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

9.2k · August 2, 2021

Recent Macrovoices podcast transcript ,interview with Bill Blaine really exploring a few thigns discussed here,particularly the distinct possibility that we could end up with the worst of both worlds as a credit deflation runs alognside price inflation.

One of my little bugbears,is that aside from this thread,the bulk of what gets written about inflation/deflation is written as if they're mutually exclusive,that you can't have the two together,when actually credit systems and commodity prices do often over time go in different directions

I've just reread it to do the bits in bold and it really brings home how good this thread has been , and how prescient some of the commentary has been too under @DurhamBorns stewardship.It's like this Bill Blain is a paid up basement dweller.....Deflation/Inflation/Stagflation,failures of moentary policy post 2009,financial asset bubbles,gold,the drive for real assets,ESG failings,CHina/USA cold war......etc etc

Apologies to the LPP,highlights for skim readers.

https://www.macrovoices.com/guest-content/list-guest-transcripts/4305-2021-07-29-transcript-of-the-podcast-interview-between-erik-townsend-and-bill-blain/file

Podcast

https://macrovoices.podbean.com/e/macrovoices-282-bill-blain-consequences-of-secular-inflation/

Bill Blain: Consequences of Secular Inflation July 29th, 2021

Erik: Joining me now is Bill Blain, strategist and head of alternative assets for Shard Capital,
and probably better known as the author of Blain's Morning Porridge. One of the most intriguing
investment blogs on the internet. Bill, it's great to have you on as a first time guests. I've been
asking everybody about inflation. Janet says it is transitory. I think my favorite quote that I've
heard so far is World War II was transitory. What do you make of this transitory argument? Is
inflation here to stay? Is this a secular phenomenon? And what does it mean?

Bill: Yeah, I rather the opinion that inflation is not only here to stay, but the most significant
thing that's going on is we have long term inflation is now being imported into the real world
from distorted financial assets. Everybody tells me that there's no inflation out there. And what
we're seeing is just a transitory spike caused by supply chains breaking down, and things like
the chip shortage and people who are anticipating a faster recovery. But what we're really
seeing is all the inflation that's been generated over the last 12 years of monetary
experimentation, quantitative easing, and buying back bonds and keeping interest rates
artificially low, that's generated tremendous inflation in financial assets. And that financial asset
inflation is no creeping into the real world.

So you're going to see a whole series effects inflationary moves that occur as a result of that.
Plus, I think we're also going into a very different world that is not going to be one where you
can easily, simply brush off inflation effects as transitory. I mean, let's just think for one second
about some real world events that have just occurred. Like all these climate disasters we've
seen in the last month, they cause real costs. These costs have to be paid from somewhere.
And that is going to be inflationary in its own right. So I think we really have moved into a new
world where inflation is going to start really impacting bottom lines again.

Bill: Okay. Well, that is a very interesting and intriguing perspective. And I think he's probably
right, because, you know, we've got effectively a deflationary environment that is caused by
ultra low interest rates. I was asked a question recently about, what do you think about Europe
keeping interest rates lower for longer? And I turned around and said to answer that question
you need to understand what's happened to Japan. For 20 years, they've had ultra low interest
rates and what has been the effect, a deflationary economy. But we still have this inflationary
backdrop to the global economy and you can't separate the two. Now, it's not necessarily a
Japanese thing. But I think we are going to experience multiple different things going on. And
the big word that scares me more than any other is stagnation. Now, I grew up in the 1970s and
80s, in the United Kingdom, where we suffered incredible stagflation during the 1970s that
caused all kinds of social problems where you had massive inflation and jobs collapsing, it didn't
matter what you did two interest rates, you couldn't change that.

And so although we're talking about an inflationary threat, you also have this secondary effect
that could be deflationary in certain markets. I think copper is an interesting one to talk about
there. Because we clearly saw copper prices getting bid up in anticipation of a very strong
recovery to the pandemic. Everyone piled into copper expecting that copper as effectively a
proxy for tech sales would work. Same thing happened in lumber, because of course, we saw
the most incredible market in lumber. Again, people are anticipating recovery. And we will see
inflation as a result of that it's occurring at the moment in the shops, you try and buy a fridge
and it's temporary Sat higher because of the copper price spike, that copper is already down.
What if we get a situation where you've got real inflation in prices, but you have a deflationary
economy. That's a classic recipe for this stagflation threat.

Erik: Bill, you and I grew up in the 70s. But we were kids at the time. And frankly, the guys that
were working in the industry, and were around in the late 60s, when the onset of secular
inflation began, they're all retired. And one of the biggest things I think about is okay, who's
going to be in charge of rounding up all the guys that have been through this before when this
secular inflation really hits the tape? What's the finance industry gonna know what to do?
Because I think everybody who knows is gone or retired.

Bill: This is one of the things that really scares me because the reason we're in this
environment at the moment, is a game of consequences. Everything that happens, everything
you do today will have a consequence tomorrow. And the big issue for central banks for it as
they we are talking about. Central banks have been experimenting with monetary policy, since
the great financial crisis began in 2007. And in 2009, they came up with this brilliant idea that
they could kickstart the economy with ultra low interest rates. And they would get money to flow
into the economy by buying back bonds, which means that investors would sell their bonds and
then use that money to invest in the real economy. But that's not the way that trading works. We
all know what investors did was a curse. They sold their bonds to central banks, and then

bought more bonds to sell to central banks. And they used money from that to buy more bonds
to sell to central banks. And this is what caused massive inflation.

In financial assets, the path of that happening was very simple. Interest rates started to fall. As a
result, people saw that the yields and bonds were unsustainably low for their investment
purposes. So they started going what we call yield tourism. And they started buying equity.
Remember, equity is a much higher risk market. And they started buying so much equity, the
equity market went up, and the dividend yields and equities also came down. That has been the
consequence of ultra low interest rates, massive inflation, in financial assets. But here's the
critical thing that started 12 years ago. Now, 12 years in financial markets is an incredibly long
time. The result is there's practically nobody under the age of 35. In this city, in what we in the
UK called the city but the world calls global finance, who understands investment markets,
where it's not completely normal for central banks to be repressing interest rates and distorting
yields through their monetary experimentation and quantitative easing.

So every single fund manager under the age of 35, thinks this is perfectly normal. And that's
why when I'm out doing my job as an alternative asset investor, I see a great divide between
those of us over 40 and those below 40, who've got completely different perspectives on what
value propositions are. If you're younger, you tend to think that value is all about the price set by
the market as in a distorted market for as anybody over 40, we're tearing our hair out, and we're
going, what is going on here? How can we accept interest rates being so distorted? Look at the
effects, look at the overvaluations, look at the crazy stories that are created. So that point you
just made about where are all the old guys. Well, you know, those of us who are who've been
around the block a few times and the first time I traded treasury bonds back in, I think 1986. I
think we were talking then about the beginning of the big bull rally in bonds. Where the year
before traders were frightening me with stories about how yields have been 18%. And they were
dominant double digits still when I started trading, and now, where are we on the 10 year? 1.2
or something like that. This is a completely different world. And there are very few of us left who
remember what it was like.

Erik: The theory that I've had about this is when we get runaway inflation and of course, a lot of
people would say that's not even in the cards, that deflationary backdrop is just too strong. It's
never gonna happen. I don't claim to be smart enough to know when it's going to happen. But
my argument is this. If we have a runaway inflation, I think that suddenly the central bankers
hands are tied because all of a sudden the norm of the new normal that you're talking about,
which is hey, whatever goes wrong, they're just going to print money and that's going to fix it.
When you get run out. inflation, you can't do that anymore. And if the central bankers hands are
tied, I don't think the industry knows what to do. Am I crazy to think that? And how realistic is it
that this eventually gets to a runaway inflation kind of scenario?

Bill: You know, it's a very interesting question to ask. What instruments are there for actually
controlling inflation, the typical way you would control inflation would be select interest rates
rise. But if you were to do that today, the effect would be a massive collapse in financial
markets, which are now completely addicted to the opium of cheap money. So you would end up creating massive defaults, massive job losses, complete loss of confidence and trust in the
economy. But then how do you stem inflation reverse screwing around? Well, you got to then
think about what creates inflation. And you know, inflation is not just oil prices going up, as it
happened in the 1970s. Inflation is not just a drought season putting up the price of bread.
Inflation, this time is going to be a mix of very real inflation coming in from events like I
described earlier, some of the costs we're going to have to bear now for extreme weather
events, the wildfires in California, the flooding in Germany, and China, all these things. But also,
we'll see inflation seeping in from financial assets. And the way that's happening, if you take a
look at what hedge funds are doing today. Hedge funds are not buying treasury bonds, and
they've stopped bothering buying things like, you know, stocks and shares, they're no buying
real assets.

