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

[HousePriceMania]

2 hours ago, Loki said:

Something just happened the NASDAQ really likes...

Something else just happen when the US markets opened.  

[JMD]

5 hours ago, Cattle Prod said:

The physical house is a good hedge as the bricks and timber will inflate with replacement cost. So you need a solid house with good materials, many of the newbuild crap may have the opposite effect mind you (where the hell did low density blocks come from??). But the real question is how inflated is the land your house is sitting on? And what is fair value (agricultural prices IMO). I think low IR have fed into this more than anything.

Agreed and moreover the entire cladding issue, deficient fire breaks etc, and many other cost cuttings and general poor build quality of apartment buildings feeds much into what you are saying. How was this ever allowed to happen? Especially as has been an open secret for years apparently.                                                    However I guess the ulta risk averse approach by government (see covid etc) has exacerbated the issue by mixing up safety issues which do need fixing, with poor build standards which don't. Could almost think that the government wanted a covert, non financial trigger, for crashing the whole property market?

[HousePriceMania]

Is it something about September that brings on financial crises ?

Northern Rock

"On 14 September 2007, the Bank sought and received a liquidity support facility from the Bank of England,^[1] "

Evergrande

Evergrande Gets Loan Extensions From Several Major Creditors

Bloomberg News

August 12, 2021

 

Following on from that....

 

 

The 2008 collapse really got underway Oct 2007 too

 

Sell in May and go away, invest in Sept and you'll wish you had kept.

 

 

[sancho panza]

On 13/09/2021 at 16:44, ThoughtCriminal said:

Fucked. Absolute solar panel, wind turbine, up the shitter, fucked. 

I checked our power supplier the otehr day(Scottish play natch-I'll probably be the last person on this thread calling it that as when you go green on the trade you can use the real word).

I only went and fixed it to 2023 sometime back.I hadn't got a clue.Felt like an energy 'winner' for once in my investing career.

 

23 hours ago, DurhamBorn said:

Government is in serious trouble now,and i mean serious.Inflation is going to hit hard in all the basics,the UK is now the NHS with a government attached,they cant sustain the state without massive tax increases or massive inflation.The beauty now is these value sucking area like the NHS and welfare will devour each other.Want more NHS,cut welfare,etc.

BOE is running out of road to monetise.Maybe £90billion more max without a BK.

This this and this.

I'm getting quite intrigued as to working out how and when QE will be allowed to end/restart particualrly in EU and UK with reference to dollar.Fed still has room but has an inflation problem.

A friend was advised by an Economsit high up in Nat West that inflation was 'transitory' recently and didn't get a fixed rate mrotgage on the back of it.I didn't say anything.The policital elite and banking class are really hoping that if they bury their heads in the sand deep enough,price inflation won't happen.Credit deflation aka BK looks baked in.

 

[Boon]

Just switched electric, was on a standard tariff as well.

With these charts can someone estimate how bad the charges will get if the winter is not windy? Are we talking double/treble bills or something?

[sancho panza]

7 hours ago, Nomad said:

Historically property has been a good hedge against inflation, however with interest rates and affordability being so low I wonder if that will be the case this time round. I'm still sitting on a large amount of cash hoping for some sort of property correction, but can't see it happening now, so think I need to put my cash somewhere else, or even into property. Very unsure what to do

food,fuel,shelter.

Realityy is that rising prices in the fiorst two will restrict the flow of moeny to the third.

I'm not sure property is inflation rpoof away from the areas like the NE that aren't that overpriced relatiove to wages.

6 hours ago, DurhamBorn said:

Who outside of macro strategy would of predicted this?.A 100% bullseye for the thread.Everyone always looks at whats happening,not at what happens due to whats happening and what that reaction creates.Lots more to come yet,25% increase in wages at the bottom,or a mix of that and cuts to welfare,or systemic collapse.

https://www.bbc.co.uk/news/business-58543554

 

A super win for the working people who voted for Brexit.I hope the carers get a proper pay rise now.

21 minutes ago, Cattle Prod said:

Greta doesn't talk about China though, instead our lot want us to have ground source heat pumps, and to blow out our electrical grid with wind enegy. 

Noone gets promoted openly slagging off their boss.She's achieved more in terms of crippling the West than many hardline commies could ever dream of.

[sancho panza]

Basement dweller thesis goes mainstream.

