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

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An article discussing high natural gas costs. Why, they ask is the cost so high? Perhaps, one factor is that esg/environmentalists are busy destroying the oil and gas industry, creating higher prices. It does detail the need for necessary infrastructure and the proposed spending packages, but I wonder how much of that money will actually be spent on infrastructure instead of on pork barrel politics. It mentions the increased profits of oil/gas companies due to higher prices, but being the Ft it ends with how black families are suffering from the increased costs. But, this does underline the high costs that esg/environmentalists want for fossil fuels to make renewables competitive, will lead to increaed poverty for "wealthy" states and starvation and death for the rest of the world. The article does pump some companies, Nexans and Prysmian, but dyor.

 

 "    US natural gas prices have surged to more than $4 per million British thermal units, the highest since late 2018, a rare rally in a market that has been weighted by oversupply since the shale gas production boom started a decade ago.

What’s fuelling the spike in prices?

High temperatures are driving strong demand as Americans crank up their air conditioners to beat the heat. The National Oceanic and Atmospheric Administration, a federal agency, said last month was the hottest June on record in America, as a climate change-fuelled 1,000-year heat event baked the Pacific Northwest.

And there’s more hot weather on the horizon as a “heat dome” moves over Texas — as your Houston correspondent can attest to — and much of the US Midwest this week. (See more from Amanda below on the uneven toll the heat is inflicting on American communities.)

Typically, power producers would start switching away from gas and towards coal at these prices, taking some of the steam out of the rally. But as analysts at the energy investment bank Tudor Pickering & Holt point out, “coal generation has failed to pick up materially and gas’ share of the thermal stack has remained resilient”.

At the same time, supply has not surged on the higher prices in the way it has in recent years, when growth-hungry producers were quick to drill on any hint of higher prices. This reflects the new reality of a slower-growing US gas market, which has been transformed by a wave of consolidation (now happening in oil as well) and shareholder pressure to keep a lid on output. 

        “The market is searching for a price that will back off sufficient power sector demand or entice enough price-elastic supply to come down the pipe,” analysts at Energy Aspects, an industry consultancy, wrote in a note.

For now, that search seems to have found that prices are headed higher. The Henry Hub forward curve, the main price benchmark, is above $4 through the end of the winter, which would mark the longest sustained period above that price level since 2014.

What would be the fallout of one of the biggest natural gas price rallies since the shale boom began? A few areas we’ll be watching:

    While coal burning has not picked up yet in the ways some analysts had expected, it almost certainly will if these natural gas prices persist. The Energy Information Administration, a federal forecaster, expects coal’s share of US power generation to jump back to 24 per cent this year, from 20 per cent last, on higher natural gas prices. It could reverse a trend towards lower carbon emissions from the power sector and set back the Biden administration’s climate efforts.

    It will be another tailwind for US oil and gas producer finances, along with $70 a barrel oil, after last year’s epic bust. While it might be obvious to point out that natural gas producers will see a boost to their profits from higher prices, many often underestimate how much they can lift even predominantly oil-focused producers’ bottom line.

    Higher natural gas prices could also feed another data point into the great inflation debate. American industry has grown accustomed to some of the lowest energy costs in the world. Energy Aspects, the consultancy, says it does not expect manufacturers to pull back demand at these prices as the economic reopening gathers pace, but argues that increased energy costs “are likely to be passed on to end-use customers instead.”

Pressure on ageing power grids fuels blackout fears

Europe and North America face the prospect of serious and persistent blackouts in the coming years if countries fail to quickly rewire their ageing power grid infrastructure, according to the head of one of the world’s biggest cable manufacturers.

Power lines on both sides of the Atlantic built in the wake of the second world war are already well past their sell-by date. Now, as countries electrify sectors from transport to heating in order to tackle climate change, grids risk becoming overwhelmed.

    “The issue we have is that this power grid is 50 years [old],” Christopher Guérin, chief executive of French cable maker Nexans, told ES. “So, each year that goes by, you have a [growing] risk of power outages — blackouts — in cities.”

Making ever greater demands of today’s creaky American and European energy infrastructure, he said, is like forcing a clapped out car to drive at ever greater speeds — something is bound to go wrong eventually.
Column chart of Global electricity demand (MWh/capita) showing Electrification is causing power demand to soar
 

    Grids from Milan to Houston have already experienced significant disruption this year.

Per capita power demand has jumped from 1.4 megawatt hours (MWh) in 1975 to 3.5 MWh in 2019. As countries look to electrify their economies, that is set to climb again to 3.8 MWh by the end of the decade and 4.4 MWh by 2040, according to Nexans.