Just earlier today. I mean, the reason I'm up at Edinburgh, Scotland today is I'm visiting my
mother. And I went and did the shopping for her this morning at Morrison's. Morrison's is one of
the big UK supermarket chains. And you know what, it's just been acquired by a group of hedge
funds, because it's a real asset. And it's been acquired at an incredibly high price that nobody
thought Morrison's was worth, no one else was going to bid that for it. But that's an example of
inflation in the real world, pushing up the price of real assets. Now, eventually, that gets down to
the penny in people's pockets. And that's when we really start to see inflation occur. That starts
to change the way that people behave in an economy. And I think that's already beginning.
You've seen some incredible moves in house prices. In the USA and the UK. The US housing
markets just had a bit of a blip from the last numbers. But here in the UK, house prices are now
completely out with the scale that normal people can think about buying, all they can do is go
and rent. And that's another example of inflation because that means the money they were
going to spend on buying a house, and now they can't ever afford a house is just money they
spend on consumption. And if people are consuming lots, well guess what that causes real
inflation as well. And that's all driven by ultra low interest rates.

Bill coming back to the inflation theme, You know, a lot of people, myself included, have really
looked at gold as an inflation hedge. Frankly, there is a counter argument although I disagree
with parts of it. You can't argue that gold is not performed as well as some of us thought it might
and cryptocurrency seems to be at least the younger generations favored currency debasement
and inflation hedge. Has gold become your grandfather's Oldsmobile, or is it more likely that the
crypto guys just don't realize the risk they're taking?

Bill:And yeah, it's a fascinating question. I think there is definitely a behavioral link between the way
that people understand gold and what they think about cryptos. And that's maybe worth talking
for a second. Let me come straight up and say that I think cryptos are a complete and utter
scam. I can see absolutely nothing that a cryptocurrency can do. The currencies don't already do better and gold doesn't already do better. And you know, it's dead easy to say, enjoy
yourself, but you being poor. But, there's no real fundamentals behind it. When the pandemic
started, and I immediately predicted a massive economic shock. Even before we started
lockdowns, one of the first things I did was transfer a large portion of what I was doing into gold
in the expectation that we would see gold not only as an inflation hedge because we expected
supply change eruptions, but also because I could see it being a flight to safety hedge as well.
So I put cash into portfolio cash into gold and into treasuries and UK Gilts, that's the UK
government bond market.

And I've been kind of surprised at the way that gold has not performed better, because you've
got two classic gold pluses going on, which is uncertainty and inflation. But yet people haven't
gone for gold. And I sort of look at the crypto thing. And let's be honest, you know, cryptos, you
know, for all the trillions, they talk about being invested in Coinbase, and all the other
exchanges is still a fraction of the gold markets. Yet it has got people thinking, are there
alternative ways to hedge? I thought it was very interesting that you mentioned your
grandfather's Oldsmobile. I mean, one of the things I collect is art. And unfortunately, I bought
all the wrong things. They haven't gone up in the kind of way you want, because you just don't
know or understand how the fashion market for what is going to become big in art is going to
develop. And I suspect that's also slightly true of what's going on in crypto because there are so
many different choices now.

Erik: Bill, you run alternative assets for Shard Capital. Now, from everything that you've said,
I'm assuming that you're focusing more on real assets, not just gold. But other things like real
estate and so forth. You know, real estate is not exactly cheap. It's hard to be a value investor,
and also focus on real assets right now. Where's the value or where is the hedge if you want to
be in the real asset market? Seems like nothing's cheap.

Bill: Okay, well, the real asset markets are absolutely fascinating because they really began in
the wake of the great financial crisis that began in 2007. If you remember back then, what we
saw was banks under enormous pressure. And the regulators and central banks very quickly
changing the rules on how banks could use their capital. And effectively over the next couple of
years, we saw that banks stopped being lenders. Yeah, that's what I said, banks effectively,
we're no longer lenders, they were simply brokers. And what would happen is the banks would
go and originate an asset. And then they would find real money to invest in that asset to finance
it. And you saw a number of the big pension funds, insurance funds, and particularly smart
hedge funds, who saw the opportunities in private debt and private equity. And of course they
want and while you're getting 1%, for investing in US Treasuries, you can be getting a very well
constructed risk in private debt, yielding a proper interest rate, say, 6-7%, and often much
higher.

So I now spend most of my and I spent my whole career in the bond market, before I got
involved in developing the private asset, private debt, and private equity markets as the
alternative asset sector. And what we look for is assets that are going to create really attractive
yields, and are secured on these assets. And some of them we've learned some frightening lessons about aircraft is a great one for instance. Before the pandemic we assumed the aircraft
would retain their value for years. And you could predict exactly what they will be worth in a few
months time and a few years time. Therefore, you could create secondary markets. Therefore,
you could create valuations, and you can sell them based on resale value, and even the scrap
value down the line. That's all come to a crashing halt. But other assets, and you mentioned
property. You know property is a fascinating market, especially here in the United Kingdom,
where residential property has been on an upward curve since before America was even
conceived. I mean, we're talking about 400 years of UK residential property history. And every
time we have a crash, within two or three years, that crash will have been corrected, and the
market will be slowly edging back up.

But what we've seen in the last couple of years, is again, people understanding that the returns
that they get from distorted yields in the bond markets and other financial assets means that
they need to buy real assets. And of course, property is the one they've gone for. So you've
seen UK property not rising 2 or 3% per annum. But 9% was the number that we had yesterday.
You know, 9% per annum just means property is running out of the affordability level for most
people. But it's a great asset for those that have ready cash. And that money is still piling in,
meaning the price is getting higher and higher. Now that has a number of knock on effects. It
means that there's much greater demand for rental property, which again spells demand for
people to buy rental properties, therefore pushing up the price again.

But it also means that people give up trying to afford. that changes their behavior, if they can't
afford to ever buy their own home, why bother working so hard? Why not just take the
government furlough scheme or just throw yourself in welfare for the rest of your life. So you
know, you got to be careful. All these distortions, the consequences I talked earlier about, they
have long term effects, and they're changing the behavior of populations. So I think it's very
significant when you see house prices accelerate beyond the reach of the bulk of the
population. And this would then lead us on to another of my favorite topics, which is the
pernicious effects of wealth inequality. And that's something that I don't think is given enough
attention, when you see the depth of opportunities available to many people now. And the fact
that the world is increasingly becoming divided into haves and have nots. Now, that may not
sound terribly capitalist, but you know, the history of Europe and tells you that when people
don't get good opportunities, they tend to get rebellious and in France, they revolt.

Erik: Bill, I think wealth inequality is the biggest challenge that we face as a society and what
scares me the most is uh, you know, I think everybody is talking about it. The problem is, people
are talking the loudest about it have solutions that I don't think are really solutions. I don't think
they really solve anything. I think they'll actually make it worse in the long run. But boy, they sell
a heck of a lot better than my solutions do. What do you make of this whole populism trend and
it seems to me at least in the United States, like this whole MMT phenomenon is really gaining a
lot of steam. There's a lot of political support. There's a lot of public support for more nanny,
state government handouts, and so forth. And it seems like Stephanie Kelton and the MMT
crowd have the solution for how we're going to print up all that money without having to tax
anybody and spend a lot of money and don't worry, it's not gonna be inflationary.

Bill: Okay, well, look, the only way to answer that question is to look at the bond markets and
understand exactly what sovereign bond markets are, by sovereign bond markets. I mean, let's
keep it to the US and the UK. Both are sovereign nations, and they have financial sovereignty
over their money supply, or they have monetary sovereignty, let's put it that way. There is no
way that the UK issuing Sterling Gilts or the USA, issuing dollar bonds, is going to go bust.
Whatever happens, they can press the printing press, and they will repay in dollars or Sterling,
the debt that they've issued. That is the basic premise of new monetary theory that you can go
out and print as much money as you want. The problem then lies in foreign exchange. And if
people lose confidence in the USA, and not in its ability to repay, and they know it will repay. But
they lose confidence in the USA, because they're concerned about the political situation, or
they're concerned that it's losing the war with China, whatever. Then they're going to start
selling dollars, and that's going to be massively inflationary, again, coming back to our early
chat about inflation.