Their predictions for crude price look way out to me.There seems a lot of cognitive dissonance with regard to fossil fuels.Researcher here saying oil will be $60 in 2030.......I jsut don't know what demand/supply figures these poeple are looking at?

https://www.telegraph.co.uk/business/2021/09/12/extinction-rebellion-protests-have-made-petrol-expensive-forever/

Expensive petrol forever as climate warrior investors force oil companies to slash new drilling

Prices are likely to stay high, keeping pressure on consumers, including drivers

Carbon-battling investors are ushering in an era of permanently expensive petrol by forcing oil companies to slash their growth plans, as Morgan Stanley hikes its long-term oil price forecasts.

Big businesses are set to invest almost exclusively in managing and running down their existing oil fields rather than opening new wells because their major shareholders have gone green, according to Martijn Rats, an analyst at the investment bank.

Growing pressure to decarbonise, combined with a fear that peak demand is only around 15 years away, means that companies no longer want to increase supply despite relatively high crude prices of more than $70 per barrel.

As a result, prices are likely to stay high, keeping pressure on consumers, including drivers.

Mr Rats said: “This year, the shareholder pressure on oil companies not to increase investment in oil projects is so strong companies are on the whole not increasing investment. There is almost no recovery in capital investment this year.”

Investment last year was down at $350bn (£253bn), compared with $850bn in 2014.

As new wells are long-term projects, companies are reluctant to invest more in a very uncertain political and business environment.

Mr Rats has hiked his 2030 price forecast from $50 per barrel to $60 because of the environmental shift.

The main risk to this forecast is if major oil nations in the Opec cartel decide they have to make the most of their reserves in the next 10 years and start pumping crude as fast as possible while it is still wanted.

This could send prices tumbling, but analysts think it is unlikely in the short term as the cartel is benefitting from a strong economic recovery that will keep demand healthy for the time being.

Experts at BCA Research said: “The likelihood that the global economic recovery will continue should encourage the Saudis, Russians, Emiratis and others to maintain production discipline to drain inventories and keep Brent crude prices above $60 per barrel.”

They expect prices to hit $80 a barrel by 2024 if Opec can remain disciplined.

 

 

[sancho panza]

Long Jeremy Grantham piece in Monewyeek echoing the thread, that we've not had iirc.He reaffirms my previously stated view that jsut like 2000 we will see weakness in the market leaders before we get the BK.

In bold for skim readers

https://moneyweek.com/investments/investment-strategy/investment-gurus/603787/the-us-is-in-one-of-the-greatest-bubbles-in

The US is in one of the greatest bubbles in financial history

A slow, 12-year build-up

It’s big. This has been one of the longest economic upswings we have ever seen. Take out the Covid-19 “blip” (a quick down and up) and “the long, slow build-up had gone on for 12 years”. At the end of a long upswing such as this, “you’re likely to have very substantial profit margins, and if history repeats itself, investors are likely to consider that the high profit margins will last forever”. 

That’s the first part of making a bubble: “Very strong economics extrapolated into the indefinite future.” The second part is easy money, which we also obviously have in spades. 

Alan Greenspan, former chair of the US Federal Reserve, may have introduced America’s “aggressively pro-asset formula” of cheap money and moral hazard back in the 1990s – but today, rates are the lowest in history and we have just seen the biggest increase in the money supply ever too (a 25% year-on-year rise in the US). 

Things have been pretty stimulative outside the US but in most places this just means being at the “top end of their historical range”. Not so in the US, which has “broken way out” in terms of both government and Federal Reserve stimulus. It’s the same with equity markets. Most are at “merely normally high prices”,  but the US is a candidate for the highest-priced market in its history. 

Big Tech’s extraordinary performance

What makes this worse than a bog-standard bubble? Capitalism, says Grantham, “particularly in the US [which] is a little fat and happy”. The US Department of Justice has allowed industry to become far more monopolistic and concentrated than ever before. But at the same time, companies are less aggressive than they once were. Between the 1960s and the 1990s market share was all that mattered. Now many of the big firms focus on profit margins, using cash flow to do buybacks, for example (something executives love anyway as it works so well with their stock options and is “very low in career risk”).

Look at profit margins in the US and the rest of the world and again you see the difference. In the rest of the world, profit margins have stayed reasonably high but the US has “crashed up to record highs” with a “fairly astonishing 80% gain over the rest of the world in profits”. Even more astonishing however is the fact that something like 85% of this is accounted for by the huge tech companies. “The performance of [Big Tech] has been extraordinary – there’s been literally nothing like it in history, anywhere.” 

Take Apple, the company with the biggest market value in the world. Last quarter it announced that sales had risen by 50% in the past 12 months. “Give me a break, this is the largest company in the world,” says Grantham. Traditionally, a brilliant year for a company of this size would mean growth of, say, 5%-6%. There is no precedent for this kind of expansion. “One has to admit these are exceptional companies.” 

