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

[sancho panza]

4 hours ago, Ash4781b said:

What is the much discussed Intu Plc (commercial real estate) plan? 
 

They talk of fixing the balance sheet so that gives an early indication of full-year look ok the balance sheet. Presumably some interested parties but I can’t think what these large shopping centres will become? Eg. Lakeside, Essex is one of theirs. I suppose investors can get wiped out and someone picks up assets on cheap on a lower rent model? It’ll be interesting who they get onboard-hedge funds ?

https://www.intugroup.co.uk/en/news/news-and-press-releases/market-update/

Ghost towns,like the US,but from the top down.They'll go under level by level.

 

[spygirl]

5 minutes ago, sancho panza said:

So technically,farmer wasn;t fibbing.Just saying.

I workd on afarm in NZ.dairy farm 25 years ago.150 head .was viable then for a one man band.Now the farms have all gone to 1000's of head.Rotating milking sheds etc.

taking your milk chart then adjsuting for RPI from 1987.

Milk price in 1987 was  25 pence per pint.2019 was 44pence.

RPI 1987=100.2019 =291.

And that's without tkaing into account what a woeful measure of inflation RPI is-but better than CPI/CPIH.

No wonder loads have left the industry.

Food price inflation is coming back.Probably becuase of oil price rises.

Hungry chinese.

Maybe the flu will reduce demand?

[JMD]

19 hours ago, DurhamBorn said:

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.

thanks DB, that does help a lot. Not that I seek to replicate you of course - because everyone's risk/life-stage/wealth is different - but understanding a little about other's rationale for their allocations enables me to spot-check why I allocate, for example, 5% to soft commodities. I may increase it a bit, but then again I also have to balance with my hard commodities and PM's, we'll see.    

[Barnsey]

Handmade Burger Co and Hawkin's Bazaar both in administration past couple days, the clearing out continues!

[Barnsey]

13 hours ago, sancho panza said:

Wow,somethings up....

ANother wow.I had no idea.I wonder why on both counts.

If we were to avoid recession and continue expansion, we would be seeing these changes reversing. I take it as a sign similar to pre 2008 where the big lenders go "oops" and pull back whilst the smaller subprime lenders step in at the last moment to prey upon the over-extended. The debt cycle still exists, expansion of credit can only go on for so long.

[Noallegiance]

I wonder if the 2 million people permanently stuck in overdraft means those who are -£2k every month and get paid £1800, or if it includes those who are -£600 every month and get paid £1800?

[reformed nice guy]

21 hours 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.

Inspired by this post, I have had a look at my current standing. A lot of my purchases have been based on researching individual companies and doing ladders as recommended on this thread. I have been buying a fixed amount of index funds each month to give me a broader exposure as well. Ongoing platform charges are about 0.63% excluding dealing charges.

@DurhamBorn I currently have bonds, mostly in Vanguard bond funds. Some are inflation linked, others are not. When do you think would be a good time to sell them (or at least signals to watch for)? Is there a value in having some American bonds to act as a hedge to ongoing GBP devaluation or is my holding of American shares more than sufficient?

My net is currently very broad, so I dont plan to add any new shares, just ladder into existing ones. I plan to primarily increase the weighting of agriculture and chemicals - those are my main ladders- and significantly decrease bond weighting.

Hopefully this helps some people with their thinking and spurs debate. I am always looking to learn.

My allocation is currently (rounded figures). Only 70% of my funds in my SIPP + ISA is invested, the rest is in cash:

1% agriculture

2% car manufacturers + related (some Honda, but also got lucky with Tesla at $50!)

3% finance + related

12% bonds (mostly US and inflation linked)

3.5% chemical industry (including potash)

6.5% consumer (mostly fags and gambling)

1% defence (just BAE)

20% in lowest cost index funds

1% manufacturing (Siemans and 3m)

7% mining (glencore, rio etc)

1% miscellaneous

20% oil (mostly big companies BP, Shell etc)

1% pharma

5% PM miners

2% power companies (SSE, centrica)

0.5% steel (punt on Evraz)

7% tech (alibaba, fanuc, paypal, square ....)

4% telecoms

3% transport

 

[headrow]

Just bought another £2000 of K&S AG , 25% down on the lot i bought the other week. Now only 12% down.

 

I did something i never normally do , buy a share in a rising market. I've just doubled down on my first mistake today

[sancho panza]

6 hours ago, MrXxxx said:

So basically they are shit businessmen in that:

a) they have allowed themselves to become over leveraged,  

b) in a market where they have little control over the price of their assets,

c) in an asset that cannot be sold quickly/easily

...sounds like the amateur BTL landlord of the Countryside to me!