And that's the big risk for any monetary sovereign nation, that although they can always repay
their debt. If they lose confidence in the currency, then they will face massive inflation which
damages the nation. That's the simple equation. At the moment, every single nation in the world
is involved in a massive money printing binge, to afford the costs of the pandemic that's
happening everywhere in Europe, in Asia, China, USA, UK, everyone's printing money, Latin
America, everyone's printing money. When that stops, then people are going to start paying
attention to which countries do you actually have confidence in. Now, what countries would you
have confidence in? Would you have confidence in a country that is confident in itself in being
able to continue printing money to support the growth of the economy or would you lend the
money to an economy where the government has decided to embark on crushing austerity,
where they're suddenly cutting the money that was supporting the economy, putting companies
into bankruptcy causing massive social tensions.

Now, the conventional wisdom is that any responsible government will avoid overspending. But
in that example, I've just quoted to you, it looks far better that the government continues to
spend to even open the economy, rather than creating an austerity situation, which is likely to
fuel further wealth inequality. Now, wealth inequality is very important, because what we've
seen over the last 12 years of monetary experimentation is very, very simple. If you own
financial assets, stocks and shares, you have gotten phenomenally richer, because that's where
all the inflation has been. And if you didn't own these things, you've got much, much poorer.

And of course, financial assets are owned by the richest and society who have got far wealthier.
And when you see that these people are the ones who tend to pay less of their total income and
taxes, that causes massive resentment. Now, that is what's driving the populist agendas across
the US and specially in Europe. Funnily enough, although we have the same problems in the
UK, we're electing right wing governments. And the reason we're doing that is the sheer
incompetence of the left. And you know, sometimes, despite being a Scotsman, which makes
me naturally tending towards socialism, sometimes I wish that would continue. But this this
threat of rising wealth inequality, and more and more wealth being in the hands of fewer and fewer people who can afford to take hold of the economies. That is bound to create resentment
and that resentment will be far higher in any economy that tries to create confidence by
embarking on austerity policies.

So it's not an easy thing to simply say invest in nations that look to be the ones that are most
careful with their money and create confidence in their currency that way. You really need to be
looking at the quality of government. Which governments are actually handling the process best.
Now, the simple version of MMT that we can go and spend as much money as we work doesn't
take that into account. And if it's going to work, it's going to have to, and it really goes back to
the 1930s, when we first talked about the ability of nations to re-inflate through fiscal and
monetary policy. And I think it's going to be fascinating as we come out with a pandemic. Which
nations do it well, and which do it badly. And it's not just about social spending. And this is, I
think, is the big question for the USA. How is the USA going to make its economy fit for purpose
for the future, with the massive infrastructure spending. That's infrastructure and physical goods,
but also in goods like education to make the US fit for purpose for the next 100 years. If you
have political impasse, and I think it's that political impasse, that's the biggest threat to the USA
in the coming decade.

Erik: I want to move on to another big trend in finance, which is ESG, or environmental, social,
and corporate governance based investing. The idea of the owners of capital taking
responsibility to invest in a way that benefits society. Now I want to go on record in saying that
premise, I don't think there's anything more noble or better that I've ever heard in my life. So I'm
all for the concept. But frankly, I think this whole ESG thing is a bunch of baloney. I think that
what's going on here is it you know, it's very similar in my thinking to what we see in the whole
race inequality thing, We absolutely do have a race inequality problem, we have racist issues.
Still, it's amazing to me, we still have racism. But you know what? Burning stuff down is not a
way to solve racism. And it seems like ESG has got the same anger in terms of a lot of people
just want to do things to damage oil companies, rather than engaging in those extractive
industries and figuring out how to invest in making them better and making them less damaging.
What do you make of this and where is it headed?

Bill: Yeah, I, you know, as I've said earlier, I would probably count myself as the last living
communist in the City of London, in the being a Scotsman. I am slightly left wing, but I do
believe that this whole ESG nonsense is to use a quaint Anglo-Saxon word "bollocks" is just
absolutely incredible how it's taken over the way of thinking. Now, back when I began in the
markets in the 1980s, everything that ESG did, we did anyway. If you think about it, good
corporate governance was always one of the reasons you're invested in a company. You
invested in companies, because they were well run, and did what they said. And you invested in
companies because they added to the sum of human wealth by not only paying your dividends,
but made sure that they were going to be there next year to pay your dividends and pay your
debt back. So that ticks the environmental box. And socially you invested in companies that
treated their workers well, and made sure that everyone had the opportunities. And that's
always been true in investment. You don't need to have a checklist to do it. But as soon as you create a checklist, you turn that into bureaucracy. And the fastest way to slow anything down is
to bureaucratize the process. And that's very much what's happened.

Now I want to just share an example of recent deal that we've been trying to do here in the UK
that illustrates where ESG has gone wrong. Now at the moment, the UK is doing phenomenally
well building wind farms. But each wind farm that you stick out in the Thames Estuary requires
500 tons of steel. And to make that steel, the 500 tonnes of steel you need something like 250
tonnes of metallurgical coal, which you burn with the iron ore to create steel. Now, at the
moment in the UK, we import all our metallurgical coal from Australia, which costs massive
carbon miles. And we import most of our steel from China, which again, creates massive carbon
miles and all you're doing is all the pollution that we create for our steel that we use here in the
UK. All that carbon is still being made in China. So all you're doing is changing the place. So
one of our clients had a brilliant idea. Some of the best quality metallurgical coal in the world is
sitting in an area called Cumbria on the west coast of England. And it would be really cheap and
easy to mine it and export it around Europe because the whole Europe is saying, this is crazy.
We shouldn't be importing metallurgical coal all the way from Australia. Is there any we can use
here?

And we managed to do that. We got the concept in place, we got the planning in place. But then
of course, every single investor, including the UK National coal board pension scheme, which
pays the pensions of over 300,000 former miners said, oh, no, we don't want to do that. It
doesn't fit with our non-carbon ESG policy, tick box investment. Eventually, we did find investors
and at that stage, the government took fright because we're hosting a big environmental
conference in the UK this year, Cop 26. And the governor in charge of that did not want to be
associated with it if the UK was seem to be opening coal mines. Yeah, I agree that coal, we've
got to get away from coal. And we've got to build more renewable power to improve the climate.
I completely buy climate change. And if there's anything we can do to ameliorate the fantastic
costs that are coming, let's do it. But one of the ways to do it is certainly to reduce carbon miles.
But the result of this whole story I've just told you, the coal mine never got financed because the
bureaucracy that ESG has created, said no. And that to me, is a massive failure of financial
markets.

5.1k · August 2, 2021

30 minutes ago, JMD said:

Ok, I'll take the bait?!... but please be gentle! What can you get in Bangkok for that type of money?

I wouldn't think of spending £300k on a house in BKK (which is what that York house would cost once its been done up)

Near the centre of BKK and 100metres from Ekkamai BTS (skytrain) you can get a 20 year old 80m2 flat for circa £100,000, with pool and a gym etc..

Or on the outskirts a nice big family house of about 200m2 for about £200k (too big for me)

You can pay an absolute fortune for a brand new built slave box in the centre, but nothing like the prices on offer in England. But they have a limited resale market out there, one reason being probably sell at a loss as build quality is poor.

I'll just rent for a while, paid for by dividends ... though would like a 100m2 house with a small garden for about £120k and within 400 metres from BTS/MRT train lines which are expanding all the time.

1.1k · August 3, 2021

7 hours ago, sancho panza said:

Bill: Yeah, I rather the opinion that inflation is not only here to stay, but the most significant
thing that's going on is we have long term inflation is now being imported into the real world
from distorted financial assets.

7 hours ago, sancho panza said:

What if we get a situation where you've got real inflation in prices, but you have a deflationary
economy. That's a classic recipe for this stagflation threat.

Cracking discussion SP.

One of the theses of this thread is that cost-push inflation will lead to chronic secular inflation all through the economy, as wages start to get bid up. As I understand it, the thinking is "that is what happened in previous inflations once they got going", and we've seen plenty of anecdotals about this or that labour shortage that seemingly confirm the thesis that wages might be starting to follow assets.