 

Where is the pin?

There is no point in looking for a pin, says Grantham. “No one can tell you what the pin was in 1929. We’re not even certain in 2000. It’s more like air leaking out of a balloon. You get to a point of maximum confidence, of maximum leverage, maximum debt, and then the air begins to leak… because tomorrow is a little less optimistic than yesterday.”

There are, however, warning signs. “Before the great bubbles ended in 1929, 1972 and in 2000, in the US, the three great events of the 20th century, there was a very strange period in which, on the upside, the super-risky, super-speculative stocks started to underperform.” 

Think of it in terms of “confidence termites”. They start with the speculative stuff and gradually reach the rest of the market. This time round we are tracking that path “quite nicely”. When Grantham and I spoke (four weeks ago now), the Spac (special purpose acquisition company) index, bitcoin and Tesla were all substantially off their highs. The Biden stimulus and the good vaccine news have pushed this bubble out longer than Grantham ever expected – as has the huge breadth of market participation. In 2000 it also seemed as though everyone was in the market. 

Watch out for the “confidence termites”

“My favourite story, which is completely accurate, was that [in] the local greasy spoon... in the financial district of Boston [there were eight] television sets [and] all but one of them would be showing talking heads from MSNBC and CNN and [the eighth] would be showing replays of the Patriots football team. And a year earlier... eight out of eight were showing the Red Sox.”

You see something similar today: endless talk about Tesla sales and huge numbers of new traders in the market, all too many of them using options. Grantham reckons the termites will have made it to the rest of the market by the end of the year. 

Where to look now

Oh dear. Is there anywhere safe for investors, I ask? Back in 2000 there were plenty of cheap things around – houses weren’t horribly overpriced, and neither was the bond market; and value stocks were actually cheap. Grantham agrees there is much to worry about if you are looking at the kind of things that get the confidence termites going: the coming of the bezzle (the fraud cases that appear at the end of bubbles); more evidence that this bout of inflation is not transitory; and, in the US in particular, a worsening of the pandemic. 

On the plus side there are some relatively safe havens. One place you really should have some money is in US venture capital. “It’s far and away the most virile part of American capitalism. It has all the ideas. All the best and brightest now come into venture capital, all starting their new firms, as they should.” 

His own Grantham Foundation for the Protection of the Environment has moved its assets to 70% venture capital, with much of that focused on the wall of money heading for decarbonisation. 

There will be huge amounts of money “trying to get into the new ideas... and they will really prosper.” And the established green companies will also be beneficiaries. GMO has had a climate-change fund for the last several years, for example. “It’s doing extremely well. And it will get hurt in the burst, but it’s a global fund. It will go down less. It will come back quicker. It will run further.“ Beyond that, note that overall the equity market is not as overdone as bonds and real estate (the UK housing market, he says, is a “humdinger” – see below), so if you stay out of the US, choose carefully and emphasise emerging markets. 

When the US market collapses all markets will temporarily, at least, come down in sympathy (this is a reason to hold some cash so you can pick up the bargains by the way). However, “you will make a respectable return. Not as much as you would like, but a respectable return” over ten or 20 years. GMO’s current forecasts of annualised seven-year returns for various asset classes (see chart above) suggest that the best value is in this area – high starting valuations imply poor long-term returns. (For context, US stocks have returned an annual 6.5% after inflation over the very long term.) 

Grantham would also suggest steering your portfolio towards value stocks, which are “about as cheap as it gets… compared to the other half of the market”. Perhaps buy “the cheaper low-growth stocks in emerging [markets] and carefully-selected other developed countries” (not the US). But whatever you do, do not let yourself believe that everything is fine. It isn’t. This “is a really splendid speculation”, says Grantham, “and of course it will end badly”.

[Castlevania]

And another two energy suppliers bite the dust 

 

[Loki]

Buy high

Sell low

PROFIT.

[Hardhat]

42 minutes ago, Loki said:

Buy high

Sell low

CENTRICA.

 

[Loki]

1 minute ago, Hardhat said:

Buy high

Sell low

CENTRICA.

Now you get it 

[Majorpain]

1 hour ago, Castlevania said:

And another two energy suppliers bite the dust 

 

Those will no doubt be the unhedged ones, i'm curious who the counterparties of the hedged ones are and what sort of pain they are currently taking.  It really hasn't been cheap buying electricity in a market with zero spare capacity if they are not plant owners, and would explain the stupid high prices if they are forced to buy at any price.

[ThoughtCriminal]

Just found out a mate works in buying and selling gas and electric. 

