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

[HousePriceMania]

 

[Barnsey]

1 hour ago, DurhamBorn said:

Interesting how we saw inflation at 3.8% this autumn last March,yet the BOE said no.So our models are better than theirs,or they are fibbing.Of course its very likely its the latter.

Inflation is entrenched now,and any falls will be short term head-fakes.Government is going to have massive problems with councils trying to force through council tax increases etc and the public starting to really feel the price increases.

Absolutely the latter.

Interesting situation with many now seeing genuine wage growth, especially after Brexit. To raise rates would be acknowledging this is a "bad" thing, at least the optics of it. So whilst BoE mandated by Government to keep inflation in check, to burst this wage increase wave would be political suicide. Watch what they do not what they say has never been more true. Not just us of course, but wages need to go up first, then taxes.

[sancho panza]

On 28/08/2021 at 10:53, Talking Monkey said:

I really like Dr Tim's stuff for exactly the reason you mention, his unfailing honesty and logic. His stuff is a big contributer to my decision to be overweight in oil. 

I've got to say it is a bit bleak when you take the Seeds economic model and overlay it with what we discuss here, along with forecasters like David Hunter's predictions for end decade.

His work fits nicely aside the education given us by @DurhamBorn in terms of liquidity flows/macro roadmaps etc and @Cattle Prod in terms of teh mechanics of getting the oil to the surface.

On here we have a laugh and a joke but ye olde dr Tim jsut lays it out and it's depressing if you approach it and look at it logically.It makes perfect sense and particularly as it lays out with an emphasis on the hsitorical perpsetive and where the current trendline is going.

 

On 29/08/2021 at 11:36, belfastchild said:

One of the other big factors was co-ownership, buy half, rent half. Young female teacher relative went this way and we had a long chat about it, she couldnt see how it was making things worse and the response was 'sure its the only way I can afford to buy'. Well if everyone else is doing the same, the folk who can afford to buy now cant. If the cost of the house is maximised then theres less for all the rest of the economy, house stuff, garden stuff, having kids etc etc. I dont have kids through choice, every single one of my under 45 cousins doesnt have kids as they cant afford them, all living in rental places subsidising someone else.

Wonder what happens when all the public sector pension money goes pop..

This is a key factor that will drive our economies into rthe ground voer coming years.The boomer generation have had it all,cheap hosues and HPI,low IR's,free education,free healthcare,RPI linked pensions and let's be honest,they've got the younger generations to pay for it(I'm a tail end boomer btw-1970 vintage)

Demographically we're forced to import other countries youth as our own people can't afford to have any kids.Truly sad what we've done to our young people and that's before this park shutting clique got control of the Westminster bubble.

[sancho panza]

On 29/08/2021 at 14:08, DurhamBorn said:

@belfastchild as you say a huge part of the reason young taxpayers get stuffed on housing is because their tax is being used against them by people getting their money from government.Both pensions and benefits.I know several council workers with BTLs,usually 2 or 3.One of the first lessons i learned about contrarian macro strategy was that any given market will always try to reward the most to the least people and hurt the most people.Its the thing most fail to understand,because evidence from about a third of the way into a cycle until the end is counter to that.

In the UK the cycle has rewarded three sets more than anyone else.Property owners and scaled on how many they buy,government workers and benefit claims with children.

The ending of that cycle,and my work says it ended last winter means the above are certain to feel the most pain from this cycle.How that unfolds,timing,differences etc is cross market work and harder to pin down.

Of course the opposite side to that is hardly any wealth is sat in inflation hedged assets,equity and commods.The market has very few to reward and many to hurt at this stage in the cycle.I love where we are,because the position isnt foggy now,its clear.Inflation is flowing into the cracks like a thousand mountain streams,and trying to dam a few wont stop the lowlands flooding everywhere.The torrential rain has landed and it will reach the sea.

DB,I'd argue that the banking classes have had it pretty good to.Not jsut in terms of the bail outs 2008 but also in terms of the monetary policy that has followed.Banking used to be a utility function of the economy,generally not as well paid as other sections of commerce until the last 20 years when they industrilaized financialization of all assets.

Look at the role of private equity in stripping wealth from taxpayers and lining the pockets of the banking class....it wouldn't have been possible without the collusion of the political elite.

As for your last sentence,I couldn't agree more,the big deflationary wave is building it's jsut a matter of time until it crests.

[Hancock]

 

1 hour ago, DurhamBorn said:

Interesting how we saw inflation at 3.8% this autumn last March,yet the BOE said no.So our models are better than theirs,or they are fibbing.Of course its very likely its the latter.