But what if there's a missing ingredient, and this time it *is* different? I'm not talking about transitory inflation - the inflation in financial assets alone is going to leak into the real world for years to come, whether we like it or not. I'm talking about a relentless grind up in the cost of living that wages don't keep up with, therefore accompanied by a relentless grind down in living standards.

One missing ingredient is the energy surplus that was available during previous inflations and allowed the economy to return to prosperity. That's gone now, and all the marginal options we have are high energy-cost energy sources (whether that be tight oil, wind whatever). Yeah, "the SEEDs thesis".

Increased automation is another factor, tending to replace labour with capital and keeping inflation locked into financial assets.

This is why I"m watching velocity prints like a hawk, and right now they're still flatlining. A few quarters in a row with strong velocity increases away from the current historic lows would be confirmation of "something happening" in my book.

1.1k · August 3, 2021

Carbon offsetting is going nicely I see. Sorry, going *up* nicely.

You couldn't make it up ...

1.1k · August 3, 2021

...

1.6k · August 3, 2021

2 minutes ago, jamtomorrow said:

Carbon offsetting is going nicely I see. Sorry, going *up* nicely.

You couldn't make it up ...

Without a paywall https://archive.ph/QrObp

August 3, 2021

BP posted good results, $3.1bn for the qtr.

As we predicted, the increased oil and gas prices allowed them to remain cash flow positive in Q2 ($0.6bn) despite their warning to the contrary due to the oil spill payment and investments.

They bowed to pressure and increased the divi by a small 4%

But the important thing is they came true on their promise on buybacks and announced $1.4bn. The first half total is more than 60% of their free cash flow for the first half after allowing for the $500m already bought back and hitting the debt target.

H1 profits of $7.8bn which include some profits from divestments, market cap is currently $83bn. These results put BP on a current pe ratio of between 5.3 and 7 depending on performance for the rest of the year and assuming oil stays around where it is.

I did a quick fag packet calc and working off profits only it is currently at a 7% discount to RDSB (Looney's 'performing whilst reforming' strategy is valued at -7% LOL), hopefully will get a kick up this morning.

Edit: One last comment was that Shell's ($2bn/1.3% of market cap) buyback announcement was for the second half but BP's one ($1.4bn/1.7% of market cap) was just for Q3 so BP is at a much higher rate.

Edit2: Working with $ and £, shares and ADR's and also in quarters/half/full year makes it really easy for errors in calcs with oil companies

20.7k · August 3, 2021

40 minutes ago, jamtomorrow said:

Carbon offsetting is going nicely I see. Sorry, going *up* nicely.

You couldn't make it up ...

carbon offsets are such shit. I looked into this a few years ago when flying a lot (not because I think climate change is man made, but because some cunt at work was going on about how he always paid the carbon-offset fee) and a fair chunk of the money goes on educational programs, which basically involved flying and driving tarquin and kaylia around the world to lecture poor people whilst staying in nice hotels.

The rest was, as above, questionable forestry shit which in many cases will be harvested/burnt down/etc.

I was able to shut the greenie cunt at work up nicely with a few examples.

16.6k · August 3, 2021

7 hours ago, sancho panza said:

we could end up with the worst of both worlds as a credit deflation runs alognside price inflation

Ta. Stagflation. My primary hypothesis. 1970s with a twist, 'cause there's always a twist!

10.1k · August 3, 2021

1 hour ago, planit said:

BP posted good results, $3.1bn for the qtr.

As we predicted, the increased oil and gas prices allowed them to remain cash flow positive in Q2 ($0.6bn) despite their warning to the contrary due to the oil spill payment and investments.

They bowed to pressure and increased the divi by a small 4%

But the important thing is they came true on their promise on buybacks and announced $1.4bn. The first half total is more than 60% of their free cash flow for the first half after allowing for the $500m already bought back and hitting the debt target.

H1 profits of $7.8bn which include some profits from divestments, market cap is currently $83bn. These results put BP on a current pe ratio of between 5.3 and 7 depending on performance for the rest of the year and assuming oil stays around where it is.

I did a quick fag packet calc and working off profits only it is currently at a 7% discount to RDSB (Looney's 'performing whilst reforming' strategy is valued at -7% LOL), hopefully will get a kick up this morning.

Edit: One last comment was that Shell's ($2bn/1.3% of market cap) buyback announcement was for the second half but BP's one ($1.4bn/1.7% of market cap) was just for Q3 so BP is at a much higher rate.

Edit2: Working with $ and £, shares and ADR's and also in quarters/half/full year makes it really easy for errors in calcs with oil companies

Notice everyone mentioning Brent at $60 as well,we will average higher than that later in the cycle.Looks like they are going to put the divi up by the same as the share reduction at that $60 Brent,so they are looking to keep the cost of the dividend stable.

They are going to use the other 40% for more debt reduction.I would of rather they allocated that for more share buy backs while the stock is under £4,but debt reduction is fair enough.I think that says the board is slightly nervous about rolling over debt in the future so is being prudent.

Iv been looking into renewables costs etc and everyone thinks the costs of windfarms etc is going to drop a lot over the cycle.They are wrong i think.Better tech will be offset by higher material costs etc,so i think costs will stay flat.That says early movers and those who open up the best basins should do the best and so far BP is going big on opening up new basins.

Hopefully the shares dont run up,i want as many bought back as possible early in the cycle.

10.1k · August 3, 2021

Im not a chartist so maybe the chartists could comment,but Telefonica looks like it might be at last entering a very nice set up here for a slow steady up down staircase with slowly rising higher highs over several years,BK risk accepted.

10.1k · August 3, 2021

I should add i havent gone through BPs results much because iv just bought a big 2nd hand tent for £60 ,£300 new.Just having trial set up in the garden.Even got a blow up sofa bed for £15,a beauty.My partner has been hinting we should get away more often so i needed to find a way to avoid £90 a night B+Bs and £20 a night campsites instead.Luckily she came home and saw it and loves the idea because we can take the grandkids with us.Im not paying for electric hookups though,has anyone used a solar setup to power those portable batteries?,im going to just set up a DC to AC convertor from the 12v to 230v

August 3, 2021

3 hours ago, DurhamBorn said:

Notice everyone mentioning Brent at $60 as well,we will average higher than that later in the cycle.Looks like they are going to put the divi up by the same as the share reduction at that $60 Brent,so they are looking to keep the cost of the dividend stable.

Good analysis on the 4% dividend increase, clever and I missed it.

Notice even BP's own 'safe oil price' has gone up hugely, $60 was at the top end of their 2021 predictions in their Jan presentation and is now their base. As mentioned before OPEC+ are completely in control of oil prices now and they are massaging towards $80.

A side note is that Morgan Stanley asked about whether drop in investment is already feeding through to lower production, he then said the reason he asked was they were trying to analyse/ask each oil company to build a macro oil supply picture. They are seeing the same as us here, a supply squeeze baked in and they are trying to time it.

BP answered that the drop in production was not to do with the lower investment at present.

3 hours ago, DurhamBorn said:

They are going to use the other 40% for more debt reduction.I would of rather they allocated that for more share buy backs while the stock is under £4,but debt reduction is fair enough.I think that says the board is slightly nervous about rolling over debt in the future so is being prudent.

Would be nice, they started the year saying "at least 60%" for buybacks and have now changed to 60% in all communication

The added buybacks from BP/RDS might be enough to balance the selling of the 'suddenly have an ESG badge' funds.

3 hours ago, DurhamBorn said:

Hopefully the shares don't run up,i want as many bought back as possible early in the cycle.

Good luck with that! :Jumping:

August 3, 2021

12 hours ago, Hancock said:

Ekkamai BTS

Lived near there a few years back. Soi 61. Nice location. Have a good one!

August 3, 2021

3 hours ago, DurhamBorn said:

Iv been looking into renewables costs etc and everyone thinks the costs of windfarms etc is going to drop a lot over the cycle.They are wrong i think.Better tech will be offset by higher material costs etc,so i think costs will stay flat.That says early movers and those who open up the best basins should do the best and so far BP is going big on opening up new basins.

Completely agree, everything is getting more expensive. For one thing they might have a disposal tax on the blades or other decommissioning costs, plus the others you mention.

Electricity in the future (this should really be an entire article on it's own)

Mistake that everyone keeps making is using current/past energy dynamics for future predictions. For one thing, no one needed electricity at night so it was cheaper (and now solar produces zero at night LOL), this is changing. Boiling your kettle will now be competing with charging cars and producing hydrogen.

