msn.com/en-gb/money/other/make-pensioners-pay-national-insurance-to-help-fund-social-care-says-sir-andrew-dilnot/ar-AAMf87g?li=AAwnS0s&ocid=mailsignout

 

Was it not our very own @DurhamBorn who postulated such a scenario about 6-12 months ago?

[Loki]

35 minutes ago, sancho panza said:

They were very lucky some kids werent burned in their beds iirc

A furniture store that was over 100 years old burned down too I think.  I went to pick up a motorbike with a mate a week or so after. 

[JMD]

3 hours ago, DurhamBorn said:

Inflation is RPI ish and yes a base increase.I got that from my best guess about how much dis-inflation there had been below trend.If they push ahead with the energy transition though i think it might be higher .I think China and Russia,but China has many more friendly actors in unis etc and a lot of this woke crap is coming from that area.I see very few woke people who arent on the government payroll ,employed or welfare.Its doing massive damage,but also the fact the government roll over on almost everything.The worry is that the BOE keeps printing to fund government even with high inflation.

I agree that China today does have the money wealth to bribe individuals/institutions, but I think it is Russia that has been working (woking!?) away at subverting the West for many decades... The below video is from 1980 and refers to strategies happening from the 60's....  perhaps the ex KGB spy is merely channeling Chomsky, and exaggerating in order to earn a crust from lectures, etc? However, I think he is broadly accurate and specifically correct in saying that subversion can only happen if the host country allows it to happen (my view is that Germany last century was responsible for inflicting a mass moral hemorage upon the West, and this along with the chaos inducing post ww11 post-modernist thought (which started in French universities), provided an open door for the types of subversion detailed in the video). Worth the hour duration time to watch I think.                                                                                                                                                                   

 

[Mapper]

10 hours ago, DurhamBorn said:

They are winning a fantastic war already though,because surely this woke and cancel culture stuff must be coming direct from their agents and plants across the west

They hardly need to use agents these days. Look how vehmently the youth of the west defend Tik Tok.

8 hours ago, Animal Spirits said:

A stronger Renminbi and more capital inflows into China. That would also depend on how much control the CCP is willing to release in its efforts to become less reliant on the USD.

It should also mean they are less able to implement mercantilist trade policy reflected in the large trade imbalance with the USA where as we know, it is mostly recycled into USD assets. Large surpluses are usually the result of supressed wages/domestic consumption relative to the productive output of the economy.

The Chinese economy also has the same problems as other countries, its built on near 300% debt to gdp.

Check out the channels episodes on the history of Afghanistan as well, The Graveyard Of Empires.

The shit they are pulling in the South China Sea is terrifying, but you mention it to most people and they say "Uhh?"

Objectively, I sometimes think China is playing a blinder. 

We will (might) wake up in a few years and China will own almost everything in the region and barely a shot fired.

[geordie_lurch]

9 hours ago, JMD said:

I agree that China today does have the money wealth to bribe individuals/institutions, but I think it is Russia that has been working (woking!?) away at subverting the West for many decades... The below video is from 1980 and refers to strategies happening from the 60's....  perhaps the ex KGB spy is merely channeling Chomsky, and exaggerating in order to earn a crust from lectures, etc? However, I think he is broadly accurate and specifically correct in saying that subversion can only happen if the host country allows it to happen (my view is that Germany last century was responsible for inflicting a mass moral hemorage upon the West, and this along with the chaos inducing post ww11 post-modernist thought (which started in French universities), provided an open door for the types of subversion detailed in the video). Worth the hour duration time to watch I think.                                                                                                                                                                   

 

Adam Curtis's film on such matters is very educational - iPlayer link at https://www.bbc.co.uk/iplayer/episode/p04b183c/hypernormalisation or YouTube version below

 

[reformed nice guy]

I remember in 2007/2008 the "cash for gold" adverts started to spring up everywhere.

I saw this one today:

https://www.dailymail.co.uk/money/saving/article-9794787/Should-look-Tallys-gold-linked-account-beat-inflation.html

[DurhamBorn]

12 hours ago, Loki said:

ESG is also infesting the oilies, I know we hope it actually works in our favour, but no sector is immune from some form of it

How would you see that playing out, I assume my initial thought of GBP hyperinflation is too simplistic 

We wont get hyperinflation,but we would get sustained high inflation.The UK is lucky in that we are very well placed for renewables.Scotland is the windiest place in Europe and there is a chance we will be exporting energy in the future.That wont solve the massive structural deficits the government is allowing.You only have to look at my close.I have 4 houses of retired police on pensions,2 pro single mothers,1 pro invalidity (those 3 are all renting from family members who bought the houses,all 3 ex council workers on pensions and getting the housing benefit).Most of the others work for the government or council.

[Castlevania]

11 hours ago, sancho panza said:

They were very lucky some kids werent burned in their beds iirc

That was one furniture shop in Croydon. 

I watched the shops in Clapham Junction get ransacked. It wasn’t violent.

Anyhow, the fact that everyone they could identify went to prison, I think has acted as a big deterrent for any future trouble. That kid with the Tesco value bag of rice got from what I recall two years in a youth detention place.