The problem we have is we could easily get a BK inbetween as the turn in inflation trend causes a credit deflation.

Your model for inflation involves going food shopping and seeing prices shoot up, bills rising and seeing an epic house price inflation being added to the epic house price bubble

Sticks some smartphone apps in to your model, to get a true perspective of whats going on.

Arent we at a stage where the BK happens due to the FED tightening which will just cause investors to follow each other out the market as they'll see the FED no longer has their back; as opposed to a credit deflation actually happening.

 

[reformed nice guy]

1 hour ago, sancho panza said:

Demographically we're forced to import other countries youth as our own people can't afford to have any kids.Truly sad what we've done to our young people and that's before this park shutting clique got control of the Westminster bubble.

For me this is the most important thing and has to be opposed strongly.

The most effective contraceptive we have is high house prices.

Sacrificing our kids to the alter of GDP growth is immoral and as a population we have been cowardly to recoil to the shouts of "racist" for questioning mass migration.

The same people bleating and crawing about "social justice and equality" are the same ones keeping the wages of carers and health care assistants down. Everything in a market is connected - a lot of the elderly have relatively more funds than their following generations but if the wages of a carer went up from £9/hr to £15/hr then it would redistribute it in a much fairer way.

 

[Barnsey]

2 hours ago, sancho panza said:

Demographically we're forced to import other countries youth as our own people can't afford to have any kids.Truly sad what we've done to our young people and that's before this park shutting clique got control of the Westminster bubble.

 

42 minutes ago, reformed nice guy said:

The most effective contraceptive we have is high house prices.

Sacrificing our kids to the alter of GDP growth is immoral and as a population we have been cowardly to recoil to the shouts of "racist" for questioning mass migration.

 

Most developed economies in the same boat.

 

1 hour ago, Hancock said:

Arent we at a stage where the BK happens due to the FED tightening which will just cause investors to follow each other out the market as they'll see the FED no longer has their back; as opposed to a credit deflation actually happening.

I'll just say this is by far the consensus view right now. I'm not as convinced. 

[Harley]

We need to sort out the rent seekers (the "rentiers").  Sure the BTL brigade and its corrosive effect on a stable society but focusing on them alone is a bit like XR protesting in the UK (1% of emissions) rather than man up and deal with the likes of China and India.  A boomer with an expensive house (as a single home) is a lesson in financial delusion (except possibly for the younger inheritors of said house).  It's almost akin to an intangible asset given the ability to directly realise any value (so more indirectly as collateral to borrow more!).  But think about the others that extracted the real money to get to that point!  And it's not just housing.  Like all things these days, think about what needs to be thunk about rather than what they steer you to think about.

[Hancock]

2 minutes ago, Barnsey said:

I'll just say this is by far the consensus view right now. I'm not as convinced. 

I thought the consensus view was we actually get a deflationary bust; as opposed to a taper tantrum on steroids when people realise the FED can/will no longer keep printing money.

[sancho panza]

via kaplan

[Harley]

3 hours ago, Noallegiance said:

Ladies and Gentlemen, it's Lyn Durhamborn!

 

I'm a proud subscriber of her service!  I was keen to see how someone whose abilities I respect approaches stock picking,  asset allocations, and integrating macro.  Not cheap but part of my annual education budget!  IMO, I got a fair amount for the money, although I had to buy the book separately (would have been nice if it had been included in the sub!).

[sancho panza]

On 29/08/2021 at 15:32, Hancock said:

He's a HPCer and has been wrong on every claim i've seen him make, i read twitter for a short while the other year and he was claiming interest rates were about to go up.

He was back on HPC at the start of lockdown claiming a HPC had finally arrived.

Was entertaining on that link where he was on GB News though!

 

Possibly one of the few people who's been wronger than me on UK hosue prices.

STRed in 2002 iirc...........................

[Harley]

8 minutes ago, sancho panza said:

via kaplan

Could be the money shot.  As I mentioned upthread, value stocks (at least) are in an odd technical setup and need to "sh*t or get off the pot" with either a noticeable pullback (not sure BK) or a blow off which blows up the technical norms.

[janch]

3 hours ago, reformed nice guy said:

UK households post rare net mortgage repayment in July

Shaun Richards also covered this today:

https://notayesmanseconomics.wordpress.com/

It's not only a lack of borrowing on mortgages either:

The researcher given the job of presenting the morning meeting in front of Governor Bailey will be thinking it is just not their day as they add this to the mortgage data above.