Energy is going to be much more of a commodity. This is driven partly by the crazy production volatility of wind and solar leading to shortages or surpluses of energy which then shapes capitalism to make most efficient use of this 'feature'.

Because of the volatility we have to build way extra supply than we need because half of it might be 'offline' at the same time. I notice the comment earlier in the thread about aluminium being more expensive, the industry was very good at making use of any available cheap energy and as that disappears it will push up the price (aluminium production is very energy intensive). In the medium term all this spare energy will be used to produce hydrogen, it will be big business but as hydrogen starts eating up any spare energy, it will put a floor under the price per kWh. If hydrogen starts taking off it will raise this floor, costs per kWh are going to be high.

Going back to the first sentence, when you put these high electricity prices into calculations for EV's (and no economy 7), it removes the financial case for moving to EV's, they might only be for rich people.

ps I realise that things are more complicated than I have suggested but wanted to emphasise the change in dynamics that people keep ignoring.

16.6k · August 3, 2021

2 hours ago, DurhamBorn said:

Im not a chartist so maybe the chartists could comment,but Telefonica looks like it might be at last entering a very nice set up here for a slow steady up down staircase with slowly rising higher highs over several years,BK risk accepted.

Which one (ticker and exchange)? £20 a stock but mates rates for you!

PS: Just don't tell anyone!

4.4k · August 3, 2021

10 hours ago, sancho panza said:

Recent Macrovoices podcast transcript ,interview with Bill Blaine really exploring a few thigns discussed here,particularly the distinct possibility that we could end up with the worst of both worlds as a credit deflation runs alognside price inflation.

One of my little bugbears,is that aside from this thread,the bulk of what gets written about inflation/deflation is written as if they're mutually exclusive,that you can't have the two together,when actually credit systems and commodity prices do often over time go in different directions

I've just reread it to do the bits in bold and it really brings home how good this thread has been , and how prescient some of the commentary has been too under @DurhamBorns stewardship.It's like this Bill Blain is a paid up basement dweller.....Deflation/Inflation/Stagflation,failures of moentary policy post 2009,financial asset bubbles,gold,the drive for real assets,ESG failings,CHina/USA cold war......etc etc

Apologies to the LPP,highlights for skim readers.

https://www.macrovoices.com/guest-content/list-guest-transcripts/4305-2021-07-29-transcript-of-the-podcast-interview-between-erik-townsend-and-bill-blain/file

Podcast

https://macrovoices.podbean.com/e/macrovoices-282-bill-blain-consequences-of-secular-inflation/

Bill Blain: Consequences of Secular Inflation July 29th, 2021

Erik: Joining me now is Bill Blain, strategist and head of alternative assets for Shard Capital,
and probably better known as the author of Blain's Morning Porridge. One of the most intriguing
investment blogs on the internet. Bill, it's great to have you on as a first time guests. I've been
asking everybody about inflation. Janet says it is transitory. I think my favorite quote that I've
heard so far is World War II was transitory. What do you make of this transitory argument? Is
inflation here to stay? Is this a secular phenomenon? And what does it mean?

Bill: Yeah, I rather the opinion that inflation is not only here to stay, but the most significant
thing that's going on is we have long term inflation is now being imported into the real world
from distorted financial assets. Everybody tells me that there's no inflation out there. And what
we're seeing is just a transitory spike caused by supply chains breaking down, and things like
the chip shortage and people who are anticipating a faster recovery. But what we're really
seeing is all the inflation that's been generated over the last 12 years of monetary
experimentation, quantitative easing, and buying back bonds and keeping interest rates
artificially low, that's generated tremendous inflation in financial assets. And that financial asset
inflation is no creeping into the real world.

So you're going to see a whole series effects inflationary moves that occur as a result of that.
Plus, I think we're also going into a very different world that is not going to be one where you
can easily, simply brush off inflation effects as transitory. I mean, let's just think for one second
about some real world events that have just occurred. Like all these climate disasters we've
seen in the last month, they cause real costs. These costs have to be paid from somewhere.
And that is going to be inflationary in its own right. So I think we really have moved into a new
world where inflation is going to start really impacting bottom lines again.

Bill: Okay. Well, that is a very interesting and intriguing perspective. And I think he's probably
right, because, you know, we've got effectively a deflationary environment that is caused by
ultra low interest rates. I was asked a question recently about, what do you think about Europe
keeping interest rates lower for longer? And I turned around and said to answer that question
you need to understand what's happened to Japan. For 20 years, they've had ultra low interest
rates and what has been the effect, a deflationary economy. But we still have this inflationary
backdrop to the global economy and you can't separate the two. Now, it's not necessarily a
Japanese thing. But I think we are going to experience multiple different things going on. And
the big word that scares me more than any other is stagnation. Now, I grew up in the 1970s and
80s, in the United Kingdom, where we suffered incredible stagflation during the 1970s that
caused all kinds of social problems where you had massive inflation and jobs collapsing, it didn't
matter what you did two interest rates, you couldn't change that.

And so although we're talking about an inflationary threat, you also have this secondary effect
that could be deflationary in certain markets. I think copper is an interesting one to talk about
there. Because we clearly saw copper prices getting bid up in anticipation of a very strong
recovery to the pandemic. Everyone piled into copper expecting that copper as effectively a
proxy for tech sales would work. Same thing happened in lumber, because of course, we saw
the most incredible market in lumber. Again, people are anticipating recovery. And we will see
inflation as a result of that it's occurring at the moment in the shops, you try and buy a fridge
and it's temporary Sat higher because of the copper price spike, that copper is already down.
What if we get a situation where you've got real inflation in prices, but you have a deflationary
economy. That's a classic recipe for this stagflation threat.

Erik: Bill, you and I grew up in the 70s. But we were kids at the time. And frankly, the guys that
were working in the industry, and were around in the late 60s, when the onset of secular
inflation began, they're all retired. And one of the biggest things I think about is okay, who's
going to be in charge of rounding up all the guys that have been through this before when this
secular inflation really hits the tape? What's the finance industry gonna know what to do?
Because I think everybody who knows is gone or retired.

Bill: This is one of the things that really scares me because the reason we're in this
environment at the moment, is a game of consequences. Everything that happens, everything
you do today will have a consequence tomorrow. And the big issue for central banks for it as
they we are talking about. Central banks have been experimenting with monetary policy, since
the great financial crisis began in 2007. And in 2009, they came up with this brilliant idea that
they could kickstart the economy with ultra low interest rates. And they would get money to flow
into the economy by buying back bonds, which means that investors would sell their bonds and
then use that money to invest in the real economy. But that's not the way that trading works. We
all know what investors did was a curse. They sold their bonds to central banks, and then

bought more bonds to sell to central banks. And they used money from that to buy more bonds
to sell to central banks. And this is what caused massive inflation.

In financial assets, the path of that happening was very simple. Interest rates started to fall. As a
result, people saw that the yields and bonds were unsustainably low for their investment
purposes. So they started going what we call yield tourism. And they started buying equity.
Remember, equity is a much higher risk market. And they started buying so much equity, the
equity market went up, and the dividend yields and equities also came down. That has been the
consequence of ultra low interest rates, massive inflation, in financial assets. But here's the
critical thing that started 12 years ago. Now, 12 years in financial markets is an incredibly long
time. The result is there's practically nobody under the age of 35. In this city, in what we in the
UK called the city but the world calls global finance, who understands investment markets,
where it's not completely normal for central banks to be repressing interest rates and distorting
yields through their monetary experimentation and quantitative easing.

So every single fund manager under the age of 35, thinks this is perfectly normal. And that's
why when I'm out doing my job as an alternative asset investor, I see a great divide between
those of us over 40 and those below 40, who've got completely different perspectives on what
value propositions are. If you're younger, you tend to think that value is all about the price set by
the market as in a distorted market for as anybody over 40, we're tearing our hair out, and we're
going, what is going on here? How can we accept interest rates being so distorted? Look at the
effects, look at the overvaluations, look at the crazy stories that are created. So that point you
just made about where are all the old guys. Well, you know, those of us who are who've been
around the block a few times and the first time I traded treasury bonds back in, I think 1986. I
think we were talking then about the beginning of the big bull rally in bonds. Where the year
before traders were frightening me with stories about how yields have been 18%. And they were
dominant double digits still when I started trading, and now, where are we on the 10 year? 1.2
or something like that. This is a completely different world. And there are very few of us left who
remember what it was like.