I don't know how much commercial experience you have but the difference between being lauded as a genius and labelled a fraudster can be minimal at times.

We can't all be geniuses.I'm not.I've made some mistakes-oh boy have some of them cost what were large sums to us.

Leverage can creep up on you in business as cash flow worsens but not disastrously so, or revenues drop but not badly enough to force the bank call an immediate stop to your account.Some people assess the evidence and figure they'll give it another couple of years etc etc by which time they're even deeper in the hole but reason that the only way out is to keep digging.

Creeping leverage,mixed with declining profits and negative free cash flow can lead to businesses that were hugely profitable going under.Look at some bars and restaurants.

Mix these factors with illquid assets and you have a pontetn cocktail that can lead to impoverishment.

I have witnessed some really great commercial minds lose money on ventures.I have also seen some really stupid people get lucky big time.

 

 

[Talking Monkey]

2 minutes ago, sancho panza said:

I don't know how much commercial experience you have but the difference between being lauded as a genius and labelled a fraudster can be minimal at times.

We can't all be geniuses.I'm not.I've made some mistakes-oh boy have some of them cost what were large sums to us.

Leverage can creep up on you in business as cash flow worsens but not disastrously so, or revenues drop but not badly enough to force the bank call an immediate stop to your account.Some people assess the evidence and figure they'll give it another couple of years etc etc by which time they're even deeper in the hole but reason that the only way out is to keep digging.

Creeping leverage,mixed with declining profits and negative free cash flow can lead to businesses that were hugely profitable going under.Look at some bars and restaurants.

Mix these factors with illquid assets and you have a pontetn cocktail that can lead to impoverishment.

I have witnessed some really great commercial minds lose money on ventures.I have also seen some really stupid people get lucky big time.

 

 

I second this, I have seen some really dumb people take absolutely reckless amounts of debt (some of it acquired fraudulently) and take the most bewildering hugely leveraged gamble on BTL and they are now sat lucky big time on huge amounts of equity. Literally dumb as fuck people with several million in housing equity

[JMD]

21 hours ago, Tdog said:

Planning laws that have enabled them to stick their shite supermarkets everywhere, you dont think this is by accident that they can build one of the commercial units on greenbelt land ... but an ordinary man cannot build a house on one.

EU aka Germany have been making our laws for about 40 years now,

But one example is the crested newt which by law is a protected species .... the UK is over run with the pesky little things, but EU law dictates that it is bordering on the impossible to build a residential house if they are in the area ... when it is only in certain parts of the EU where there numbers are rarity.https://www.google.com/search?q=great+crested+newt+european+protected+species&oq=crested+newt+eu+&aqs=chrome.1.69i57j0.7299j1j7&sourceid=chrome&ie=UTF-8

British supermarkets were cheap enough before their arrival, they're just not needed ... and neither is Siemens needed to come here, we could have quite easily built our own windmills and blades without the cunts getting taxpayer handouts to open factories.

 

Tdog, lets just say i'm glad we are leaving the EU empire, but sad we cant do the same with the US empire. As i see it you and I probably agree about the negatives of operating under 'external authorities', regardless of how those authorities might be constituted. Not least because the prize of (economic) freedom is such a fantastic driver for wealth creation.     

Its just that I don't see conspiracies, hidden or otherwise (its why I referenced mitteleuropa in my post) - the so called 'covert' policies are usually fully signposted and the participants proceed to do as they advertised 'on the tin' for those who look. Instead I think it is mostly bad political leadership and laziness that enables others to dominate or game the system to their own advantage - so our heavily indebted and war-weary post-war Britain did lose dominance over its overseas markets (i.e. SE Asia/ME went to US), and our labour relations were crap (i.e. industries went to Germany).  

I suppose we can be thankful that these transfers of power, which have happened throughout history, now thankfully occur peacefully. Just hoping that the imminent push/pull between China and US can be resolved by perhaps a new Cold War - some are already calling the coming 'conflict' Cold War 11. 