In the US, the Department of Energy has estimated that power outages already cost the economy up to $70bn annually. President Joe Biden has blamed “chronic under-investment” in the country’s grid infrastructure and proposed spending $100bn to upgrade the system as part of plans to shift America to carbon-free power by 2035.

But it is still unclear how much of Biden’s wish list, which includes tax credits for renewables and transmission lines, will make it into a bipartisan infrastructure package set to be finalised this week.
Bar chart of Average grid age (years) showing Electric grids in Europe and North America are well past their prime
 

    America’s rewiring plans — coupled with similar efforts under way in Europe as part of Brussels’ Green Deal programme — is good news for cable makers like Nexans and its Italian rival Prysmian.

“When you analyse the Europe Green Deal investment, when you analyse Biden’s ‘Build Back Better’ plan, when you go into the details of what Xi Jinping is doing in China in regards to the carbon neutrality objective in 2060 . . . when you sum all that, we are at the beginning of a huge electrical revolution,” said Guérin.

The market for wire and cables today sits at around $100bn — about a quarter of which is in the US. By 2030 that figure is set to rise by more than half to $156bn, said Guérin.

Over the coming decade, Nexans plans to divest the parts of the company not focused on electrification — shedding the 45 per cent of its business that makes cables for sectors like automotive and telecoms — in a bid to focus all of its resources on capturing this rising demand.

“All countries need to massively invest in the renewal of their power grid,” he said. “It will be massive in the next 20 years.”
 

[DurhamBorn]

2 hours ago, Castlevania said:

Saw that. Unilever were hit last week too. Suggests that they don’t have as much pricing power as they may have alluded to. 

Exactly,and its push inflation so they cant pass it on quickly.Brands have more cost inputs so inflation hits them harder than own label etc.Lots of excuses,one offs etc claimed,but they are running to stand still on very high ratings.

[DurhamBorn]

2 hours ago, JMD said:

But why do you think big dominant players like Reckitt and Unilever don't have pricing power? Is it because their brands are expensive and customers are moving to cheaper products? Or maybe 'temporary'(?!) supply chain problems? ...Very interested to understand why, because would be valuable knowledge to apply to other companies that also maybe can't adapt their businesses to the looming inflation pressures.

Push inflation cycle.

Imagine a tin of beans.

The company has to pay the increased cost on the beans,the transport,the paper in the label,the workers,the steel can,everything before Tesco pay them in 3 months.

The opposite happened for 38 years.

The potash company though is the de-complex end and first,they have very little input inflation,they get the price uplift first.Apart from maybe the oil company selling them the diesel and power and the telco selling them their comms.

3 telcos in your market all increasing prices,200 bean sellers squeezing every last bit of margin.

 

 

[wherebee]

2 hours ago, Castlevania said:

In many cases you’re paying a premium for the perceived quality of the brand. At one time you may well have paid a premium for a much higher quality product. However many consumer goods companies have spent years reforumlating their products by removing ingredients with cheaper alternatives to boost their margins. 

 

This, in spades.  Think of something like marmite- utterly unique, irreplaceable with other brands, strong loyalty, I know if the price went up 10% I'd still pay.  And before someone says it, Vegemite is not fucking marmite.

Now think of jaffa cakes.  Generics available.  Ingredients watered down over time.  Sizes changed.  If prices rise, for each penny some people will stop buying.

premium brands originated in victorian times where cheap brands were full of not nice stuff and sometimes even stuff that might kill you.  Very much like Chinese products now.  People bought the premium brands for quality and uniqueness.  Now that quality is gone...

[Starsend]

46 minutes ago, DurhamBorn said:

Push inflation cycle.

Imagine a tin of beans.

The company has to pay the increased cost on the beans,the transport,the paper in the label,the workers,the steel can,everything before Tesco pay them in 3 months.

The opposite happened for 38 years.

The potash company though is the de-complex end and first,they have very little input inflation,they get the price uplift first.Apart from maybe the oil company selling them the diesel and power and the telco selling them their comms.

3 telcos in your market all increasing prices,200 bean sellers squeezing every last bit of margin.

 

 

A lot of companies are going to suffer going forward with their over-priced brands. They're going to struggle passing on costs and consumers are likely to have less money to spend as well.

Aldi salad cream, Bramwells, I can't tell the difference between that and Heinz. Aldi 55p, Heinz £2+ in most places. That's a staggering difference.

