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

[JMD]

13 hours ago, sancho panza said:

Which brings me to my point. Decompelxity.....basically, my view is that we are headed to much more regional markets primarily down to increased transport costs.This article has really altered the way I'm gauging the future in that as you allude DB,the way to trade this is not to worry about who's retail supply chain is more optimal, but rather protect yuourself witha decent position in the commodities that underpin the industry.

My big big take home from my chat with that farmer,is that I think we're long overdue a period of rampant food price inflation.The govt is worreid about a debt deflation hence they're facing the worng way. Their solution to prevent a debt deflation almost guarantees food price inflation at some point.

Potash and oil....potash and oil....

 

SP, I agree totally on the 'decomplexity'.

Last year DB and Harley started a discussion about 'Investing Closer to the Sources' and it really struck a chord with me. I guess decomplexity is the same/extension of the original thesis - Perhaps Harley/DB can confirm/add their thoughts?

So yes, hard and soft commodities as you say above... but also PM's/energy co's… and other source assets? Hopefully, this is where the excellent 'decomplexity' theory can be fleshed out more by those here with far more knowledge and expertise than me.

 

So far I haven't decided on my allocation split but my personal portfolio will be divided between dividend/reflation stocks (long), and commodities/'decomplexity' (long), plus a momentum strategy that I havnt worked out yet.

As often stated here, everyone needs to find their own investment style that works for them and I think this will work for me. Its straightforward and un(de)complex, like me!  

 

[Harley]

1 hour ago, DurhamBorn said:

.......

Iv started to ladder into OCI as well,if you could maybe run the rule over the technicals,

https://www.hl.co.uk/shares/shares-search-results/o/oci-n.v.-eur20

......

Bit of a similar story to K+S in terms of signals, except I would have seen that uptick on the weekly on 2 Dec 19 as probably a false one and would not have been surprised by the subsequent rollover.  But again, a bullish spin might say it has only pulled back to that point so far, so could rise from this base.  Not sure it's quite there yet.  It's 54% down from its high (upon its listing?).  Funny how many stocks (ETFs too) have to fall quite a bit for a few years after their initial placing before finding their feet.  Presumably takes a while to wash away the stain from all those troughers at the initial placing!  I'd also note that on the monthly it may be making a support zone between here and EUR15.850 and it hasn't quite yet broken the prior low on that chart.  I quite like stocks that fall like this and then bounce (reminds me of a bouncing ball and the release of that kinetic energy).  Goes back to my systems work in my Advanced Economic Theory study days.  Again, one to watch.

[JMD]

5 hours ago, BoSon said:

Food price inflation enough to destroy the likes of Lidl?

Maybe time to stock up on long life basics, both to hedge against inflation, and to keep away from gen pop if the snake-flu virus in China goes pandemic. The reaction to close off a city makes me think they know the current and potential impact is much worse than being reported. 

Will have to see what basics last for years. I presume there's more than sacks of rice, dried pasta, and tinned stuff to consider. Maybe add bottled water and gas and other stuff to go full prepper. 

Why pick on Lidle, surely these type of retailers are the future?

Anyway, I've thought a lot about this 'doomsday scenario', but don't personally expect it to happen. Food/water, etc would be important yes - but if I was truly worried about such things, i'd also stock up on tobacco and home brewing/wine stuff/build your own home still even. If the money system broke i think these type of 'commodities' would be more valuable/tradeable than say silver.

 

[Harley]

1 hour ago, DurhamBorn said:

My macro work says the sector will bottom in the next 5 months then a structural run higher hence me buying now (i expect we are bottom or within 16% of bottom on the sector).Im expecting some to 10x over the cycle,and thats some of the big ones.

Thanks for that key input, it really adds another dimension to the technical and fundamental (financial) work.  Get those three working and our plane is happily running on all three cylinders!  I would like to think if these things go, they'll go big given where they are.  My personal lesson from the 2000 crash is still with me and shouting loud - with a coming inflection point (marked by peak everything) look away from the crowd for the dogs that'll have their day (but don't rush in!).    

[Harley]

On food price inflation, just to repeat what I've said a few times, it has already been ripe with shrinkflation, etc in all stores.   The newer trend has been to go for more "gluppeter" (i.e. processed) stuff where they can change the ingredient mix to take advantage of what ingredients happen to be currently cheaper, but also cheapen the mix overall (e.g. more flour (pastry) than filling).  Some supermarkets do appear to have upped the proportion of such products they sell and they do look to be of very cheap quality. 

[Agent ZigZag]

3 minutes ago, Harley said:

On food price inflation, just to repeat what I've said a few times, it has already been ripe with shrinkflation, etc in all stores.   The newer trend has been to go for more "gluppeter" (i.e. processed) stuff where they can change the ingredient mix to take advantage of what ingredients happen to be currently cheaper, but also cheapen the mix overall (e.g. more flour (pastry) than filling).  Some supermarkets do appear to have upped the proportion of such products they sell and they do look to be of very cheap quality. 

