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

[Loki]

I have a mental image of nat gas shorters frantically checking fine print 

[DurhamBorn]

55 minutes ago, Talking Monkey said:

DB if the upcoming bust is going to be this bad what will the one  at the end of the next cycle be thought of

I try not to think about it yet.Lots can change between now and then though.The cycle might play out slightly less damaging,say rates top out at 8% rather than 18%,inflation at 9% rather than 23% as the road map shows as the range.A lot depends on if there are conflicts and wars as well.The world seems to be ex growth so printing will simply lead to inflation.The question is how much.UK is well placed,at least better than most as we will likely lead the energy change.

[DurhamBorn]

1 minute ago, Cattle Prod said:

Yeah I'm mainly in major E&P, some large independent E&P, one or two minnows for fun, and I have no service exposure other than options on OIH and XES. I think they will have to make a shift in their business too. The companies that made a huge amount on servicing shale (how much of the 200bn capex wasted went to them?) will not resurrect that revenue stream, so don't agree with Steve Kaplan that they will get back to where they were. Maybe a double, as so oversold. 

However, Schlum in particular is very high tech, and could easily apply their R&D spend to new energies. That is what I am watching for. In the meantime, we (my company at least, but not unusually) are very dependent on them, and pay eye watering sums for their kit. I'm actually visiting one of their tool shops tomorrow, tens of millions of dollars worth of highly machined steel. Maybe a hundred million, I should ask the guy I'm meeting!

Yes it would be really interesting to hear their insiders take on the future.Im buying them anyway because they should do fine in the next cycle,and for me showed they are ahead of the game by moving more to deeper offshore etc and dropping the rigs etc in shale.However its a big question about how they would fit in to the future.

[Barnsey]

6 hours ago, Tdog said:

Well i for one am hoping this leads to an epic HPC. But no doubt Carnage will be parting with a 0.5% cut in rates tomorrow.

Likewise, whilst yesterday’s cut is boosting US house builders, mortgage rates aren’t budging. When they cut to zero, I can’t imagine the economy will be in a good enough place for folks to feel confidence about buying a huge overpriced asset, especially as whichever large company they work for announce layoffs. Saying this, US mortgage rates could halve from where they are now, but that’ll be in the depths of the bust.

Expecting the same dynamic to play out here.

[Barnsey]

Okaaaaay 

 

[Majorpain]

43 minutes ago, Barnsey said:

Okaaaaay 

 

Car crash.

On the plus side my new PC monitor arrived yesterday, Made in China Sept 19 and shipped in a day, so there is no shortage of that particular one ATM. 

[BearyBear]

JPM running out of cash..?

https://www.bloomberg.com/news/articles/2020-02-25/jpmorgan-eyes-plan-to-tap-fed-s-discount-window-to-break-stigma 

[Loki]

26 minutes ago, BearyBear said:

JPM running out of cash..?

https://www.bloomberg.com/news/articles/2020-02-25/jpmorgan-eyes-plan-to-tap-fed-s-discount-window-to-break-stigma 

They could sell some silver

[TheCountOfNowhere]

8 hours ago, Tdog said:

Well i for one am hoping this leads to an epic HPC. But no doubt Carnage will be parting with a 0.5% cut in rates tomorrow.

The reinflated mega bubble was caused by fls/term funding sub sub prime debt. 

Irs were 0.5 for years before that. 

 

Would they bring out a new jousing prop as thousands ate dying..... Yes,  most likely 🤣

[Loki]

I agree with @Tdog in that i would love prices to drop

i agree wity @TheCountOfNowhere that it will not be allowed to happen

[kibuc]

5 minutes ago, Loki said:

I agree with @Tdog in that i would love prices to drop

i agree wity @TheCountOfNowhere that it will not be allowed to happen

The same could be said (and was/is being said) about stocks - they will not be allowed to crash. They'll cut and print and rinse and repeat until the good work is done.

However, the consensus here seems to be that they will crash, as at some point CBs run out of ammo and reality prevails.

I don't see why housing should be immune to similar logic.

[Loki]

3 minutes ago, kibuc said:

The same could be said (and was/is being said) about stocks - they will not be allowed to crash. They'll cut and print and rinse and repeat until the good work is done.

However, the consensus here seems to be that they will crash, as at some point CBs run out of ammo and reality prevails.

I don't see why housing should be immune to similar logic.

I really hope you're right.  I can see stocks being allowed to fall as "only rich people have stocks"!  But "hard working families" is a different matter. I'm not saying I'm right, just traumatised from years of nonsensical HPI

As CBs only product is debt i can see house prices staying high. We haven't even hit multi generational whole family mortgages yet!

[TheCountOfNowhere]

11 minutes ago, Loki said:

I agree with @Tdog in that i would love prices to drop

i agree wity @TheCountOfNowhere that it will not be allowed to happen

Allowed? 

