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

[DurhamBorn]

The irony @Cattle Prod is the very forces forcing down oil now are ending,and the very forces that will send it up are only now sitting on government desks.Consumption doesnt use as much energy as investment.Its just how it is.Expect to hear that oil is dead.The energy complex is dead etc.The goverments have two choices at the end of a massive dis-inflation cycle and debt deflation.Carry on and see revolution and the destruction of the economy,or inject massive amounts of liquidity into investment.They will take the second choice,and rightly so.The thing is though,it will be every country taking that route.My road map said oil at $43,maybe a spike below $15 in the paper market for a very short period,then a long slow rise to $200,or maybe $300.Im really hoping the sector takes another wack down so my ladders can trigger.

On an aside,did you manage to chat to the Schlumberger guys about how they see the company post oil?,or their thoughts on the cycle?

[DurhamBorn]

11 hours ago, Noallegiance said:

Did society fall apart pre-central banking? Or was central banking a societal watershed?

Yes,every few years.CB meant economies could grow and create wealth.They get a lot of bad press,but have mostly done a good job.They just lost their way the last 30 years,mostly due to not making governments deal with the welfare state.

[Noallegiance]

9 minutes ago, DurhamBorn said:

Yes,every few years.CB meant economies could grow and create wealth.They get a lot of bad press,but have mostly done a good job.They just lost their way the last 30 years,mostly due to not making governments deal with the welfare state.

I knew you'd have a considered response.

[MrXxxx]

Thought this might be useful (UK market dividends summary for sectors 2019)

https://www.linkassetservices.com/our-thinking/dividend-monitor-q4-2019

[TheCountOfNowhere]

Sell, sell everything 

 

https://www.bbc.co.uk/news/world-middle-east-51787238

[BearyBear]

https://www.bloomberg.com/news/articles/2020-03-07/saudis-plan-big-oil-output-hike-beginning-all-out-price-war?srnd=premium
 

oil to $10..?

[Democorruptcy]

9 hours ago, DurhamBorn said:

The irony @Cattle Prod is the very forces forcing down oil now are ending,and the very forces that will send it up are only now sitting on government desks.Consumption doesnt use as much energy as investment.Its just how it is.Expect to hear that oil is dead.The energy complex is dead etc.The goverments have two choices at the end of a massive dis-inflation cycle and debt deflation.Carry on and see revolution and the destruction of the economy,or inject massive amounts of liquidity into investment.They will take the second choice,and rightly so.The thing is though,it will be every country taking that route.My road map said oil at $43,maybe a spike below $15 in the paper market for a very short period,then a long slow rise to $200,or maybe $300.Im really hoping the sector takes another wack down so my ladders can trigger.

On an aside,did you manage to chat to the Schlumberger guys about how they see the company post oil?,or their thoughts on the cycle?

What have you got ladders left in? Oil has hit your $43 target and a week or two back I thought you said you had removed your ladders because you didn't want to miss such an important sector before it turned?

[DurhamBorn]

10 hours ago, Cattle Prod said:

No, I'd need to get them in the pub, they are like robots with the blue uniform on. But the shop is busy, I was trying to secure backup tools, and they can't promise them as they are booked for other jobs.

Just so I'm clear on your comments above, DB, are you and your roadmap seeing the big event in oil now, as in this is the secular bottom, when you say long slow up from here? Or do you see another excursion to low numbers in 'the big kahuna'? Or maybe you see the big kahuna happening now. Either way, I'm positioned. I'd like PEs to go lower in the majors though, some of the smaller independends have PEs below 5, which although more risky, is low enough for me!

I see the bottom around now without a huge credit event.However a big credit event is very likely and would see things lower,much lower,for a short period.The problem is that these companies will be one of the key areas protecting against inflation in the next cycle.So we want them,but of course as cheap as we can.If they are cut in half from entry its not a good start.Sentiment is off the scale so an undershoot is very likely,but thats more gut feeling.

My road map did its job as it saved me from 30% falls in the likes of Shell and Repsol before opening positions,both touched next ladder points on Friday and were bought,but have two more ladder points left.I think my bottom ladder in Shell is £13.60.If that hit id be down around 18% before divis.Id be happy if that happened and then turned for a cycle.In simple terms i think starting to ladder into the oilies from here is a good move for the next cycle,but as always ladder in.

 

 

 

[Barnsey]

 

[NogintheNog]

16 hours ago, Cattle Prod said:

I've not seen Total discussed much here, but they already have a high % of revenue coming from green energy. And they have pointedly refused to go near shale, even at the height of the mania.

I've had a relatively small investment since about 2014 in Total ADR in my SSISA. In £ terms the price is back to where I bought at but 5 years of about 4% divis. I lose some to tax of course as in ISA, but will start buying more with my SIPP money that has just been transferred as a cash lump sum.

I believe I'm right in thinking that US ADR dividends do not get taxed as the American tax system recognizes them as a personal pension??

