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

[sancho panza]

13 hours ago, DurhamBorn said:

Iv looked at my road map but the sentiment indicators are just useless at the minute as they go off the scale.However if i take my sentiment to a 3x (thats the highest possible iv ever used) it still shows a turn in oil above $40.That road map work on oil has saved me a hell of a lot of money by seeing me miss most of the falls in the sector.My tracking is showing Shell should be down another 6% though with oil at $43,so interesting to see if that happens.

personally,I think trying to read anyhting into the sentiment last week otehr than from an extrememely short term perpsective is pointless.Good sold off with bad and sometimes worse than bad.It was indiscriminate and .I think a more nuanced changes in direction may be inbound.

Japan has announced stimulus package as per barnsey and it seems highly likely fed/other CB's will follow because they can.The thing that will stop future QE/ZIRP is rising inflationary expectations in the the infaltion they measure ie CPI/CPIH(I accept they're shocking measures of inflation but we're working with their playbook not ours)

This is what @Majorpain and @Cattle Prod were alluding to.We have a period of infaltion coming and once that's running,it'll set the big kahuna up for 2021/22 because they won't be able to hide from 10% CPI.

I've bored on already about this corona virus not being ebola.I tried telling MrsP but she's gripped by the panic the media are spreading.I spoke to a few people in my line of work over the last few days(NHS) and the overbearing view is that it's a strain of flu that's spreads quicker and has a higher mortality rate than normal flu(which kills a lot people globally every year).Noone's skipping work because of it which would be a tell tale sign to start crapping yourself.

My cyncial mind thinks that it will be used as a justification for a host of things that aren't in most people's interests.

6 hours ago, Barnsey said:

COVID19 not getting any better, yet markets heard "liquidity" and are responding in expected fashion, Brent up 4%! Everything else well and truly green (for now).

I think we could rally from here before another leg down but certain sectors may have done their selling.We have plenty of ammo left for the oilies and possibly some goldies too.

kudos to DB for his price calls.Absolteuly stunning.$43...............nailed it.

 

[DurhamBorn]

@sancho panza agree,every profit downgrade will be blamed on it.Easy way out for a CEO.Printing was needed 18 months ago,so it will not stop the damage the economy is in,but will see people wake up to the inflation threat.Im not going to do any road map work for a while as im pretty much now concentrating on buying companies and allocation,but il probably keep doing oil for the interest of the thread.Also my $ is showing down 10% from here,so around 90

[sancho panza]

5 hours ago, Loki said:

The great thing about having a portfolio based on this thread is that even on days like today you're not left thinking 'Should i sell?'  

x2.Oil,gold,silver,potash,electricty providers and some Card factory.

5 hours ago, Bricks & Mortar said:

Bad news sells.
Nobody wants to report that the number of active cases has been falling for more than a fortnight.

https://www.worldometers.info/coronavirus/coronavirus-cases/#active-cases

Very interesting B&M.I've been genuinely surprised at the way some people including the wonderful Mrs P are reacting.Death toll on Chiense roads dwarfs the worldwide infections total currently.

I'm not normally a conspiracy theorist but there's more to this than meets the the eye.Trump has said it's nothing to worry about but the Chinese govt are using it to up their control.

 

[Democorruptcy]

Special Hussman downdate:

https://www.hussmanfunds.com/comment/observations/obs200301/

[MvR]

1 hour ago, JMD said:

Yes your correct, I should have clarified things more - that so many of these type of funds are now risky due to lazily mimicking the malaise of stock market mis-investment, but at some point after the looming market shake down, I will be looking into EM funds/etfs and other thematic funds/etf's if they provide access to 'difficult to invest in' markets, but will be keeping my shares. 

Good point about diy etf's, if only these were available for us here. Perhaps after our new US trade deal...?

You can create something like that yourself in Interactive Brokers.  You can create "baskets" of stocks to buy or sell together in particular proportions, automatically generate re-balancing orders a la the Permanent Portfolio system, and analyse your holdings to find their beta-weighted delta relationship to any given index or instrument. ( i.e. how individual stocks, or a whole basket or portfolio, would be expected to respond to a move in the index instrument, based on historic correlation ). 