Good observation there H

[Agent ZigZag]

21 minutes ago, Harley said:

 My personal lesson from the 2000 crash is still with me and shouting loud - with a coming inflection point (marked by peak everything) look away from the crowd for the dogs that'll have their day (but don't rush in!).    

This is a lesson I still need to learn and become more disciplined in

[TheCountOfNowhere]

1 hour ago, Harley said:

On food price inflation, just to repeat what I've said a few times, it has already been ripe with shrinkflation, etc in all stores.   The newer trend has been to go for more "gluppeter" (i.e. processed) stuff where they can change the ingredient mix to take advantage of what ingredients happen to be currently cheaper, but also cheapen the mix overall (e.g. more flour (pastry) than filling).  Some supermarkets do appear to have upped the proportion of such products they sell and they do look to be of very cheap quality. 

People have mitigated the food inflation to some extent by changing super markets, I. E... M and S - > waitrose - > sainos - > tesco - > Morrisons - > aldi. 

If you moved like that you're still paying less than you did 10 years ago. I can still buy a bottle of wine for the same price I did 20 years ago and to be honest... Its better quality. 

 

It's when lidl and aldi raise their prices we have a problem. 

[JMD]

5 hours ago, MrXxxx said:

Exactly, yet however much farmers complain they continue in the same business?!...from this fact I can only assume one of three things...either they are stupid (I don't believe this to be the case), they are lazy/reluctant to change, or its not as bad as they say...I often find those who plead poverty aren't, yet the real ones keep quiet.

MrXxxx, I had a friend who's parents owned a small farm. His parents were elderly and had eventually, but reluctantly, invested in automation to help keep things going - new tractor/harvester etc - costing well over half a million pounds. The thing is my friend admitted that the farm wasn't really economically viable, more a hobby, yet for example the tractor purchased was an all-singing/dancing and he said he liked visiting so that he could play on it! Special agri. loans funded this.

Most small farms (and lot of the larger ones) are not viable without big farm subsidies, however these subsidies will continue because future subsidies will be less focused on food production and more about land management/growing trees, which will fit with the new agenda for saving the planet.

[JMD]

6 hours ago, Tdog said:

Their shite and no cheaper than Asda/Tesco food should be, but UK planning laws dictated to us by the Germans now means they're very convenient.

Id ban the lot of the for selling the crappiest food possible.

Sorry, but what are the German inspired 'planning laws' that favour Lidle/Aldi, both are German co's I believe. Or are you referring to the EU in general, a political construct that Peter Hitchens refers to as 'the continuation of Germany by other means'? A concept I admit I find interesting, similar to that of 'Mitteleuropa'.

(For those who may be interested, a similar policy to Mittelafrika, and goes a long way toward explaining main causes of WW1).

[Castlevania]

I’ve never met an optimistic farmer.

[DurhamBorn]

1 hour ago, Harley said:

Thanks for that key input, it really adds another dimension to the technical and fundamental (financial) work.  Get those three working and our plane is happily running on all three cylinders!  I would like to think if these things go, they'll go big given where they are.  My personal lesson from the 2000 crash is still with me and shouting loud - with a coming inflection point (marked by peak everything) look away from the crowd for the dogs that'll have their day (but don't rush in!).    

Exactly,and i think this sector is one where you need to be looking to late cycle sell points.It could be underwater for a long time,but x3 in 6 months.Im not sure yet on the allocation to the sector,im leaning towards around 10%.What i like here is i think its the most likely area to multiply inflation.So if we do indeed get inflation an allocation here should ensure protection.

My loose road map says cycle inflation (this keeps changing) 68% to 118% potash likely to 3x to 6x inflation so minimum 204% increase in price,and that would lead to at least 5x the stocks price more likely around 7x.

So my road map indicates that a 10% sector holding will cover 2/3s of the inflation affect on my whole portfolio over the cycle.I could of course increase the allocation,but thats unlikely.

The thing is though of course if a couple went under before things got going it could pull back the returns a lot seeing as its not a diverse sector and quite concentrated.

[DurhamBorn]

2 hours ago, JMD said:

SP, I agree totally on the 'decomplexity'.

Last year DB and Harley started a discussion about 'Investing Closer to the Sources' and it really struck a chord with me. I guess decomplexity is the same/extension of the original thesis - Perhaps Harley/DB can confirm/add their thoughts?

So yes, hard and soft commodities as you say above... but also PM's/energy co's… and other source assets? Hopefully, this is where the excellent 'decomplexity' theory can be fleshed out more by those here with far more knowledge and expertise than me.