[Barnsey]

Wow 

[NogintheNog]

1 hour ago, DurhamBorn said:

I see the bottom around now without a huge credit event.However a big credit event is very likely and would see things lower,much lower,for a short period.The problem is that these companies will be one of the key areas protecting against inflation in the next cycle.So we want them,but of course as cheap as we can.If they are cut in half from entry its not a good start.Sentiment is off the scale so an undershoot is very likely,but thats more gut feeling.

My road map did its job as it saved me from 30% falls in the likes of Shell and Repsol before opening positions,both touched next ladder points on Friday and were bought,but have two more ladder points left.I think my bottom ladder in Shell is £13.60.If that hit id be down around 18% before divis.Id be happy if that happened and then turned for a cycle.In simple terms i think starting to ladder into the oilies from here is a good move for the next cycle,but as always ladder in.

 

 

 

I'm starting to wonder whether this is the pin that pricks multiple bubbles (to quote Peter Schiff), and that we do get a much lower oil price. I'm convinced that the future price of oil is way above $43 just as I'm convinced the future price of Gold is way above $1000/ounce. The question is what is the path to those future prices. I'm now down on BP, RDSB, evens on TOT. But I've just reset my ladders for lower prices still.

There is also the possibility that using the "never let a good crisis go to waste" that these companies will cut their dividends in such extraordinary times! Is an 8-10 yield justified with the US 10 year at less than 1%?

[Errol]

4 hours ago, Cattle Prod said:

Anything is possible. A flaw in this brilliant strategy is that Saudi can only pump like that by turning on thousands of old wells, and stressing their ageing reservoirs. Can only last about three months. Russia knows this of course, I'd wait them out if I was Putin. 

Sounds like an MBS tantrum, I hope he suffers for it. Let's see where price discovery really is! If oil goes into the 20s I'm all in, and can finally stop stressing about whether this is the big one or not, because it will be the big one for oil. I look forward to filling my time with something else for the next 7 or 8 years.

Also, the $9.55 low is $16.85 on my above chart in today's money. Bloomberg - doesn't understand inflation. Sigh

It was Russia that began this. Putin turned down OPEC and the world - refused to lower production.

They are going for the American jugular - shale and oil industry and the massive debts associated with it.

Russia is the strongest country in the world oil price wise. They are built to survive lower prices.

[Chewing Grass]

1 minute ago, Errol said:

Russia is the strongest country in the world oil price wise. They are built to survive lower prices.

Golden rule, burn everyone else’s coal and oil before you burn your own, especially when the price is right and you owe the banks fuck-all.

[DurhamBorn]

16 minutes ago, NogintheNog said:

I'm starting to wonder whether this is the pin that pricks multiple bubbles (to quote Peter Schiff), and that we do get a much lower oil price. I'm convinced that the future price of oil is way above $43 just as I'm convinced the future price of Gold is way above $1000/ounce. The question is what is the path to those future prices. I'm now down on BP, RDSB, evens on TOT. But I've just reset my ladders for lower prices still.

There is also the possibility that using the "never let a good crisis go to waste" that these companies will cut their dividends in such extraordinary times! Is an 8-10 yield justified with the US 10 year at less than 1%?

I think thats very possible,even likely.Every CEO will be blaming this virus for profit falls,some justified,some not so.If it happens though the companies will likely use the spare cash to buy back shares and repay debt.The Telco sector is likely to do the same,though they will be paying down debt,not share buy backs.Even the likes of Imperial might cut the divi to help fund quicker debt payments.A lot of CEOs will have their eye on the future and know inflation and with it rates are going to increase within a few years.Crucial that the debt is fixed,and spread out nicely so it can be paid down as it comes due,or only some of it rolled over.

[Don Coglione]

20 minutes ago, Errol said:

It was Russia that began this. Putin turned down OPEC and the world - refused to lower production.

They are going for the American jugular - shale and oil industry and the massive debts associated with it.

Russia is the strongest country in the world oil price wise. They are built to survive lower prices.

Thoughts on Gazprom? I think someone else stated on here that it has the potential to become the most valuable company in the world; I am minded to concur. What concerns me is geopolitical and currency risk - I would have to buy the ADS, denominated in USD. If and when things get ugly, could the US declare any holdings in Gazprom as null and void, or simply illegal?

[Bricormortis]

https://www.msn.com/en-gb/cars/news/vw-to-partner-with-centrica-to-provide-home-charging-in-uk/ar-BB10U3Gp?ocid=spartanntp

While buying an electric car, Volkswagen Group's brands will propose home charging installation by Centrica's British Gas.

Volkswagen Group announced that its subsidiary Elli (founded in early 2019) will partner with Centrica's British Gas to provide customers an option of home charging station installation in the UK.

The three-year partnership concerns home charging hardware solutions for new EV owners, but customers can also combine the installation with British Gas electric vehicle tariff to use off-peak electricity prices.