Some stuff though is not as good. Their brown sauce is so bad I threw it away and will pay the premium for HP.

Sell Heinz!

[Harley]

4 minutes ago, Starsend said:

A lot of companies are going to suffer going forward with their over-priced brands. They're going to struggle passing on costs and consumers are likely to have less money to spend as well.

Aldi salad cream, Bramwells, I can't tell the difference between that and Heinz. Aldi 55p, Heinz £2+ in most places. That's a staggering difference.

Some stuff though is not as good. Their brown sauce is so bad I threw it away and will pay the premium for HP.

Sell Heinz!

Reminds me of that "shop for less" tv programme that's been running for years.  

[Boon]

24 minutes ago, wherebee said:

This, in spades.  Think of something like marmite- utterly unique, irreplaceable with other brands, strong loyalty, I know if the price went up 10% I'd still pay.  And before someone says it, Vegemite is not fucking marmite.

Now think of jaffa cakes.  Generics available.  Ingredients watered down over time.  Sizes changed.  If prices rise, for each penny some people will stop buying.

premium brands originated in victorian times where cheap brands were full of not nice stuff and sometimes even stuff that might kill you.  Very much like Chinese products now.  People bought the premium brands for quality and uniqueness.  Now that quality is gone...

 

Tesco sell this though:

https://www.tesco.com/groceries/en-GB/products/276976038

The discount to the brand is not that big though (Marmite is £2.49)

Like I said in condiments the effect is more pronounced
ie: Heinz Tomato Ketchup: £2.00 for 550g, Tesco own brand: 65p for the same size or 43p for the same version in the 'Value' brand

The ingredients lists for these products aren't that long - maybe 5 or so ingredients, is there such thing as better quality salt, or sugar? 

People can easily conflate the taste of familiarity for quality. Like most people I grew up with Heinz tomato sauce so I can tell the difference; quite subtle but a difference nonetheless. However, it isn't worthy of that massive price premium. 

This sort of shit must apply to loads of household products where we choose brands over non-brands, but eventually declining real incomes must really affect their pricing power.

 

[Lightscribe]

2 hours ago, wherebee said:

This, in spades.  Think of something like marmite- utterly unique, irreplaceable with other brands, strong loyalty, I know if the price went up 10% I'd still pay.  And before someone says it, Vegemite is not fucking marmite.

Now think of jaffa cakes.  Generics available.  Ingredients watered down over time.  Sizes changed.  If prices rise, for each penny some people will stop buying.

premium brands originated in victorian times where cheap brands were full of not nice stuff and sometimes even stuff that might kill you.  Very much like Chinese products now.  People bought the premium brands for quality and uniqueness.  Now that quality is gone...

Like Marmite, Bovril (I like both) is another Unilever product. I think this will be a good example to keep track of.

They already tried removing the beef stock from the recipe some years back which was met with consumer uproar.

This is the type of product to watch

a) It’s costly, beef bones and stock make up 50%. Beef will go through the roof with inflation (feed, costs, rearing time etc)

b) Beef (and red meat) as a product will be on the environmental no go zone. Virtue signalling free to be carbon, health and fat taxed to oblivion.

c) Costs £4 a 250g jar at co-op, only £3 at Iceland. I suspect the price to go up massively with salt tax added too. 

I suspect Unilever will try again to remove the beef stock element (which they may drop to a trace amount in percentage), but this time it will be with the backing of the consumers.

‘Think of the damage you’re doing to yourself and the environment buying such a product you planet killing cretins! We’ll raise the price in line with the salt tax in order so you buy less of it. We’ll then remove the beef stock for the sake on the environment. The price however will have to regrettably stay the same.’

[Hancock]

1 hour ago, Lightscribe said:

I suspect Unilever will try again to remove the beef stock element (which they may drop to a trace amount in percentage), but this time it will be with the backing of the consumers.

M&S done the same with these and i stopped buying them, pastry with beef gravy just doesn't do it for me.

[Harley]

Talking of brands, Aldi do make me smile.  Bought a bottle of very nice fizzy white "Prospero" for a special picnic!  Better than that fake.....ha, can't even remember the name, just keep thinking "Prospero"!

PS:  Ah "Prosecco" or summing like that!

[Harley]

Trouble with brands is the Tesco delivery folk have got us sussed.  Every now and then they substitute Tesco's own for a brand and we're hooked.  Started with chips and was Bains rolls last week!

[DurhamBorn]

2 hours ago, Hancock said:

M&S done the same with these and i stopped buying them, pastry with beef gravy just doesn't do it for me.