Erik: The theory that I've had about this is when we get runaway inflation and of course, a lot of
people would say that's not even in the cards, that deflationary backdrop is just too strong. It's
never gonna happen. I don't claim to be smart enough to know when it's going to happen. But
my argument is this. If we have a runaway inflation, I think that suddenly the central bankers
hands are tied because all of a sudden the norm of the new normal that you're talking about,
which is hey, whatever goes wrong, they're just going to print money and that's going to fix it.
When you get run out. inflation, you can't do that anymore. And if the central bankers hands are
tied, I don't think the industry knows what to do. Am I crazy to think that? And how realistic is it
that this eventually gets to a runaway inflation kind of scenario?

Bill: You know, it's a very interesting question to ask. What instruments are there for actually
controlling inflation, the typical way you would control inflation would be select interest rates
rise. But if you were to do that today, the effect would be a massive collapse in financial
markets, which are now completely addicted to the opium of cheap money. So you would end up creating massive defaults, massive job losses, complete loss of confidence and trust in the
economy. But then how do you stem inflation reverse screwing around? Well, you got to then
think about what creates inflation. And you know, inflation is not just oil prices going up, as it
happened in the 1970s. Inflation is not just a drought season putting up the price of bread.
Inflation, this time is going to be a mix of very real inflation coming in from events like I
described earlier, some of the costs we're going to have to bear now for extreme weather
events, the wildfires in California, the flooding in Germany, and China, all these things. But also,
we'll see inflation seeping in from financial assets. And the way that's happening, if you take a
look at what hedge funds are doing today. Hedge funds are not buying treasury bonds, and
they've stopped bothering buying things like, you know, stocks and shares, they're no buying
real assets.

Just earlier today. I mean, the reason I'm up at Edinburgh, Scotland today is I'm visiting my
mother. And I went and did the shopping for her this morning at Morrison's. Morrison's is one of
the big UK supermarket chains. And you know what, it's just been acquired by a group of hedge
funds, because it's a real asset. And it's been acquired at an incredibly high price that nobody
thought Morrison's was worth, no one else was going to bid that for it. But that's an example of
inflation in the real world, pushing up the price of real assets. Now, eventually, that gets down to
the penny in people's pockets. And that's when we really start to see inflation occur. That starts
to change the way that people behave in an economy. And I think that's already beginning.
You've seen some incredible moves in house prices. In the USA and the UK. The US housing
markets just had a bit of a blip from the last numbers. But here in the UK, house prices are now
completely out with the scale that normal people can think about buying, all they can do is go
and rent. And that's another example of inflation because that means the money they were
going to spend on buying a house, and now they can't ever afford a house is just money they
spend on consumption. And if people are consuming lots, well guess what that causes real
inflation as well. And that's all driven by ultra low interest rates.

Bill coming back to the inflation theme, You know, a lot of people, myself included, have really
looked at gold as an inflation hedge. Frankly, there is a counter argument although I disagree
with parts of it. You can't argue that gold is not performed as well as some of us thought it might
and cryptocurrency seems to be at least the younger generations favored currency debasement
and inflation hedge. Has gold become your grandfather's Oldsmobile, or is it more likely that the
crypto guys just don't realize the risk they're taking?

Bill:And yeah, it's a fascinating question. I think there is definitely a behavioral link between the way
that people understand gold and what they think about cryptos. And that's maybe worth talking
for a second. Let me come straight up and say that I think cryptos are a complete and utter
scam. I can see absolutely nothing that a cryptocurrency can do. The currencies don't already do better and gold doesn't already do better. And you know, it's dead easy to say, enjoy
yourself, but you being poor. But, there's no real fundamentals behind it. When the pandemic
started, and I immediately predicted a massive economic shock. Even before we started
lockdowns, one of the first things I did was transfer a large portion of what I was doing into gold
in the expectation that we would see gold not only as an inflation hedge because we expected
supply change eruptions, but also because I could see it being a flight to safety hedge as well.
So I put cash into portfolio cash into gold and into treasuries and UK Gilts, that's the UK
government bond market.

And I've been kind of surprised at the way that gold has not performed better, because you've
got two classic gold pluses going on, which is uncertainty and inflation. But yet people haven't
gone for gold. And I sort of look at the crypto thing. And let's be honest, you know, cryptos, you
know, for all the trillions, they talk about being invested in Coinbase, and all the other
exchanges is still a fraction of the gold markets. Yet it has got people thinking, are there
alternative ways to hedge? I thought it was very interesting that you mentioned your
grandfather's Oldsmobile. I mean, one of the things I collect is art. And unfortunately, I bought
all the wrong things. They haven't gone up in the kind of way you want, because you just don't
know or understand how the fashion market for what is going to become big in art is going to
develop. And I suspect that's also slightly true of what's going on in crypto because there are so
many different choices now.

Erik: Bill, you run alternative assets for Shard Capital. Now, from everything that you've said,
I'm assuming that you're focusing more on real assets, not just gold. But other things like real
estate and so forth. You know, real estate is not exactly cheap. It's hard to be a value investor,
and also focus on real assets right now. Where's the value or where is the hedge if you want to
be in the real asset market? Seems like nothing's cheap.

Bill: Okay, well, the real asset markets are absolutely fascinating because they really began in
the wake of the great financial crisis that began in 2007. If you remember back then, what we
saw was banks under enormous pressure. And the regulators and central banks very quickly
changing the rules on how banks could use their capital. And effectively over the next couple of
years, we saw that banks stopped being lenders. Yeah, that's what I said, banks effectively,
we're no longer lenders, they were simply brokers. And what would happen is the banks would
go and originate an asset. And then they would find real money to invest in that asset to finance
it. And you saw a number of the big pension funds, insurance funds, and particularly smart
hedge funds, who saw the opportunities in private debt and private equity. And of course they
want and while you're getting 1%, for investing in US Treasuries, you can be getting a very well
constructed risk in private debt, yielding a proper interest rate, say, 6-7%, and often much
higher.

So I now spend most of my and I spent my whole career in the bond market, before I got
involved in developing the private asset, private debt, and private equity markets as the
alternative asset sector. And what we look for is assets that are going to create really attractive
yields, and are secured on these assets. And some of them we've learned some frightening lessons about aircraft is a great one for instance. Before the pandemic we assumed the aircraft
would retain their value for years. And you could predict exactly what they will be worth in a few
months time and a few years time. Therefore, you could create secondary markets. Therefore,
you could create valuations, and you can sell them based on resale value, and even the scrap
value down the line. That's all come to a crashing halt. But other assets, and you mentioned
property. You know property is a fascinating market, especially here in the United Kingdom,
where residential property has been on an upward curve since before America was even
conceived. I mean, we're talking about 400 years of UK residential property history. And every
time we have a crash, within two or three years, that crash will have been corrected, and the
market will be slowly edging back up.

But what we've seen in the last couple of years, is again, people understanding that the returns
that they get from distorted yields in the bond markets and other financial assets means that
they need to buy real assets. And of course, property is the one they've gone for. So you've
seen UK property not rising 2 or 3% per annum. But 9% was the number that we had yesterday.
You know, 9% per annum just means property is running out of the affordability level for most
people. But it's a great asset for those that have ready cash. And that money is still piling in,
meaning the price is getting higher and higher. Now that has a number of knock on effects. It
means that there's much greater demand for rental property, which again spells demand for
people to buy rental properties, therefore pushing up the price again.

But it also means that people give up trying to afford. that changes their behavior, if they can't
afford to ever buy their own home, why bother working so hard? Why not just take the
government furlough scheme or just throw yourself in welfare for the rest of your life. So you
know, you got to be careful. All these distortions, the consequences I talked earlier about, they
have long term effects, and they're changing the behavior of populations. So I think it's very
significant when you see house prices accelerate beyond the reach of the bulk of the
population. And this would then lead us on to another of my favorite topics, which is the
pernicious effects of wealth inequality. And that's something that I don't think is given enough
attention, when you see the depth of opportunities available to many people now. And the fact
that the world is increasingly becoming divided into haves and have nots. Now, that may not
sound terribly capitalist, but you know, the history of Europe and tells you that when people
don't get good opportunities, they tend to get rebellious and in France, they revolt.