 

So far I haven't decided on my allocation split but my personal portfolio will be divided between dividend/reflation stocks (long), and commodities/'decomplexity' (long), plus a momentum strategy that I havnt worked out yet.

As often stated here, everyone needs to find their own investment style that works for them and I think this will work for me. Its straightforward and un(de)complex, like me!  

 

I said to @sancho panza how much i enjoyed that article and how much it really struck a chord.Id never really considered it in those terms,but in a way a reflation is a decomplexity cycle.You can have the most complex car in the world,with a huge supply chain,masses of parts suppliers etc,but if oil doubles it doesnt care if the punter instead buys a 2nd hand diesel.The liquidity is simply pushed away from the complex to the un-complex.

Like the potash we are looking at right now.It doesnt matter what Tesco or anyone else stocks.What parts of the supply chain change.Who gets squeezed out.If potash doubles,they have to pay.

Its a reason i like the telcos later in the cycle.I fully accept there could be even bigger falls in them yet,but they arent getting the value they should be.I think that will change.Appl and the Chinese can slug it out all they want on the phones,they all use the networks.

[Loki]

4 minutes ago, DurhamBorn said:

Appl and the Chinese can slug it out all they want on the phones,they all use the networks.

Good point!

[Talking Monkey]

16 minutes ago, DurhamBorn said:

Exactly,and i think this sector is one where you need to be looking to late cycle sell points.It could be underwater for a long time,but x3 in 6 months.Im not sure yet on the allocation to the sector,im leaning towards around 10%.What i like here is i think its the most likely area to multiply inflation.So if we do indeed get inflation an allocation here should ensure protection.

My loose road map says cycle inflation (this keeps changing) 68% to 118% potash likely to 3x to 6x inflation so minimum 204% increase in price,and that would lead to at least 5x the stocks price more likely around 7x.

So my road map indicates that a 10% sector holding will cover 2/3s of the inflation affect on my whole portfolio over the cycle.I could of course increase the allocation,but thats unlikely.

The thing is though of course if a couple went under before things got going it could pull back the returns a lot seeing as its not a diverse sector and quite concentrated.

DB one thing that would be really helpful is a rough idea of % portfolio by sector that you have in mind, would give us novices a rough framework

[DurhamBorn]

4 minutes ago, Talking Monkey said:

DB one thing that would be really helpful is a rough idea of % portfolio by sector that you have in mind, would give us novices a rough framework

Its a work in progress but im thinking 10% potash and related.16% oil and gas and utility linked,8% transports,12% PM miners silver and gold 14% telcos,then 40% a lot of none sector specific stocks that are mostly hated now,il include tobacco etc in there.

My main aim is to lean towards inflation,not go all in though and if im wrong simply underperform,not have to work in B+Q at 65.

[Talking Monkey]

3 minutes ago, DurhamBorn said:

Its a work in progress but im thinking 10% potash and related.16% oil and gas and utility linked,8% transports,12% PM miners silver and gold 14% telcos,then 40% a lot of none sector specific stocks that are mostly hated now,il include tobacco etc in there.

My main aim is to lean towards inflation,not go all in though and if im wrong simply underperform,not have to work in B+Q at 65.

Wonderful thank you DB

[JMD]

1 hour ago, DurhamBorn said:

So my road map indicates that a 10% sector holding will cover 2/3s of the inflation affect on my whole portfolio over the cycle.I could of course increase the allocation, but thats unlikely.

The thing is though of course if a couple went under before things got going it could pull back the returns a lot seeing as its not a diverse sector and quite concentrated.

DB, would your 10% be in potash co's only, or also extend/include related (as I see it) sector-parts, e.g. Incitec (general fertilizers) and Evonik (feed, chems). I ask because, for example, I was planning a 5% allocation across 'all three' of the sector-parts. 

Accept everyone has a different approach to risk/return, but helpful to understand what the 10% comprises. 

[DurhamBorn]

14 minutes ago, JMD said:

DB, would your 10% be in potash co's only, or also extend/include related (as I see it) sector-parts, e.g. Incitec (general fertilizers) and Evonik (feed, chems). I ask because, for example, I was planning a 5% allocation across 'all three' of the sector-parts. 

Accept everyone has a different approach to risk/return, but helpful to understand what the 10% comprises. 

Im counting Evonik as seperate and in a allocation iv got marked as agriculture other,.Most of them though i count in the sector where over 50% of their turnover comes from.There are a few fuzzy of course.OCI is potash,but could also be a winner from green fuel etc,but i count it in the potash holdings only.Im not too concerned around the edges as the other areas they tend to be in are reflation anyway.I also tend to use what ETF they are in as a guide to what sector they really are.Im not really bothered by exact holdings as long as im diverse enough.