Overall, individuals borrowed no additional consumer credit in July. Within this, they borrowed an additional £0.1 billion of ‘other’ forms of consumer credit (such as car dealership finance and personal loans), offset by net credit card repayments of £0.1 billion (Chart 2). On average, £1.2 billion of consumer credit was borrowed, per month, in the 2 years to February 2020.

 

 

[janch]

3 hours ago, DurhamBorn said:

The problem we have is we could easily get a BK inbetween as the turn in inflation trend causes a credit deflation.

I'm getting a bit twitchy re BK. 

Several things going on at once.  Slow down in China as above........a few things I bought (off-piste) seem to have reached their tops eg AHT; FERG; CTH; the lack of borrowing by households as above,  the fact we usually have any upsets in financial markets in Sept/Oct; supply chain distuptions; covid lingering longer than was initially expected; end of stimmy checks in US/furlough in UK and resumption of payment of rent/mortgages;  much higher inflation than is being reported........

I'm gradually selling my off-piste purchases which have been what you would call growth stocks.  My analysis was little more than picking a few things which seemed to be rising steadily (sorry @Harley)

I'm hoping to have a bit of a war chest in case we get a repeat of the March 20 scenario and this time I will plunge in as I mostly missed the boat then

 

[DurhamBorn]

4 hours ago, Festival said:

DB and friends,

 

Great blog this full of useful information.

 

What happens to BATS and IMB over the very long term do you think? Do you expect to see the gradual reduction in the percentage people smoking feeding through into lower Price Earnings ratios and a gradual reduction in the share price all things being equal (which I appreciate they never are)? Will they be able to hold the dividend payments given this or will they have to cut these over time. And how long have they got to go - 20-30 years without major diversification?

 

 

I think both are different.Imps will use buybacks of around 6% a share at this price within 18 months i suspect.I think they should be able to hold profit steady without that for another few years,maybe four or five.Then price increases wont cover use falls.However then the question is will use falls be more than price increases and 6% buybacks.I dont think they will.Without doing anything i think Imps can increase the divi 3% a year for a decade.I also think they will be a fast follower on heat not burn and vapes etc.They are smaller,but big enough.Retailers will always stock their range to keep the couple of bigger players from squeezing their margins too much.

BATs is a machine.Its only weakness at the moment is too much debt.It cant buy back shares at the moment as it needs to de-leverage more.However i think they might be tempted to launch 3% buybacks a year within 18 months for a while and flatline the debt for a while.I think they would do this with the shares below around £34,and stop and do debt above that.BAT will also end up with a huge vape/new products business.Its reach is incredible.If cannabis etc takes off as a legal drug in any way in big markets then big tobacco will clean up.

Outside of debt one risk is they decide to splurge cash on buying other companies.Small bolt ons they can expand are good,big ones arent.However with the share where they are they cant do an equity funded deal,and they cant do a big debt one.

One lesson iv learned about the sector,and BAT the most is dont try to 2nd guess it.When the sector is left for dead and ignored buy it.You could even use the divs every year to simply buy gold and silver,or pay down a mortgage etc.

 

[MvR]

Monthly supply and demand zones in Silver. You draw them on the longer time frames where a short bodied candle is followed by a long bodied one. This month's candle closing looks bullish if we hold ups here. 

W%R(45) on the weekly has just gone oversold and could reverse too.

 

 

 

[sancho panza]

On 29/08/2021 at 21:28, DurhamBorn said:

Crazy valuations and selling fast.Thats the end,or close to it of a cycle.Selling slow and cheap is the start.Governments efforts are outliers on housing.The dis-inflation of rates from 1982 is the real macro driver.On top of course you had the cross market affects of mass immigration ,mass single mothers so two house instead of one etc.

Property will always be the end parking spot of wealth over time,but the risks now are huge.I think the most likely pin is the government running out of room on the BOE monetizing the deficit.I think that starts this winter.We will see.

I've psoted recently how Leicester has two months inventory for semi detached hosues.Thats a hot market.Expect that to get bid up.

Flats in LE2 circa 18 months supply has bear market wirtten all over it.

This is an equity swapping marekt and the plates will spin until they don't and people start trying to all get through the exit together.I know a few oldies sat in big houses who will be sellers as son as prices reverse to fund pensions,but while they're going upt hey wont

On 29/08/2021 at 21:42, goldbug9999 said:

I don't think there are cycles anymore, all the major economies have been printing like crazy any time there looks like being a sniff of recession. Its been 13 years now in the UK since an actual recession and I'm seeing no signs of one on the horizon. Governments and CBs now have people convinced there is "no more boom and bust" no reason to take any pain, no creative destruction. A nominal recession just ins't politically acceptable any more. I mean I thought house prices were toppy in 98 fucking lol in hindsight. So ignoring any actually common sense as to why something that costs 30k to build sells for 300k I see no end in sight.