Erik: Bill, I think wealth inequality is the biggest challenge that we face as a society and what
scares me the most is uh, you know, I think everybody is talking about it. The problem is, people
are talking the loudest about it have solutions that I don't think are really solutions. I don't think
they really solve anything. I think they'll actually make it worse in the long run. But boy, they sell
a heck of a lot better than my solutions do. What do you make of this whole populism trend and
it seems to me at least in the United States, like this whole MMT phenomenon is really gaining a
lot of steam. There's a lot of political support. There's a lot of public support for more nanny,
state government handouts, and so forth. And it seems like Stephanie Kelton and the MMT
crowd have the solution for how we're going to print up all that money without having to tax
anybody and spend a lot of money and don't worry, it's not gonna be inflationary.

Bill: Okay, well, look, the only way to answer that question is to look at the bond markets and
understand exactly what sovereign bond markets are, by sovereign bond markets. I mean, let's
keep it to the US and the UK. Both are sovereign nations, and they have financial sovereignty
over their money supply, or they have monetary sovereignty, let's put it that way. There is no
way that the UK issuing Sterling Gilts or the USA, issuing dollar bonds, is going to go bust.
Whatever happens, they can press the printing press, and they will repay in dollars or Sterling,
the debt that they've issued. That is the basic premise of new monetary theory that you can go
out and print as much money as you want. The problem then lies in foreign exchange. And if
people lose confidence in the USA, and not in its ability to repay, and they know it will repay. But
they lose confidence in the USA, because they're concerned about the political situation, or
they're concerned that it's losing the war with China, whatever. Then they're going to start
selling dollars, and that's going to be massively inflationary, again, coming back to our early
chat about inflation.

And that's the big risk for any monetary sovereign nation, that although they can always repay
their debt. If they lose confidence in the currency, then they will face massive inflation which
damages the nation. That's the simple equation. At the moment, every single nation in the world
is involved in a massive money printing binge, to afford the costs of the pandemic that's
happening everywhere in Europe, in Asia, China, USA, UK, everyone's printing money, Latin
America, everyone's printing money. When that stops, then people are going to start paying
attention to which countries do you actually have confidence in. Now, what countries would you
have confidence in? Would you have confidence in a country that is confident in itself in being
able to continue printing money to support the growth of the economy or would you lend the
money to an economy where the government has decided to embark on crushing austerity,
where they're suddenly cutting the money that was supporting the economy, putting companies
into bankruptcy causing massive social tensions.

Now, the conventional wisdom is that any responsible government will avoid overspending. But
in that example, I've just quoted to you, it looks far better that the government continues to
spend to even open the economy, rather than creating an austerity situation, which is likely to
fuel further wealth inequality. Now, wealth inequality is very important, because what we've
seen over the last 12 years of monetary experimentation is very, very simple. If you own
financial assets, stocks and shares, you have gotten phenomenally richer, because that's where
all the inflation has been. And if you didn't own these things, you've got much, much poorer.

And of course, financial assets are owned by the richest and society who have got far wealthier.
And when you see that these people are the ones who tend to pay less of their total income and
taxes, that causes massive resentment. Now, that is what's driving the populist agendas across
the US and specially in Europe. Funnily enough, although we have the same problems in the
UK, we're electing right wing governments. And the reason we're doing that is the sheer
incompetence of the left. And you know, sometimes, despite being a Scotsman, which makes
me naturally tending towards socialism, sometimes I wish that would continue. But this this
threat of rising wealth inequality, and more and more wealth being in the hands of fewer and fewer people who can afford to take hold of the economies. That is bound to create resentment
and that resentment will be far higher in any economy that tries to create confidence by
embarking on austerity policies.

So it's not an easy thing to simply say invest in nations that look to be the ones that are most
careful with their money and create confidence in their currency that way. You really need to be
looking at the quality of government. Which governments are actually handling the process best.
Now, the simple version of MMT that we can go and spend as much money as we work doesn't
take that into account. And if it's going to work, it's going to have to, and it really goes back to
the 1930s, when we first talked about the ability of nations to re-inflate through fiscal and
monetary policy. And I think it's going to be fascinating as we come out with a pandemic. Which
nations do it well, and which do it badly. And it's not just about social spending. And this is, I
think, is the big question for the USA. How is the USA going to make its economy fit for purpose
for the future, with the massive infrastructure spending. That's infrastructure and physical goods,
but also in goods like education to make the US fit for purpose for the next 100 years. If you
have political impasse, and I think it's that political impasse, that's the biggest threat to the USA
in the coming decade.

Erik: I want to move on to another big trend in finance, which is ESG, or environmental, social,
and corporate governance based investing. The idea of the owners of capital taking
responsibility to invest in a way that benefits society. Now I want to go on record in saying that
premise, I don't think there's anything more noble or better that I've ever heard in my life. So I'm
all for the concept. But frankly, I think this whole ESG thing is a bunch of baloney. I think that
what's going on here is it you know, it's very similar in my thinking to what we see in the whole
race inequality thing, We absolutely do have a race inequality problem, we have racist issues.
Still, it's amazing to me, we still have racism. But you know what? Burning stuff down is not a
way to solve racism. And it seems like ESG has got the same anger in terms of a lot of people
just want to do things to damage oil companies, rather than engaging in those extractive
industries and figuring out how to invest in making them better and making them less damaging.
What do you make of this and where is it headed?

Bill: Yeah, I, you know, as I've said earlier, I would probably count myself as the last living
communist in the City of London, in the being a Scotsman. I am slightly left wing, but I do
believe that this whole ESG nonsense is to use a quaint Anglo-Saxon word "bollocks" is just
absolutely incredible how it's taken over the way of thinking. Now, back when I began in the
markets in the 1980s, everything that ESG did, we did anyway. If you think about it, good
corporate governance was always one of the reasons you're invested in a company. You
invested in companies, because they were well run, and did what they said. And you invested in
companies because they added to the sum of human wealth by not only paying your dividends,
but made sure that they were going to be there next year to pay your dividends and pay your
debt back. So that ticks the environmental box. And socially you invested in companies that
treated their workers well, and made sure that everyone had the opportunities. And that's
always been true in investment. You don't need to have a checklist to do it. But as soon as you create a checklist, you turn that into bureaucracy. And the fastest way to slow anything down is
to bureaucratize the process. And that's very much what's happened.

Now I want to just share an example of recent deal that we've been trying to do here in the UK
that illustrates where ESG has gone wrong. Now at the moment, the UK is doing phenomenally
well building wind farms. But each wind farm that you stick out in the Thames Estuary requires
500 tons of steel. And to make that steel, the 500 tonnes of steel you need something like 250
tonnes of metallurgical coal, which you burn with the iron ore to create steel. Now, at the
moment in the UK, we import all our metallurgical coal from Australia, which costs massive
carbon miles. And we import most of our steel from China, which again, creates massive carbon
miles and all you're doing is all the pollution that we create for our steel that we use here in the
UK. All that carbon is still being made in China. So all you're doing is changing the place. So
one of our clients had a brilliant idea. Some of the best quality metallurgical coal in the world is
sitting in an area called Cumbria on the west coast of England. And it would be really cheap and
easy to mine it and export it around Europe because the whole Europe is saying, this is crazy.
We shouldn't be importing metallurgical coal all the way from Australia. Is there any we can use
here?

And we managed to do that. We got the concept in place, we got the planning in place. But then
of course, every single investor, including the UK National coal board pension scheme, which
pays the pensions of over 300,000 former miners said, oh, no, we don't want to do that. It
doesn't fit with our non-carbon ESG policy, tick box investment. Eventually, we did find investors
and at that stage, the government took fright because we're hosting a big environmental
conference in the UK this year, Cop 26. And the governor in charge of that did not want to be
associated with it if the UK was seem to be opening coal mines. Yeah, I agree that coal, we've
got to get away from coal. And we've got to build more renewable power to improve the climate.
I completely buy climate change. And if there's anything we can do to ameliorate the fantastic
costs that are coming, let's do it. But one of the ways to do it is certainly to reduce carbon miles.
But the result of this whole story I've just told you, the coal mine never got financed because the
bureaucracy that ESG has created, said no. And that to me, is a massive failure of financial
markets.

I will def listen to that Bill Blain podcast. However, I note that he's an investment manager and we do hear from so many of these managers. So for 'diversity', how about the below Victor Shvets podcast (i know i mentioned him recently) - he's senior investment banker at Macquarie, but doesn't hold banks because he can't see future need for them!! So how's that for being a contrarian?!