[reformed nice guy]

2 hours ago, JMD said:

MrXxxx, I had a friend who's parents owned a small farm. His parents were elderly and had eventually, but reluctantly, invested in automation to help keep things going - new tractor/harvester etc - costing well over half a million pounds. The thing is my friend admitted that the farm wasn't really economically viable, more a hobby, yet for example the tractor purchased was an all-singing/dancing and he said he liked visiting so that he could play on it! Special agri. loans funded this.

Most small farms (and lot of the larger ones) are not viable without big farm subsidies, however these subsidies will continue because future subsidies will be less focused on food production and more about land management/growing trees, which will fit with the new agenda for saving the planet.

I have a close friend that is a farmer.

If it wasnt from the money made selling dogs then he would be under water

[BoSon]

4 hours ago, JMD said:

Why pick on Lidle, surely these type of retailers are the future?

 

Lidl and Aldi base their image on value for money, like ASDA with the 'ASDA price' slogan. So any serious food price inflation will damage them more than the bigger supermarkets as people decide they may as well go back to the bigger supermarkets with more choice if the budget ones aren't that cheap anymore.

All down to public perception and with the relatively small sizes of Lidl and Aldi stores they don't have space to offer a wider range of products to hide the expensive ones like you get in the bigger supermarket stores where there can be three or four grades of price/quality for the same type of food, to cater for those on the breadline all the way up to the brand snobs that pay through the nose at Waitrose.

[BoSon]

4 minutes ago, Tdog said:

I get their duck that you roll in those thin bread thingys and dib in Hoisin Sauce, thats nice ... and they have a pulled pork in BBQ' sauce that cooks in about half an hour, which when serviced with rice and veg is quite nice even though its processed meat... both are my kids favourites so get them now and then for simplicity.

And their cereals are cheap and up to the job ... but their fruit and veg for the most part is appalling, as is their fresh meat. Im not man enough to try their ham etc... looks like it could kill a man.

Aye, need to be canny with the comparisons between chains as each have their strengths on the genuine discounts and often cycle between offer prices for certain things. MySupermarket is good for checking what is on offer where so can stock up while cheap.

[Democorruptcy]

6 hours ago, DurhamBorn said:

@Harley below,

https://www.hl.co.uk/shares/shares-search-results/k/k-and-s-ag-npv2

Iv started to ladder into OCI as well,if you could maybe run the rule over the technicals,

https://www.hl.co.uk/shares/shares-search-results/o/oci-n.v.-eur20

 

My macro work says the sector will bottom in the next 5 months then a structural run higher hence me buying now (i expect we are bottom or within 16% of bottom on the sector).Im expecting some to 10x over the cycle,and thats some of the big ones.

 

I've seen some people lose a lot of money on betting exchanges, risking a lot on a bet for little upside. It's seemed like risking running in front of a steamroller to pick up a few pennies. Your figures there could be the opposite by not investing. Say you have a £1,000 and are right about 10x, the profit is £10,000. The biggest danger is not investing and waiting to time the bottom. However if prices rise, you might find it harder to buy in at all and it runs away from you without investing. If the biggest downside is -16%, your maximum loss on your £1,000 is only £160 but you could miss out on £10,000 

[DurhamBorn]

1 minute ago, Democorruptcy said:

I've seen some people lose a lot of money on betting exchanges, risking a lot on a bet for little upside. It's seemed like risking running in front of a steamroller to pick up a few pennies. Your figures there could be the opposite by not investing. Say you have a £1,000 and are right about 10x, the profit is £10,000. The biggest danger is not investing and waiting to time the bottom. However if prices rise, you might find it harder to buy in at all and it runs away from you without investing. If the biggest downside is -16%, your maximum loss on your £1,000 is only £160 but you could miss out on £10,000 

Agree 100% on that.My oil target is $43,seems nuts,but heading in the right direction,but im laddering in already to many.Potash iv already got first and second ladders into them all.K+S touched 3rd ladder.Its why i usually use ladders as it removes the human fear and timing.First ladder goes in when i think things are cheap and the rest get set then.Im actually happy then when stocks fall even though im down on some.Iv found most never hit bottom ladder,but if they do i tend to be 15% down before dividends on stocks then down around 80%+ from highs.

[Democorruptcy]

10 minutes ago, DurhamBorn said:

Agree 100% on that.My oil target is $43,seems nuts,but heading in the right direction,but im laddering in already to many.Potash iv already got first and second ladders into them all.K+S touched 3rd ladder.Its why i usually use ladders as it removes the human fear and timing.First ladder goes in when i think things are cheap and the rest get set then.Im actually happy then when stocks fall even though im down on some.Iv found most never hit bottom ladder,but if they do i tend to be 15% down before dividends on stocks then down around 80%+ from highs.

Yes, you have won me around to your ladders. At first I was a bit sceptical about incurring extra fees on more transactions but in the scale of things those fees are peanuts.