There are always cycles.They've extended this one with some fincail slight of hand but it'll jsut make the cycle end more painful as less people will be prepared for it.

As @Noallegiance was jsut saying,byt the time it's £200 to fill a car,it will be well on it's way and people will be paying for food before they pay for their mortgage.

On 30/08/2021 at 00:06, DurhamBorn said:

Monetize fiscal spending to fund free handouts and lift liquidity across base money by huge amounts is the answer they are looking for.

https://www.dailymail.co.uk/money/markets/article-9937947/MAGGIE-PAGANO-Workers-not-employers-power.html

"Even our most thoughtful economists are not sure what is behind such a mismatch between supply and demand of labour, and what effect this will have on inflation or productivity and corporate profitability. 

Nor is anyone sure about why the unemployed don't want to work"  

 

It's incredible isn't it? Shows msot economists lack basic common sense in the way they create these crises and still don't see them coming.

I also liked this.It's our turn and they don't like it....

 

'For the past four decades, employers have been in the driving seat: migration, globalisation and deregulation has meant an endless supply of cheap – and compliant – workers. By far the biggest reason for this has been migration: over the past 20 years the number of non-UK nationals working in the UK jumped from 1.06m to 3.75m before Brexit. 

As economist Doug McWilliams points out, what is less well-known is that since 1985 the number of over 50s in the workplace has soared by 3.8m. '

[JMD]

1 hour ago, Harley said:

We need to sort out the rent seekers (the "rentiers").  Sure the BTL brigade and its corrosive effect on a stable society but focusing on them alone is a bit like XR protesting in the UK (1% of emissions) rather than man up and deal with the likes of China and India. Like all things these days, think about what needs to be thunk about rather than what they steer you to think about.

Exactly right Harley, its the rentiers where our attention should be focused. Blaming/shaming the bottom-of-the-pile BTL guys and gals for gulibly (greedily?) acting upon the nefarious plans of the finance elites achieves very little. I'm far more interested in the next dastardly scheme those same elites are cooking up, maybe it will be 'green themed' (expected), or maybe it will be NHS/health-social care related!? (ill let those with dark imaginations 'flesh' this one out!)       

But it needn't be all doom and gloom, so in terms of positive 'thunking'... Overly financialised economies (such as UK): 1-grant far too much power to their financial institutions; 2-are corrosive toward their 'real' economies. Compare the Nordic countries to the UK - maybe a bit selective of me(?), but i think this is the comparison to make if we are to make any rational progress toward finding solutions (perhaps as per this thread, monetary collapse is tragically baked-in, however no harm in at least dreaming of a better place!). Anyway, the Nordic citizenry actively share in the wealth of their countries and moreover, when things do become skewed - i.e. 2007 GFC - they actually go about changing their system... Sounds almost too simple doesn't it?... but that's exactly what Iceland did when they let their banks fail.    

 

 

 

[sancho panza]

On 30/08/2021 at 00:44, Hancock said:

Im looking to get out of here, even if prices correct by say 10% in 2022 its merely back to the insane prices post covid.

I do still think we'll get an epic HPC in nominal terms, its just its going to come too late for me and my kid to benefit from, if interest rates do spike that'll be the time.

Have you looked at rural canada?

This article is from last year so prices will be up,but psot BK,if you're happy living away from the big cities,some of these places look good.

https://www.loveproperty.com/gallerylist/86546/homes-for-sale-in-canadas-most-beautiful-small-towns

 

On 30/08/2021 at 11:40, DurhamBorn said:

I think there has been too much value destruction to get back to those levels.The balance sheet showed the problems,but i ignored them,big mistake,but then in the scheme of a portfolio a small hit,even if nasty in isolation.However i think it was the reason @sancho panza developed his COMA score approach so a spray and pray style can try to at least avoid the big traps.Sometimes you can get value from losses.

It was DB and tbh ,much as the red hurts my eyes,it's been a price worht paying when I look at how the coma scores have enableds us to spread out acorss sectors and pick the msot likely winners.It's not infalliable but it suits us.

I don't mind costly msitakes if there's some learnings that improve me as an ivnestor.,

Scottish play....ouch!!