[DurhamBorn]

Look at that oil price.Almost everyone was calling up when it was $60+.My liquidity flow/GDP cross market said down to perhaps $43.Still pointing to the $43 area,but that could be too harsh of course (though sub $20 still flashing on a debt deflation smack down),key was that the road map got the direction right.Very happy that the lead and lag work got the turn within days as well.Its a bit tricky giving different scores to different sized economies like India and China and convert GDP numbers to oil demand.Gives confidence we are in the right ballpark by getting the lag turn right though.The longer oil road map takes in more fuzzy figures where we convert printing to demand growth and an increase in velocity.Thats showing $267 oil in 2028 

[DurhamBorn]

@reformed nice guy i still think rates will hit 0% so a holding in US bonds is a good place.Iv got some myself still.The time to sell will be when everyone dumping Apple and buying treasuries.The linkers id probably just hold through everything.

[Craig]

26 minutes ago, DurhamBorn said:

Look at that oil price.Almost everyone was calling up when it was $60+.My liquidity flow/GDP cross market said down to perhaps $43.Still pointing to the $43 area,but that could be too harsh of course (though sub $20 still flashing on a debt deflation smack down),key was that the road map got the direction right.Very happy that the lead and lag work got the turn within days as well.Its a bit tricky giving different scores to different sized economies like India and China and convert GDP numbers to oil demand.Gives confidence we are in the right ballpark by getting the lag turn right though.The longer oil road map takes in more fuzzy figures where we convert printing to demand growth and an increase in velocity.Thats showing $267 oil in 2028 

And that's presumably when everything goes tits up? 

[Barnsey]

Gilts & Treasury yields still heading downwards, what are they sniffing out vs reflation hype? 

[DurhamBorn]

1 hour ago, Barnsey said:

Gilts & Treasury yields still heading downwards, what are they sniffing out vs reflation hype? 

Think rates might go to zero Barnsey yet,its the panic printing that will bring that kicks in a reflation.Deflation first.

[DurhamBorn]

47 minutes ago, Cattle Prod said:

Entirely possible. Are you modelling Brent or WTI, and when roughly do uou see the cycle low in?

My interpretation is that the current retracement is paper oil, sentiment driven. The discounting of the 3 recent geopolitical risk events is evidence of that, its completely nuts on a fundamental level. There is still a mass perception of supply, and only US shale decline will shake it. Well if they want to give us a discount, fine!

There is mounting evidence that the physical market is tight, despite the falling price. Most obviously, its still backwardated. Why not in contango? People are still paying a premium for available rather than stored physical. And sometimes quite a premium. In three of my companies markets we are getting $4 (in the UK), $6 and $10 above Brent prices per barrel. There is low sulphur oil in Australia going for c. $100 a bbl! Maybe 90 now.

$43 sounds like a nice discount, I expect it would be short lived. I've already started buying some deep otm call options. I can't resist the leverage and they are getting cheaper. Dyodd 

One last point DB, demand falls are rare and tend to only happen in major economic crises. The EIA is constantly revising upwards last years/quarters demand projection. It's been a linear trend for decades.

Good you noted the danger before the turn. The paper oil market is huge and can slap the price around very easily (as we are seeing now). Its also now being priced in CNH and I don't fully understand the implications of this. Price is set at the margin, and a CNH rise against the dollar could be lowering dollar oil prices when they buy it (as the largest importer).

Its a very choppy road map because the market is so big ,but i think the bottom could be in within 3 months.Remember as well we mean demand falls against expected production.Demand can still be going up,but it slows while production rises.If that makes sense.Im happy to be buying into the sector now,though i do have ladders set in case my target hits.We always use WTI.

If the printing happens as expected the road map looks incredible 7 years out.Over $200 is almost certain and even $300 in reach.

I did an interesting sketch of where price pushes the speed of green investment,and once oil goes over $110 its actually hydrogen that comes into play.I see a situation where big oil uses the massive cash flows at $100+ oil to fund hydrogen and kill electric.Thats a very interesting thought and im wondering is big oil already thinking it?.I think they are.That wasted wind power at night might not be charging batteries,but making hydrogen.Makes you wonder who is pushing SSE shares up,they are nearly 50% up from my bottom ladder now.I also think Drax might convert to hydrogen at some point and is an interesting play on the above,without stab in the dark risk.

[Democorruptcy]

10 hours ago, Cattle Prod said:

One last point DB, demand falls are rare and tend to only happen in major economic crises. The EIA is constantly revising upwards last years/quarters demand projection. It's been a linear trend for decades.

What about in a Pandemic? I would have thought a large part of the oil price drop recently is connected to this Corona Virus scare. If people stay at home instead of going out, they use less. Yesterday Gold/Silver up but Oil down.