 

Then cant stop it. If the bankers try and Rob us again while 100s of 1000s die im hoping people will turn on then. 

 

As we are we seeing, they dont control the market. 

[DurhamBorn]

2 minutes ago, kibuc said:

The same could be said (and was/is being said) about stocks - they will not be allowed to crash. They'll cut and print and rinse and repeat until the good work is done.

However, the consensus here seems to be that they will crash, as at some point CBs run out of ammo and reality prevails.

I don't see why housing should be immune to similar logic.

Its the US long bond that determines UK house prices to a large degree and the Fed dont give a toss about prices in the Cambridge,so like you say not immune.

We already have a massive bear market in stocks.Many large to mid range companies are down 50%,75%+ from their highs.This is being missed because of a few mega caps and glamour stocks going up so much.Amazon only needs to go up 3% and that would cover Vodafone and Telefonica being cut in half.

The last time i saw differences like this was right at the end of the tech bubble.Its not as broad this time,but its very similar.

 

[Democorruptcy]

13 hours ago, DurhamBorn said:

They sure will,and what people should remember is that during a reflation/inflation companies will struggle to raise equity or debt.So the only people who can invest are the ones gaining from the inflation.Im struggling with the likes of Schlumberger though CP.I think they are worth buying in ladders at these prices,but i worry that they will end up without a business,of course a long time after the next cycle,but still its a consideration.

Is Chevron one you like?

Quote

 

Chevron Corporation (Chevron) manages its investments in subsidiaries and affiliates, and provides administrative, financial, management and technology support to the United States and international subsidiaries that engage in integrated energy and chemicals operations. The Company operates through two business segments: Upstream and Downstream. Upstream operations consist primarily of exploring for, developing and producing crude oil and natural gas; liquefaction, transportation and regasification associated with liquefied natural gas; transporting crude oil by international oil export pipelines; processing, transporting, storage and marketing of natural gas, and a gas-to-liquids plant. Downstream operations consist primarily of refining of crude oil into petroleum products; marketing of crude oil and refined products; transporting of crude oil and refined products, and manufacturing and marketing of commodity petrochemicals.

https://www.hl.co.uk/shares/shares-search-results/c/chevron-corporation-common-stock-usd-0.75/company-information

 

 

[kibuc]

13 minutes ago, DurhamBorn said:

Its the US long bond that determines UK house prices to a large degree

That's a very interesting thing to say. I am more in the "rampant and reckless BTL lending" camp, although those things might be connected.

Could you explain the connection between US bonds and UK housing? Cheers.

[DurhamBorn]

26 minutes ago, Democorruptcy said:

Is Chevron one you like?

 

I like Chevron,but im not buying it at the moment.I bought BP,Shell and Repsol,a few Equinor,Drax,and i was already was full of SSE ,actually tagged the bottom on those at just over £10,Centrica has eaten most of that profit though  

[DurhamBorn]

24 minutes ago, kibuc said:

That's a very interesting thing to say. I am more in the "rampant and reckless BTL lending" camp, although those things might be connected.

Could you explain the connection between US bonds and UK housing? Cheers.

The US long bond pretty much determines the longer term cost of money.In complex economies like the west the cost of money is what drives everything else.There are lots and lots of cross market work and affects,but the starting point,the page 1 line 1 of macro strategy is "whats the cost of money".Then you need road maps to work out where money goes first,and when it arrives at different places.Its the leads and lags we look for.Once inflation take hold the US long bond will rise,and the mortgage broker in Cambridge wont know why,but his fixed rates will be up 25%,then 50%,then 100% etc.

[DurhamBorn]

12 minutes ago, Tdog said:

Can picture it now, they hire Comical Ali to inform the masses most of you and your family and friends are going to die, but don't worry your house price is looking to rise by 2.67% in 2020, but will be 105.5% higher by 2025.

I remember watching him on TV during the gulf war."They flee like rats",didnt he end up being allowed to leave and live out his life somewhere?.

[kibuc]

Just now, DurhamBorn said:

The US long bond pretty much determines the longer term cost of money.In complex economies like the west the cost of money is what drives everything else.There are lots and lots of cross market work and affects,but the starting point,the page 1 line 1 of macro strategy is "whats the cost of money".Then you need road maps to work out where money goes first,and when it arrives at different places.Its the leads and lags we look for.Once inflation take hold the US long bond will rise,and the mortgage broker in Cambridge wont know why,but his fixed rates will be up 25%,then 50%,then 100% etc.

Thanks. So, following that logic, housing would go down gradually as a result of increasing rates, instead of crashing rapidly in the bust? Or would it be the crash first, and then many years of staying behind the inflation curve?