[Hancock]

19 minutes ago, sancho panza said:

Have you looked at rural canada?

This article is from last year so prices will be up,but psot BK,if you're happy living away from the big cities,some of these places look good.

 

I went to Toronto in January 2005 to do a special FX course; in my infinite wisdom i didn't check to see what their winters were like and only took my Hugo Boss summer jacket.

I arrived in the afternoon and it was about -5C, a coldness i'd never felt during the day.

The taxi driver said this is nothing it'll be -30C later on in the week ... and he was right, it was fucken horrific, i could have cried when walking outside. Someone had pushed a huge concrete bollard onto a frozen pond and it didn't make a dent.

Lasted 10 days in total and had to get into an argument with the university to get my money back (Canadians were allowed a 2 week window to leave the course and get a full refund, but foreigners weren't).

I'd sooner go back to prison than Canada!

Got drunk with an Indian doctor on the flight back, he had lasted a similar amount of time, stating he could hack an English winter but not a Canadian one.

When i got back to Blightly i booked myself on the next flight to Thailand and stayed for about 4/5 months!

One of my biggest mistakes in life was to come back to England in 2010, and expect a HPC! 

[Gin]

15 minutes ago, Hancock said:

I'd sooner go back to prison than Canada!

 

 

 

3. Canada is deadly cold. More Canadians die each year from exposure to extreme cold temperatures than from other natural events, according to Statistics Canada. An average of 108 people die annually from the cold, while only 17 succumb to other nature-related events.

[sancho panza]

5 hours ago, Hancock said:

Arent we at a stage where the BK happens due to the FED tightening which will just cause investors to follow each other out the market as they'll see the FED no longer has their back; as opposed to a credit deflation actually happening.

 

BK will occur when a lot of sellers try to squeeze through the exit at the same time for a variety of reasons,downward price spiral reinforcing waves of selling reinforcing waves of selling.

Net effect is that banks with Dowd Buckner ratios sub 20/1 survive,those above dish out haircuts to bondholders (which is likely most of the Western ones),who then start selling other bonds to cover their bank bond losses etc etc.Fishers paradox then kicks in as more people paying down debt reduces the ability of otehr people to pay down debt(job loses) which reinforces downward spiral in bond prices etc etc.

In the meantime,western currenceis drop hard into the abyss and the price of fuel goes up jsut as people can leasdt afford it.

it was laid out here many eyars ago by someone who relfected hard on what he got wrong.

note rising interest rates not needed.

https://en.wikipedia.org/wiki/Irving_Fisher

1. Debt liquidation and distress selling.
2. Contraction of the money supply as bank loans are paid off.
3. A fall in the level of asset prices.
4. A still greater fall in the net worth of businesses, precipitating bankruptcies.
5. A fall in profits.
6. A reduction in output, in trade and in employment.
7. Pessimism and loss of confidence.
8. Hoarding of money.
9. A fall in nominal interest rates and a rise in deflation-adjusted interest rates.

3 hours ago, Harley said:

We need to sort out the rent seekers (the "rentiers").  Sure the BTL brigade and its corrosive effect on a stable society but focusing on them alone is a bit like XR protesting in the UK (1% of emissions) rather than man up and deal with the likes of China and India.  A boomer with an expensive house (as a single home) is a lesson in financial delusion (except possibly for the younger inheritors of said house).  It's almost akin to an intangible asset given the ability to directly realise any value (so more indirectly as collateral to borrow more!).  But think about the others that extracted the real money to get to that point!  And it's not just housing.  Like all things these days, think about what needs to be thunk about rather than what they steer you to think about.

XR really are lame aren't they.As you say,we don't see them going to China and protesting rather they stay here where the polcie protect them as they dig up/blockade bits of Londinium

 

[BurntBread]

Apropos of nothing at all, here is a lovely quote from Eric Weisstein (with thanks to @MvR), which seems relevant to many things in the world today:

"The idealism of every age is the cover-story for its thefts."

[Hancock]

2 hours ago, sancho panza said:

BK will occur when a lot of sellers try to squeeze through the exit at the same time for a variety of reasons,downward price spiral reinforcing waves of selling reinforcing waves of selling.

 

I agree there will be a once in a lifetime bust at some point, but does is it come in the next 12 months when the FED tighten faster than is expected, hence just a taper tantrum on steroids ... or does it come in several years when the next cycle comes to an end and no one wants to borrow as interest rates are in double figures, thus a deflationary bust.

"There are more questions than answers" - https://www.youtube.com/watch?v=DDTvLldOgZs