 

He said its completely fucked due to the reliance on wind. Told me if we don't get a mild winter its going to be absolute carnage. 

 

He says the firm in the screenshot are well worth a follow on twitter as they know whats coming before anyone else. 

 

From up here in Teesside of all places. 

[Bobthebuilder]

On 13/09/2021 at 17:07, DurhamBorn said:

Government is in serious trouble now,and i mean serious.

Yep, they are fucked.

I was considering carrying on my business as usual but, have decided to reel it back to under £12500 per year.

I think that I am the only one who works and pays taxes in my street.

[Barnsey]

 

[Loki]

1 minute ago, Barnsey said:

 

Ya gotta pump those numbers up!

[Barnsey]

6 hours ago, DurhamBorn said:

They think inflation is levelling off.It will be,the first spurt will fall back,then turn up again as lagging inputs like wages take affect.

Falling hotel prices offsetting rising rent of shelter cpi

[DurhamBorn]

12 minutes ago, Bobthebuilder said:

Yep, they are fucked.

I was considering carrying on my business as usual but, have decided to reel it back to under £12500 per year.

I think that I am the only one who works and pays taxes in my street.

Or SIPP anything over £12.5k.My partner is now saving everything over tax allowance into her SIPP and iv started to give my kids some money to do the same.She has also moved in with my daughter cough  so my council tax has gone down 25%.Car is running on cherry diesel now and very little being bought that comes under VAT.

My son will be hit with the NI increase so il give him enough to get 3x it back in tax into his SIPP.

With inflation running so high the governments tax take cant help but grow and of course thats the plan,but with so much of the money now going on state wages and benefits it will be interesting to see how they affect each other going forward.It will also be interesting to see if vacancies stay very elevated.

My son works for Aldi,they lost 5 staff today in the warehouse off to other jobs,two to Amazon for better time off and sign on bonus.The lads left are doing more and more hours and of course that means they are sick and looking for new jobs.I told him to hold in because he will get a pay rise soon.Its everywhere.Of course retail cools right off after xmas,so it will be interesting to see how things go,but big wage inflation is certain.

 

 

[Yadda yadda yadda]

17 minutes ago, Barnsey said:

 

No way that house prices are higher per sq metre in France than the UK. I doubt Germany too.

UK prices are probably correct but the European ones inflated.

[Yadda yadda yadda]

40 minutes ago, ThoughtCriminal said:

Just found out a mate works in buying and selling gas and electric. 

 

He said its completely fucked due to the reliance on wind. Told me if we don't get a mild winter its going to be absolute carnage. 

 

He says the firm in the screenshot are well worth a follow on twitter as they know whats coming before anyone else. 

 

From up here in Teesside of all places. 

Is there a cumulative effect? A few days with little wind is fine, just run nearly everything at full whack. After a while some plants need to shut down for repair. I'm not sure how quickly the pumped storage can refill and if that has been compromised.

If they're in trouble now they'll fail at some point in the winter. Still they increase demand by bringing in unproductive migrants.

[Ghostly]

47 minutes ago, Barnsey said:

 

Presumably it’s the non-bomby part of Israel that has rising prices.

[Bobthebuilder]

45 minutes ago, DurhamBorn said:

Or SIPP anything over £12.5k.

I can SIPP the lot, being self-employed.

[Noallegiance]

1 hour ago, DurhamBorn said:

Or SIPP anything over £12.5k.My partner is now saving everything over tax allowance into her SIPP and iv started to give my kids some money to do the same.She has also moved in with my daughter cough  so my council tax has gone down 25%.Car is running on cherry diesel now and very little being bought that comes under VAT.

My son will be hit with the NI increase so il give him enough to get 3x it back in tax into his SIPP.

With inflation running so high the governments tax take cant help but grow and of course thats the plan,but with so much of the money now going on state wages and benefits it will be interesting to see how they affect each other going forward.It will also be interesting to see if vacancies stay very elevated.

My son works for Aldi,they lost 5 staff today in the warehouse off to other jobs,two to Amazon for better time off and sign on bonus.The lads left are doing more and more hours and of course that means they are sick and looking for new jobs.I told him to hold in because he will get a pay rise soon.Its everywhere.Of course retail cools right off after xmas,so it will be interesting to see how things go,but big wage inflation is certain.

 

 

I asked you some time last year whether you thought it possible that the shit show you saw coming could be worse than you thought.

I think the last few weeks has shown that yes, it will be.

[Noallegiance]

Just fixed my standing and unit costs for 24 months. Slightly more than current variable tariff but fuck being open to sustained price rises of this magnitude.