I've never used the basket feature, or indeed 95% of the platform's features, but it's a cracking toolkit if you want to experiment with that sort of thing, albeit with a steepish learning curve.  I use the beta-weighted delta all the time though, as it's a great way to quickly know my exposure in terms of equivalent SPYs or whatever, so if I decide I want to hedge, I know exactly how much of what instrument to buy or sell to go market neutral.

[Harley]

2 hours ago, Boon said:

Bought BP, Shell and Aviva this morning on market open....typical that the market gives up its gains almost immediately after!

Good, I had a bit of a lie in this morning!

[Democorruptcy]

37 minutes ago, Talking Monkey said:

Why does the second wave kill more

A bit about pandemic waves

A Perspective on Multiple Waves of Influenza Pandemics

[sancho panza]

45 minutes ago, Democorruptcy said:

Surplus Economics latest 

https://surplusenergyeconomics.wordpress.com/2020/02/29/165-to-catch-a-falling-knife/

 

You never do it jsutice DM,jsut dangle the carrot....what a superb piece from the father of the decomplex trade.What a fine mind.

#165. To catch a falling knife

Posted on February 29, 2020

AT THE END OF TWO ERAS, HOT MARKETS NEED COOL THINKING  

Unless you’ve been in a dealing-room on Wall Street or in the City of London (or, as in my own case, in both) during a market crash, it’s almost impossible to imagine quite how febrile and frenetic the atmosphere becomes. Rumours flourish and wild theories proliferate, whilst facts are scarce. Analysts are expected to provide instant answers, perhaps on the principle that even an answer which turns out to be wrong is of more immediate use than no answer at all.

It’s a sobering thought that the only financial market participants with any prior crash experience at all are those who’ve been working there for at least twelve years – and even they may have been lulled into complacency by a decade and more in which the working assumption has been that, thanks to the omnipotence and the omniscience of central bankers, ‘stock prices only ever go up’.

This complacency, a dozen years in the making, is a resilient force, and showed signs of staging a come-back in the final trading minutes of a tumultuous week. The logic, if such it can be called, is that the Federal Reserve and the other major central banks will spend the weekend concocting a solution.

For once, this rumour is almost certainly founded in reality, and my strong hunch is that the central banks will have announced co-ordinated measures before the weekend is over. These measures are likely to include further rate cuts, a resumption of the Fed’s $400bn “not QE” programme that ended in December, and statements of intent by all of the central bankers. The likelihood of something along these lines, even if it achieves nothing of substance, will have raised expectations to fever pitch by the time that the markets reopen.

We should be in no doubt that this central bank intervention will be ultra-high-risk. For starters, there are plenty of reasons why it might not work. The Fed, for instance, cannot “print antibodies”, as someone remarked on the superb Wolf Street blog, in which Wolf Richter reminded us that “if you don’t want to get on a plane in order to avoid catching the virus, you’re not going to change your mind because T-bill yields dropped 50 basis points”.

Critically, if the central bankers try something and – beyond a brief “dead cat bounce” – it doesn’t work, then their collective credibility as supporters of equity markets will be shot to pieces, which would overturn market assumptions to such an extent that a correction could turn into a full-blown crash. Their only real chance of success will rest on persuading investors that whatever happens in the real economy has no relevance whatsoever for the markets.

My own preference would be for central bankers decide to do nothing, or, as they might express it themselves, ‘conserve their limited ammunition for a more apposite moment’. This, though, is a preference based almost wholly on hope rather than expectation. We might or might not over-estimate the powers of the central bankers, but we should never underestimate their capacity for getting things wrong.

The double dénouement      

From personal experience, analysts are pulled in two directions at once in circumstances like these. Whilst one part of you wants to provide the instant answers which everyone demands, the other wants to find a physically and mentally quiet space in which to think through the fundamentals. It’s fair to say that, at times like this, it’s enormously important to step back and produce a coldly objective interpretation.