I make all my own home made pies.Mostly chicken and steak mince ones.I get the mince when reduced etc and can make a big pie for around £2.20 with onion,some mashed potatoe nd home made pastry.Works out about 950g with 500g of mince.I wondered how the shops could make a profit selling the 700g ones at £2.20 until i read the ingredients.Beef 18%,so 140g of mince to my 500g and likely terrible quality mince while i use the 5% fat steak mince.

 

[Harley]

Had gyros tonight using left over Sunday lamb (small joint will do four meals for two).  Went easy on the lamb but added home grown courgettes and some red onions, etc with feta (was upgraded to "authentic" Greek by the Tesco delivery folk).  Chips dusted with paprika and a freshly picked home grown salad.  Home grown strawberries for afters.  People seem to eat too much meat - much prefer padding out a little bit with lots of nice veg.  The Italians get the right balance (compare theirs with a Brit spag bol).

[Harley]

13 minutes ago, DurhamBorn said:

I make all my own home made pies.Mostly chicken and steak mince ones.I get the mince when reduced etc and can make a big pie for around £2.20 with onion,some mashed potatoe nd home made pastry.Works out about 950g with 500g of mince.I wondered how the shops could make a profit selling the 700g ones at £2.20 until i read the ingredients.Beef 18%,so 140g of mince to my 500g and likely terrible quality mince while i use the 5% fat steak mince.

 

Or use tinned chicken in white wine sauce from my prepper store, in filo pastry to avoid the staurated fat in (good) pastry.  Best for filo though is left over or home grown veg with pesto and feta!  I just can't get buying prepared food.  The only "E" in our family is "E, that was good"!

[MrXxxx]

6 hours ago, wherebee said:

And before someone says it, Vegemite is not fucking marmite

Agree...although have you tried the Aldi own brand Marmite?....I couldn't tell the difference.

[MrXxxx]

20 minutes ago, Harley said:

The only "E" in our family is "E, that was good"!

:-))))

[planit]

So glad we managed to shrug off all that serious graph based analysis to relax with some recipes and 'my mince is more manly than yaurs' chat.

 

[ThoughtCriminal]

Efficacy peaks after only two months, isnt preventing infection or transmission at anywhere near the level trial claimed. 90% efficacy my fucking arse. 

 

Now this. 

 

These "vaccines" are a fucking disaster. 

[JMD]

On 26/07/2021 at 16:08, Pinkpanther said:

Macrovoices - I think it ws 3 weeks ago, Vickor Shvets seemed to be bang on what Durhamborn has been saying in terms of deflation/inflation and

change.  https://www.macrovoices.com/989-macrovoices-279-viktor-shvets-the-inflation-deflation-pendulum
It was so interesting - I bought his book and will post in the Library when Ive finished,

Having beeing following the covid thread since the beginning - I think that Covid/fiscal policy and the shift to digital currency are totaly linked.
The Fiat collapse that may happen in the next decade is now just a matter of time. There are a lot of thread on this forum that are interlinked.

Thanks for the open discussion and sharing of Ideas.

 

Wow!! That's a great macro voices podcast. When an investment banker of over 40 years says: 'The private sector will never again walk alone unnasisted', you know the guy is predicting serious change. And indeed he does have many other deep and rather dark thoughts about the next couple of decades ahead. I do think ill be buying his book... but I'll be reading it during daylight hours lest it give me nightmares!!

[JMD]

10 hours ago, Boon said:

I think the notion of brand equity is quite a hard one to really measure, and for some brands it can quickly change.

Hellmans Mayonnaise for instance for Unilever, a solid enough brand which people happily buy. I must admit for sauces I did this out of habit.

I wouldn't buy a branded tinned tomatoes and pay 2x the price over own brand, because to me there is no real difference.

Started doing the same with condiments, and it's been the same. OK a slight difference but nothing which says I should spend double on one.

I would guess that declining real incomes means that trade-offs will be made and these kind of premium brands are first in line. It doesn't have the emotional attachment of say alcohol brands, or something like Coke. 

Agreed. Western consumerism and branding, along with advertising propaganda are pet hates of mine. Though I am not perfect... and so you will need to pry my Haywood's Piccalilli from my cold dead hands!

[Harley]

Re.  Brands.  Just to mention many large companies only have positive net asset values thanks to their intangible asset valuations, brands often being a key component of such assets!

[Loki]

1 hour ago, ThoughtCriminal said:

Efficacy peaks after only two months, isnt preventing infection or transmission at anywhere near the level trial claimed. 90% efficacy my fucking arse. 