Shvets views on inflation/deflation make sense to me: He says politicians will use the only 'economic tools' at their disposal (to prevent revolution), ie MMT to kick-the-can for remainder of the decade, this will produce secular inflation in the medium term. During this period, ever bigger stateist type policies will be introduced, debt will increase further - until at some point in 10/20 years time the 'reset' occurs, but before this happens Western nations will engineer that most of their debt is owed to themselves and that perpetual iou(me!)/bonds are created at say 1%. He also states that the two big trends are technology, and the financialisation of the economy, and that long term these will cause endemic disinflation.

He touches on other themes that encapsulate his belief that capitalism is pretty much defunct (yes he really is a banker!; apparently we have created too much capitol, so investment returns ultimately go to zero), and that tech will slowly eat all our jobs, and that the state will increasingly run most elements of our lives. These themes are explored in his book, The Great Rupture.

I believe Shvets broadly chimes with @DurhamBornthoughts and predictions on this thread. And would love to know what DB thinks of Victor Shvets macro theory?

This podcast is 2-hours long, but well worth the time imho, particularly as it also gives some insights into where we're heading and also why. Contexts that many financial commentators simply don't go into.

Expert Investor: Viktor Shvets - Future of humanity and impact on investing - Equity Mates Investing Podcast

10.1k · August 3, 2021

7 minutes ago, Harley said:

Which one (ticker and exchange)? £20 a stock but mates rates for you!

PS: Just don't tell anyone!

TEF Spain or Crest version Harley , 1% up since post sod macro get charting

2.8k · August 3, 2021

6 hours ago, jamtomorrow said:

Increased automation is another factor, tending to replace labour with capital and keeping inflation locked into financial assets.

The thing we'll have to wait for (because it's impossible to know or even model) is how much the cost of automation (energy use) will replace the human labour cost.

16.6k · August 3, 2021

26 minutes ago, DurhamBorn said:

TEF Spain or Crest version Harley , 1% up since post sod macro get charting

That's a dog at 249% debt to equity ratio. I'll have to hold me nose to look at it!

Now Telefonica Brazil (VIV) at 19% DTE, well that would have been much better!

Yep, popped out of oversold on the weekly in Jul21 and up 9% since but I'm not so sure if that'll sustain. May even have broken that upward trend line and touched it from below before easing off (i.e. prior support becoming resistance).

The monthly popped back in Mar21 and is on the way towards overbought but some fair room left to go but maybe losing a bit of steam and rounding. It's been stair-stepping down since Aug15 and I would expect to see more bottoming action before a change of trend but such are the times.

I could well be wrong, of course, DYOR, etc. I get a negative bias with those sorts of DTE's! But I would be interested to hear your rationale.

PS: IMO better telcos out there for me, if you have the market access!

PPS:. Sorry, just got thrown out of the office!

10.1k · August 3, 2021

12 minutes ago, Harley said:

That's a dog at 249% debt to equity ratio. I'll have to hold me nose to look at it!

Now Telefonica Brazil (VIV) at 19% DTE, well that would have been much better!

Yep, popped out of oversold on the weekly in Jul21 and up 9% since but I'm not so sure if that'll sustain. May even have broken that upward trend line and currently touching it from below (i.e. prior support becoming resistance).

The monthly popped back in Mar21 and is on the way towards overbought but some fair room left to go but maybe losing a bit of steam and rounding. It's been stair-stepping down since Aug15 and I would expect to see more bottoming action before a change of trend but such are the times.

I could well be wrong, of course, DYOR, etc. I get a negative bias with those sorts of DTE's! But I would be interested to hear your rationale.

PS: IMO better telcos out there for me, if you have the market access!

PPS:. Sorry, just got thrown out of the office!

I like high debt to equity on the telcos because i think the bond holders will end up funding the equity holders through inflation in that fixed coupon low rate debt funding infrastructure that will depreciate at a fixed rate while prices increase is a way to leverage inflation.If this dis-inflation carries on though and this inflation is just a blip then a high DTE would be nasty.Macro call is key on it and a close eye needed on the cycle as always.

2.7k · August 3, 2021

More gold (Pardon the pun) from Lyn.

Currency debasement x gold price suppression?

If and when reality reasserts itself then pray you're holding gold.

15.3k · August 3, 2021

14 hours ago, Hancock said:

within 400 metres from BTS/MRT train lines which are expanding all the time

why do you wanna be in a city? cunts will beat the shite out of you when the zombie apocalypse arrives

what's the timing on the BK now folks? next month?

1.4k · August 3, 2021

3 hours ago, DurhamBorn said:

TEF Spain or Crest version Harley , 1% up since post sod macro get charting

My thoughts, based partly on a really nice, easy, effective TA method I've been trying out over the last month or so, "Supply and Demand Zones".

They work best on long time frames and provide multiple entry / exit prices that would make good ladder in/out levels, so hopefully useful to people here.

A Demand zone is defined by a short bodied candle, any colour, followed long bodied green candle. The zone is from the top of the body of the short candle, to the bottom of the wick.

The reverse for a supply zone. Look for short bodied candles followed by a long bodied rad candle. The zone is from the bottom of the short candle, to the top of the wick.

The principle behind it is that short bodied candles on long timeframe charts ( monthly/weekly/daily) represent balance areas.. matched supply and demand. To move a market a long way up out of it's balance area requires large scale buying, but institutional trades don't tend to chase markets.

This means the long candle move was likely retail based, and the institutions, if they are also buyers, will have a lot of unfilled orders back in the balance area. Therefore, if the prices falls back to this level, the institutions step in again and support price.

I'm surprised how effective it is, and that I've only just discovered it after two decades.

Anyway.. to Telefonica SA, I've drawn the zones on the monthly chart first, and then added more based on the weekly chart.

Below is the the monthly chart show how the zones are drawn.

Here's the Weekly showing zones from the weekly and the monthly charts. Notice how price has reversed at or near zone boundaries.

Here's the Daily, showing weekly and monthly zones

And for clarity, here's the Daily, showing only zones from the weekly chart.

When you view these zones on the daily chart, you can see price is butting up to the bottom of resistance zone defined by the short candle from July 2020. We've tested the zone a couple of times, and reversed, so it's likely to be weaker than it was, but it' still there. It's also part of a broad band of overlapping supply zones up to 500 ( €5 ).

Based in Ichemoku, it's not quite breakout ready yet. The future cloud turned red, the pink dotted Chikou span isn't in clear air, and the green/blue fast and slow lines are bearish.

Overall, while the general shape of the chart feels like it could break out, there are some hurdles to get over first, and the IMHO odds favour a bit more consolidation first. This is a low conviction prediction though... 70% maybe, but TA doesn't get much more reliable than that anyway.

(EDIT: I just noticed an extra demand zone I drew from somewhere. sorry for any confusion.. hopefully the principle is clear )

31k · August 3, 2021

My Dad mentioned reading about hidden hyperinflation to me today, which may be indicitive of the general population starting to wake up to what's happening.

Welcome to DOSBODS

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

Recommended Posts

sancho panza

Link to comment

Share on other sites

Hancock

Link to comment

Share on other sites

jamtomorrow

Link to comment

Share on other sites

jamtomorrow

Link to comment

Share on other sites

jamtomorrow

Link to comment

Share on other sites

DoINeedOne

Link to comment

Share on other sites

planit

Link to comment

Share on other sites

wherebee

Link to comment

Share on other sites

Harley

Link to comment

Share on other sites

DurhamBorn

Link to comment

Share on other sites

DurhamBorn

Link to comment

Share on other sites

DurhamBorn

Link to comment

Share on other sites

planit

Link to comment

Share on other sites

Mapper

Link to comment

Share on other sites

planit

Link to comment

Share on other sites

Harley

Link to comment

Share on other sites

JMD

Link to comment

Share on other sites

DurhamBorn

Link to comment

Share on other sites

Noallegiance

Link to comment

Share on other sites

Harley

Link to comment

Share on other sites

DurhamBorn

Link to comment

Share on other sites

ThoughtCriminal

Link to comment

Share on other sites

nirvana

Link to comment

Share on other sites

MvR

Link to comment

Share on other sites

JoeDavola

Link to comment

Share on other sites

Archived

Recently Browsing 0 members