Seen from this sort of ‘top-down’ perspective, current market turmoil is symptomatic of the uncertainty caused by the simultaneous ending of two eras, not one.

The first of these ‘ending eras’ is a chapter, four-decades long, that we might label ‘neoliberal’ or ‘globalist’.

The other, which we can trace right back to the invention of the first effective heat-engine in 1760, is the long age of growth powered by the enormous amount of energy contained in fossil fuels.

Whilst environmental issues are the catalyst bringing our attention to ‘the end of growth’, the Wuhan coronavirus is acting, similarly, to crystallise an understanding that ‘the chapter of globalist neoliberalism’, too, is drawing to a close.

The best way to understand and interpret these intersecting dénouements is to start with some principles, and then apply them to the narrative of how we got to where we are.

Here, with no apology for brief reiteration, are the three core principles of surplus energy economics.

First, the energy economy principle – all economic activity is a function of energy, since literally nothing of any economic utility whatsoever can be produced without it.

Second, the ECoE principle – whenever energy is accessed for our use, some of that energy is always consumed in the access process.

Third, the claim principle – having no intrinsic worth, money commands value only as a ‘claim’ on the output of the energy economy.

Together, these principles – previously described here as “the trilogy of the blindingly obvious” – provide the essential insights required if we’re to make sense of how the economy works, how it got to where it is now, and where it’s going to go in the future.

The ECoE trap

Critically, the energy cost component (known here as the Energy Cost of Energy, or ECoE) has been rising relentlessly since its nadir in the two decades after 1945. Since surplus energy, which is the quantity remaining after the deduction of ECoE, drives all economic activity other than the supply of energy itself, rising ECoEs necessarily compress the scope for prosperity.

The way in which we handle this situation in monetary terms determines the distribution of prosperity, and informs the economic narrative that we tell ourselves, but it doesn’t  – and can’t – change the fundamentals.

Where fossil fuels are concerned (and these still account for more than four-fifths of all energy supply), the factors determining trend ECoE are geographical reach, economies of scale, the effects of depletion and the application of technology.

These can usefully be expressed graphically as a parabola (see fig. 1). As you can see, the beneficial effects of geographical reach and economies of scale have long since been exhausted, making depletion the main driver of fossil fuel ECoEs. Technology, which hitherto accelerated the downwards trend, acts now as a mitigator of the rate at which ECoEs are rising. But we need to recognise that the scope for technology is bounded by the envelope of the physical properties of the primary resource.

Fig. 1

Analysis undertaken using the Surplus Energy Economics Data System (SEEDS) indicates that, where the advanced economies of the West are concerned, prior growth in prosperity goes into reverse when ECoEs reach levels between 3.5% and 5.0%. Less complex emerging market (EM) economies are more ECoE-tolerant, and don’t encounter deteriorating prosperity until ECoEs are between 8% and 10%.

With these parameters understood, we’re in a position to interpret the true nature of the global economic predicament. The inflexion band of ECoEs for the West was reached between 1997 (when world trend ECoE reached 3.5%) and 2005 (5.0%). For EM countries, the lower bound of this inflexion range was reached in 2018 (7.9%), and it’s set to reach its upper limit of 10% in 2026-27, though prosperity in most EM countries is already at (or very close to) the point of reversal.

Desirable though their greater use undoubtedly is, renewable energy (RE) alternatives offer no ‘fix’ for the ECoE trap, since the best we can expect from them is likely to be ECoEs no lower than 10%. That’s better than where fossil fuels are heading, of course, but it remains far too high to reverse the trend towards “de-growth”.  In part, the limited scope for ECoE reduction reflects the essentially derivative nature of RE technologies, whose potential ECoEs are linked to those of fossil fuels by the role of the latter in supplying the resources required for the development of the former.

The energy-economic position is illustrated in fig. 2, in which American, Chinese and worldwide prosperity trends are plotted against trend ECoEs. Whilst the average American has been getting poorer for a long time, Chinese prosperity has reached its point of reversal and, globally, the ‘long plateau’ of prosperity has ended.