[DurhamBorn]

53 minutes ago, Cattle Prod said:

Well then we are in screaming agreement. There is a little help in supply in Q1 in Brazil, Guyana and Norway (Johan Sverdrup field I talked about before). All absorbed by Q2 Q3. After that, nothing extra evident. I think the physical market will start screaming then. The world still needs about 5m bpd of new production every year to offset natural declines. Thats a new Saudi Arabia every 2 years or so. Not going to continue.

WTI has been in a nice price channel since the 2016 lows, and the next bottim hit on that is around 47/48. I think it'll almost certainly go there, and an overshoot to 43 in a capitulation selloff is very reasonable. Its all lining up. I can see the "end of oil" headlines already! 

I don't know much about hydrogen, and I need to. I'd heard there was a fundamental problem with EROI, energy return on energy invested. It took more energy to produce and store it than what it gives back. But if they have overcome that, game on. I always liked that the exhaust fumes from a hydrogen car would be pure water.

At present we priced it as about $110 oil when hydrogen gets very interesting.There is also a lot of electric going to waste on a night as more wind comes online and a lot of work on cutting the price of the manufacturing.Its getting close where you might be able to have an on site electrolyser.

The first big winners in this should be the bus companies.There comes a point as oil goes through the roof that buses can all move to the then cheap hydrogen.I worked for Cummins and they are investing a lot in the drive trains.

I think this is the reason SSE has been doing so well as it could be a big player.

file:///C:/Users/User/Downloads/Impact of Electrolysers_SSEN Final Report.pdf

https://news.aberdeencity.gov.uk/aberdeens-pioneering-hydrogen-bus-project-arrives-at-major-milestone/

UK could lead the world as well.

[Harley]

15 hours ago, Cattle Prod said:

This is very interesting, ......

I'm finding Max Keiser's vidoes/podcasts very relevant at the moment.  He just did one on the (Soros?) idea of Reflexivity.  Relevant to this systems discussion.

 

PS:  @sancho panza, one episode also covered a bit about the velocity of money.  The one above covers a hell of a lot more (like the potential issue with trackers/ETFs I and others have mentioned).  Oh, how rude of me, hello Max!

[Castlevania]

2 hours ago, DurhamBorn said:

At present we priced it as about $110 oil when hydrogen gets very interesting.There is also a lot of electric going to waste on a night as more wind comes online and a lot of work on cutting the price of the manufacturing.Its getting close where you might be able to have an on site electrolyser.

The first big winners in this should be the bus companies.There comes a point as oil goes through the roof that buses can all move to the then cheap hydrogen.I worked for Cummins and they are investing a lot in the drive trains.

I think this is the reason SSE has been doing so well as it could be a big player.

file:///C:/Users/User/Downloads/Impact of Electrolysers_SSEN Final Report.pdf

https://news.aberdeencity.gov.uk/aberdeens-pioneering-hydrogen-bus-project-arrives-at-major-milestone/

UK could lead the world as well.

Hydrogen fuel cell vehicles use twice as much platinum group metals as a conventional car. Should be good for platinum miners if it does take off.

[Hardhat]

More good news for JLP holders then!

[DurhamBorn]

48 minutes ago, Castlevania said:

Hydrogen fuel cell vehicles use twice as much platinum group metals as a conventional car. Should be good for platinum miners if it does take off.

Indeed and guess who is funding a lot of the research,Anglo-American,the worlds biggest platinum miner.

[Castlevania]

5 minutes ago, DurhamBorn said:

Indeed and guess who is funding a lot of the research,Anglo-American,the worlds biggest platinum miner.

However electric vehicles don’t use any platinum group metals. Petrol/electric hybrids do. On the flip side electric cars seem to use a fair bit of silver. So might be worth having exposure to both platinum group and silver miners.

[DurhamBorn]

Just now, Castlevania said:

However electric vehicles don’t use any platinum group metals. Petrol/electric hybrids do. On the flip side electric cars seem to use a fair bit of silver. So might be worth having exposure to both platinum group and silver miners.

Exactly,and its crucial to to consider hydrogen might win out on cars and not electric.Of course electric itself wins because its needed to convert the hydrogen.I like Drax because it might convert one of its stations to hydrogen production etc.Energy is going to be massive in the next cycle.Oil through the roof and then alternatives doing the lifting.Put simply more money is going to be going to the sector,a lot more and everyone else will have to pay.

Im not even doing any work on the sector at all as the road maps are clear on the direction once out of this deflation.Im more interested now on the cross market work.Who else gains by expensive oil etc.Who else might get ramped later in the cycle as people wake up to the sectors getting a tail wind.

Oil,clean energy,telcos,transports and potash look like fantastic areas for the base of a portfolio.