[Democorruptcy]

1 hour ago, DurhamBorn said:

The US long bond pretty much determines the longer term cost of money.In complex economies like the west the cost of money is what drives everything else.There are lots and lots of cross market work and affects,but the starting point,the page 1 line 1 of macro strategy is "whats the cost of money".Then you need road maps to work out where money goes first,and when it arrives at different places.Its the leads and lags we look for.Once inflation take hold the US long bond will rise,and the mortgage broker in Cambridge wont know why,but his fixed rates will be up 25%,then 50%,then 100% etc.

This shows the relationship between USA 10 yr bond and 30 year mortgage rates. Both clearly going up until The Fed engaged reverse thrust last year.

https://www.thebalance.com/treasury-note-and-mortgage-rate-relationship-3305734

UK mortgage rates don't seem to have followed that and just got cheaper? If the BoE continues to give banks cheap money, doesn't that negate the 'cost of money' in the real world?

[BoSon]

15 hours ago, Democorruptcy said:

How do we think helicopter money would be distributed? What would the rules be?

Means tested or everyone?

I'm not on the electoral roll and don't pay council tax. I'm registered at a doctors for an address I no longer live at. Driving licence is at a mate's.

I don't want to miss my share due to the compounding when I buy RDSB with it 

Simplest route is surely using people's NI number to ensure everyone qualified gets some and only one portion.

Maybe if the who-ha over gig economy and self-employed workers not being able to get sick pay if needing to self-isolate continues and 'a 5th of the population are at home sick' then distributing cash to individuals will be how they address the core problem of paying the bills and getting food (delivered).

Seems if they are wanting to use inflation in the medium term to erode national debt then they also need to prop up wages to make it sustainable in terms of affordability to the public. Helicopter money in the first instance (for coronavirus emergency support) leading to a baseline citizens income may be a way forward. 

Would it work and if so are they seriously looking at it as an option?

[Democorruptcy]

7 minutes ago, BoSon said:

Simplest route is surely using people's NI number to ensure everyone qualified gets some and only one portion.

Maybe if the who-ha over gig economy and self-employed workers not being able to get sick pay if needing to self-isolate continues and 'a 5th of the population are at home sick' then distributing cash to individuals will be how they address the core problem of paying the bills and getting food (delivered) keeping corporate/bank profits up by enabling payments to be kept being made.

Seems if they are wanting to use inflation in the medium term to erode national debt then they also need to prop up wages to make it sustainable in terms of affordability to the public. Helicopter money in the first instance (for coronavirus emergency support) leading to a baseline citizens income may be a way forward. 

Would it work and if so are they seriously looking at it as an option?

Slight edit to your post, it isn't like TPTB really care about people is it? 

I have a NI number so that might work for me. 

I think it would help stop deflation and turn it into inflation, ask Uncle Ben. I've been saying for a while that I think they will do it, in one form or another. At the time of the banking crisis Robert Peston seemed well informed, by someone. I noticed yesterday when discussing the Fed cut he said "The problem is that it isn't putting money into people's hands".

[Harley]

34 minutes ago, Democorruptcy said:

I think it would help stop deflation and turn it into inflation, ask Uncle Ben. I've been saying for a while that I think they will do it, in one form or another. At the time of the banking crisis Robert Peston seemed well informed, by someone. I noticed yesterday when discussing the Fed cut he said "The problem is that it isn't putting money into people's hands".

#MeToo.  Some form of MMT.  Emergency at first, like income tax was initially, and then forever.  Inflationary, which for them is a bonus.  Maybe a wealth tax to balance things a bit.  Will be interesting to see how many get it - i.e. the real population size!

[Democorruptcy]

The seeds of the next debt crisis?

Quote

William White, who while head of the monetary and economics department at the Bank for International Settlements in Basel was one of the few economists to predict the financial crisis, says the subsequent great experiment in ultra-loose monetary policy is intensely morally hazardous. This, he argues, is because unconventional central bank policies may “simply set the stage for the next boom and bust cycle, fuelled by ever declining credit standards and ever expanding debt accumulation”.

A comparison of today’s circumstances with the period before the financial crisis is instructive. As well as a big post-crisis increase in government debt, an important difference now is that the debt focus in the private sector is not on property and mortgage lending, but on loans to the corporate sector. A recent OECD report says that at the end of December 2019 the global outstanding stock of non-financial corporate bonds reached an all-time high of $13.5tn, double the level in real terms against December 2008.

The rise is most striking in the US, where the Fed estimates that corporate debt has risen from $3.3tn before the financial crisis to $6.5tn last year.

https://www.hl.co.uk/news/2020/3/4/the-seeds-of-the-next-debt-crisis?

William White is retired now but has a personal website, he writes and speaks widely on macroeconomic issues.