Fig. 2

Response – going for broke

As well as explaining what we might call the ‘structural’ situation – where we are at the end of 250 years of growth powered by fossil fuels – the surplus energy interpretation also frames the context for the ending of a shorter chapter, that of ‘globalist neoliberalism’.

Regular readers will know (though they might not share) my view of this, which is that the combination of ‘neoliberalism’ with ‘globalization’ (in the form in which it has been pursued) has been a disaster.

Whilst there’s nothing wrong with spreading the benefits of economic development to emerging countries, this was never the aim of the ‘globalizers’. Rather, the process hinged around driving profitability by arbitraging the low production costs of the EM nations and the continuing purchasing power of Western consumers, the clear inference being that this purchasing power could only be sustained by an ever-expanding flow of credit.

The other, ‘neoliberal’ component of this axis was based on an extreme parody which presents the orderly and regulated market thesis as some kind of justification for a caveat emptor, rules-free, “law of the jungle” system which I’ve called “junglenomics”.

From where we are now, though, what we need is analysis, not condemnation. As we’ve seen from the foregoing energy-based overview of the economy, ‘neoliberalism’ was as much an inevitable reaction to circumstances as it was a malign and mistaken theory.

Essentially, and for reasons which energy-based interpretation can alone make clear, a process of “secular stagnation” had set in by the late 1990s, as the Western economies moved ever nearer to ECoE-induced barriers to further growth. At this juncture, policymakers were compelled to do something because, just as never-ending growth is demanded by voters, the very viability of the financial system is wholly predicated on perpetual growth. The contemporary penchant for ‘globalist neoliberalism’ simply determined the form that this intervention would take.

Since our interest here is in the present and the immediate future rather than the past, we can merely observe that, after the failure of ‘credit adventurism’ culminated in the 2008 global financial crisis (GFC), the subsequent adoption of ‘monetary adventurism’ simply upped the stakes in a gamble that couldn’t work. What this in turn means is that the probability of truly gargantuan value destruction is poised, like Damocles’ sword, over the financial system. If it hadn’t been the Wuhan coronavirus which acted as a catalyst, it would have been something else.

Conclusions and context

As we await the next twists in some gripping economic and financial dramas, it’s well worth reminding ourselves that stock markets, and the economy itself, are very different things. High equity indices are not hall-marks of a thriving economy, least of all at a time when market processes have been hijacked by monetary intervention.

In so far as there’s an economic case for propping up markets, that case rests on something economists call the “wealth effect”. What this means is that, whilst stock prices remain high, the accompanying optimistic psychology makes people relaxed about taking on more credit. The inverse of this is that, if prices slump, the propensity to borrow and spend can be expected to fall sharply.

The snag with this is straightforward – unless you believe that debt can expand to infinity, perpetual expansion in credit is a very dubious (and time-limited) plan on which to base economic policy. If the central banks do succeed in reversing recent market falls, the only real consequence is likely to be a deferral, to a not-much-later date, of the impact of the forces of disequilibrium which must, in due course, redress some of the enormous imbalances between asset prices, on the one hand, and, on the other, all forms of income.

Ultimately, we don’t yet know how serious and protracted the economic consequences of the coronavirus will turn out to be. My belief is that these consequences are still being under-estimated, even if, as we all hope, the virus itself falls well short of worst-case scenarios. It’s hard to see how, for example, Chinese companies can carry on paying workers, and servicing their debts, with so much of the volume-driven Chinese economy in lock-down.

Within the broader context, which includes environmental considerations in addition to the onset of “de-growth” in prosperity, we may well have reached ‘peak travel’, which alone would have profound consequences. Other parts of the financial system – most of which are far more important than equity markets – seem poised for a cascade. If it isn’t ‘Wuhan, and now’, the likelihood is that it will be ‘something else, and soon

24 minutes ago, Democorruptcy said:

Special Hussman downdate:

https://www.hussmanfunds.com/comment/observations/obs200301/

Thanks for psoting,I'm meant to be working but had to read that surplus energy piece.Beyond superb.I'll do the downdate later.