If that is the only long term "side effect"/bad news about them I will be happy... Immediate Clots/Bells Palsy etc etc etc notwithstanding. 

[sancho panza]

On 24/07/2021 at 15:50, DurhamBorn said:

@sancho panza its funny you mention falls,because thats what half the calls my partner responds to are.Its when they press their button etc.Usually two respond to a fall because one really struggles to do it well,and not at all for obese people.They are so short staffed they have been sending them on their own for falls.One woman,very very experienced 61 years old pulled her back,but carried on working.Next shift the supervisor phoned her 3 times while she was heading to her list of calls to divert to others.Her attitude was so bad towards her she told her to forget it,she was coming back to the depot then going home,and she did.Shes now on the sick,and i doubt will return,shel do 6 months paid sick and leave.

There is simply not enough reward for work,and worse not enough difference between working and a single mother with two kids on welfare.Furlough etc has opened peoples eyes to how much they are giving up of their life for little or no reward.

Twoissues you highlight.

Firstly,the falls.Social care is a very expensive business.People think it's simple going around and picking up some old Duchess off the floor but it's actually quite often a complex problem that needs some kit.Lifting anyone without lifting aids invites bad back issues,periods off sick.Particularly where patients are obese.This isn't a pulbic sector affliction either,much as people like to think it is.Bad backs are a serious problem in social care.

Supplimentary point to that is that is that there's tipping points in all businesses where all of a sudden systems go from coping to not coping at all in a short timeframe.NHS is seeing that atthe minute.

The second more important point on furlough, highlighted in bold is really a summary of where we are.Imagine being a brand new paramedic on the bottom of band 5,£25k p.a or net pay £1600pcm.You work weekends,nights,lates etc and you take home the same as you would on furlough...............people are doing the maths and watching as people who do nothing pick up more a month in take home.

 

 

On 24/07/2021 at 21:23, MrXxxx said:

Likewise @CP, but at the moment we don't even have the mobility...and with Brexit we have lost the right of residence across the whole of Europe!

That's like arguing that a move to another prison will be a step to freedom.

[JMD]

1 hour ago, ThoughtCriminal said:

Efficacy peaks after only two months, isnt preventing infection or transmission at anywhere near the level trial claimed. 90% efficacy my fucking arse. 

 

Now this. 

 

These "vaccines" are a fucking disaster. 

So even the 'vaccine brands' are not a patch on what they used to be!?!

[sancho panza]

On 26/07/2021 at 14:23, Froggy2000 said:

https://market-ticker.org/akcs-www?post=243059

Apologies for the slight thread derailment but it ties in closely with nuclear being the long term threat to the oil majors.  Would make green investments / bonds even more of a calamity too if this technology plays out as hoped.

I like Karl's writing style too 😄.

Market ticker takes me back ......

On 26/07/2021 at 18:20, Harley said:

Anyone invest in Japanese stocks?  Quite a few cyclical stocks appearing on my screener this week and are also in the oversold zone on the weeklies.  A few have pinged buys on the weekly but most are not there yet but are strengthening.  However the monthlies are still overbought.  So pull back or major change in trend?  IMO, looking at past moves, any upside from overbought are usually limited so on balance I'll wait to see if we get a grind lower.  Note the VJPN ETF itself doesn't show this (such are trackers!).

 

Japan Tobacco and a couple of their telecom stocks are worth a nudge(although the latter are abit pricey)

11 hours ago, Castlevania said:

There are own brand substitutes for most of their products. If your input costs are up by 10% it’s a big ask to maintain your margin and also put the selling price up 10% without taking a sales hit when there are cheaper substitutes available. 

In many cases you’re paying a premium for the perceived quality of the brand. At one time you may well have paid a premium for a much higher quality product. However many consumer goods companies have spent years reforumlating their products by removing ingredients with cheaper alternatives to boost their margins. 

I think you need to pay attention to the brands that dominate a sector and where people are unlikely to seek substitutes when faced with a price hike and so can pass on their higher input costs.

This is the issue and why I avoid the sector like the plague. I well remember Karl Denninger's 08 warnings about margin compression.As you say,the brand leaders spend a fortune trying to cut costs but maintain a differential with the own brand stuff.

Mrs P is a food scientist and she says the own brand supermarket products are really pushing the big boys hard.

Also as dispoable income shrinks for working age hosueholds,they will drop down to cheaper brands.Makes sense.Bleach is bleach.