8 minutes ago, Democorruptcy said:

A bit about pandemic waves

A Perspective on Multiple Waves of Influenza Pandemics

Thanks again.Looks very interesting from a clinical perpsective.

[Harley]

3 hours ago, DurhamBorn said:

Iv got tax down to as low as i can now

I cracked open a (tax free) non alcoholic beer last month when HRMC wrote to me saying I no longer needed to do a tax return!  I think they refused to believe I had a life change all those years ago and must now be sick of me only ever using it to get some money back (including declaring CGT losses for some dream-on future relief!)!  Think I'll keep sending one in though just to p*ss them off!  My partner is now working towards a similar exit.  Maybe she should take that council job too!  I suggested she went for a 3 day a week job (plus 2 days a week in the allotment) which I guess could well be the council job, only she'll have to turn up for 5 days a week and do her head in for 2 of those days!

Disclosure:  Unlike other councils, mine is shite but has nice offices and pensions to pay!

[Harley]

Put on my mask, goggles and hazmat suit and opened up some income portfolios today.  I stuck to the less virulent monthlies and noted how so far it's a bit of a blip for some and just part of a well established trend for others.

For example:

BHP topped out Jun 2019

BATS second such pull back but still trending up

BLND topped out Dec 2019

BT still heading down since Nov 2015

....and so on!

Time will tell but monthlies are sooo much kinder!

 

[sancho panza]

38 minutes ago, DurhamBorn said:

@sancho panza agree,every profit downgrade will be blamed on it.Easy way out for a CEO.Printing was needed 18 months ago,so it will not stop the damage the economy is in,but will see people wake up to the inflation threat.Im not going to do any road map work for a while as im pretty much now concentrating on buying companies and allocation,but il probably keep doing oil for the interest of the thread.Also my $ is showing down 10% from here,so around 90

on the monthlies DXY was Oct 19,itself a lower hgih from Dec 2016 for the Dow theorists.

Interstign as well to note DXY went down from 20/feb  99.83 to 2/3 97.55 whislt TLT went from 145.79 to 155.6 during same stretch.Not sure I understand that if anyone does?

[sancho panza]

Markets settled.Newcrest opened up 9% or so......won't be buying those today.

[Democorruptcy]

16 minutes ago, sancho panza said:

You never do it jsutice DM,jsut dangle the carrot....what a superb piece from the father of the decomplex trade.What a fine mind.

Thanks for psoting,I'm meant to be working but had to read that surplus energy piece.Beyond superb.I'll do the downdate later.

Thanks again.Looks very interesting from a clinical perpsective.

Sorry but sometimes I check in from my mobile and the whole document is a hell of a lot to scroll past on a small screen. I at least posted the link!

Enjoy the later reads.  

[sancho panza]

2 minutes ago, Democorruptcy said:

Sorry but sometimes I check in from my mobile and the whole document is a hell of a lot to scroll past on a small screen. I at least posted the link!

Enjoy the later reads.  

absolutely.I forgive you I forget as I only access this site when at home on my PC.

.I only post the whole thing because a lot of people don't click through and if they don't they'll miss soemthign that really is amongst the ebst analysis out there.

[Democorruptcy]

1 minute ago, sancho panza said:

absolutely.I forgive you I forget as I only access this site when at home on my PC.

.I only post the whole thing because a lot of people don't click through and if they don't they'll miss soemthign that really is amongst the ebst analysis out there.

You can lead a horse to water but you cannot make it drink!  

[TheCountOfNowhere]

Next leg doqn tomorrow? 

 

Anyone watching sirius minerals? Its comedy gold 

[kibuc]

42 minutes ago, sancho panza said:

Markets settled.Newcrest opened up 9% or so......won't be buying those today.

Things are still all over the place. New Gold +10%. Alexco -5%. Eldorado +5%. Impact -7%. 

It's tempting to trim my goldies and go very heavy on Alexco.

[Barnsey]

Get ready...

 

[Loki]

4 minutes ago, Barnsey said:

Get ready...

 

 

[Loki]

2 hours ago, Democorruptcy said:

Surplus Economics latest 

https://surplusenergyeconomics.wordpress.com/2020/02/29/165-to-catch-a-falling-knife/

 

Haven't checked that site for ages thanks

[Agent ZigZag]

1 hour ago, kibuc said:

Things are still all over the place. New Gold +10%. Alexco -5%. Eldorado +5%. Impact -7%. 

It's tempting to trim my goldies and go very heavy on Alexco.

Alexco fully allocated on this one and I am down a lot. But, I am taking the emotion away for im quietly hopeful this one will have its day in the sun.

[Agent ZigZag]

6 hours ago, DurhamBorn said:

I think a lot depends now on if they are in the Origo system or not.Those that are seem to be around 10 days,those that arent take forever.Always asking for this signed,that signed,a copy of this and that.It will never be a day for safety reasons,as some checks do need to be done,but 5 days should be the max.When talking to them though they dont seem to have any thoughts on why people might want speed.My last one i said i wanted to move now while the 15 year gilt was at 500 year lows on the yield,they couldnt understand why that mattered.Incredible.Its an amazing industry to work in though,it seems like the last great area (outside of house builders of course) where you can fleece the public in gigantic proportions.The industry has pretty much put everyone in 60/40 or 40/60 funds assuming they can return 7% so they can skim their 2.1% fees,tell the punter,theres your 5% drawdown,alls good.The problem is when it isnt of course,as i think the next cycle will show people.

In my case my pension was ready for transfer using the communication portal Origo. My pension provider notified Hargreaves on the 11th Feb 2020, 9 days after I requested the transfer to my SIPP)  to say it was ready and required confirmation that it was for the full amount as it was a six figure sum. Hargreaves failed to notify me or act on this and has been been a gross over sight on their behalf. Instead my pension has been open to last weeks correction. Now they are undertaking a 5 working day enquiry. Excluding my house it is why I like as much control over my capital and hold my wealth in a third cash third shares and third gold/silver

[DurhamBorn]

11 minutes ago, Agent ZigZag said:

In my case my pension was ready for transfer using the communication portal Origo. My pension provider notified Hargreaves on the 11th Feb 2020, 9 days after I requested the transfer to my SIPP)  to say it was ready and required confirmation that it was for the full amount as it was a six figure sum. Hargreaves failed to notify me or act on this and has been been a gross over sight on their behalf. Instead my pension has been open to last weeks correction. Now they are undertaking a 5 working day enquiry. Excluding my house it is why I like as much control over my capital and hold my wealth in a third cash third shares and third gold/silver

Its a shocking situation it really is.The whole industry is simply not good enough.I noticed today they are all trying to get the government to bring forward the move to 57 on pensions citing protecting the public,when we all know its more protecting their fees.The government is sending out a terrible message pushing back the age all the time.Im hoping they leave it as 57 in 2028 as im 55 in 2026 and would be able to go in drawn at 55 still.They shouldnt be able to change the dates on private pensions as people plan for decades.I hope you get the compo from them to cover losses.All these messages back and forth on simple questions is what frustrates things.

[Green Devil]

2 hours ago, Loki said:

 

"holy shit, people are dying in the streets. Its a good excuse to make our bankster mates richer" 

Fuckers. 

[Green Devil]

1 hour ago, Agent ZigZag said:

In my case my pension was ready for transfer using the communication portal Origo. My pension provider notified Hargreaves on the 11th Feb 2020, 9 days after I requested the transfer to my SIPP)  to say it was ready and required confirmation that it was for the full amount as it was a six figure sum. Hargreaves failed to notify me or act on this and has been been a gross over sight on their behalf. Instead my pension has been open to last weeks correction. Now they are undertaking a 5 working day enquiry. Excluding my house it is why I like as much control over my capital and hold my wealth in a third cash third shares and third gold/silver

Makes perfect sense. Why let you sell at all time highs, when they can sell to you 15% lower?