Home charging:

 

• Homes with charging points can make more money renting out their parking spaces
• UK home with Tesla Powerwall solar system prevents power outages

"The deal will see Elli, the central provider of charging hardware and related services for the main Volkswagen Group, work exclusively with British Gas to deliver a package of home charging installations, aftersales services and preparatory electrical upgrades across the UK. This will help customers to transition to EV smoothly and cost effectively, initially across the Volkswagen, SEAT, ŠKODA and Volkswagen Commercial Vehicles with plans for Audi to join later this year.

Volkswagen Group has committed to introducing 80 electric and plug-in hybrid models by 2025."

Centrica, the UK’s biggest energy company, was previously selected also by Ford.

"Centrica is working with car manufacturers, fleet owners and public bodies to support them in EV readiness, providing an EV enablement package which includes charger infrastructure, energy management, financing, and optimisation. It also offers a British Gas electric vehicle tariff that allows consumers to take advantage of off-peak electricity prices by using the car dashboard or car manufacturer’s app to schedule EV charging during the cheaper night time hours.

© Motor1.com UK Skoda Citigo e iV, elettrica formato tascabile

Sarwjit Sambhi, CEO of Centrica Consumer said:

“Getting carbon out of transport by accelerating EV adoption is critical for net zero. We’re proud to play our part by helping enable the EV transition for Volkswagen, one of the world’s most forward thinking and ambitious automotive companies.

“Centrica is committed to a pathway for the energy transition in line with the Paris agreement through focusing on three things -  helping our customers reduce their emissions, reducing the emissions of the energy system as a whole, and reducing our own.  We made material progress on all of these during 2019 and are committed to a plan for delivering net zero by 2050.”

Alex Smith, Managing Director at Volkswagen Group UK Ltd, said:

“2020 is a landmark year for the Volkswagen Group as we launch the ID.3, the first car on the ground-breaking MEB platform. The Volkswagen Group is committed to the Paris Agreement on climate change and we have set our goals on zero carbon emissions by 2050. Here in the UK we will do our part, and I am delighted that Elli have teamed up with Centrica to deliver home charging solutions. This will give customers even more confidence as they make the switch to emission free driving.”

[sancho panza]

On 07/03/2020 at 10:26, DurhamBorn said:

Oil could still go below $20 in the bust,even below $15 for a short period.The next cycle should see it fly though,and of course those companies that use oil and hedge gain a huge advantage then for a period.Domestic companies that use a lot of oil are the gainers,with a lag as usual.

I think there's a real chance of a sell off driving the price that low(more likely $30 imho).My attitude has changed over the last few months and I've adjsuted us by selling FCG/XOP/OIH/COPX postions and moving that into yellow stuff and big oil because theyre the least complex trades out there.

Looking at the weekly charts of previous oil sell offs,there 's often a 30% sell off from the main reisstance points.The problem I'm having is that with the steepness of the drop it's hard to get an idea of where the resistance point is for this timeframe but even if it's $50,that makes $35 likely.

On 07/03/2020 at 12:23, Errol said:

Fed will move next to buying a much larger range of assets, including (openly) stocks and ETFs.

Well it's panned out so well for the Bank of Japan.................................who now own 40% of all ETF's iirc.

[Harley]

20 hours ago, Cattle Prod said:

Edit (I'm on satellite internet, very spotty)

Bunker or private island?  I do hope bunker.  It's all islands and remote estates these days!

PS:  Great post!

[sancho panza]

20 hours ago, Cattle Prod said:

Thanks Sancho, good to have another view and check the confirmation bias. I've a few issues with this:

- The 'Flag' doesn't go back to 2008, the base of it goes to 2016. It is a consolidation around the shale story. It has now broken lower, and is concerning. I personally don't think it'll last long. Seems like the market is saying 'it's all over'. I don't think so.

- I don't quibble with the demand numbers, but they need to be put in the context of a long term trend. You wouldn't even see in a notch yet in terms of what is a decades long linear trend. He, and the market, is too zoomed in.

- I think he is completely wrong about majors in the shale patch. It's not the place for them. I met the guy responsible for selling the BHP assets to BP. BHP lost tens of billions on their investment. The reason it didn't work for them was that they were too cumbersome. Decisions had to go back to Australia to various committees etc etc. while EOG and the like devolve decision making to their geos on the ground, who can make the call on spotting wells etc. I'm on record on this thread as saying I've favoured Shell over BP for this reason. They may make it work in spite of themselves, but they have no technical advantage. I've stayed away from ExxonMob for this reason too, they are heavy into the Permian and shale gas. Looks like I was right to. However I'm now a buyer, I think it's all been discounted out.

- The advantage the majors have is capital. They are most likely using shale for swing production, i.e. turn it on and sell it when prices are high. This is not going to add to a glut.

- I agree with him that OPEC has blown it, and is in serious trouble. They know their production has only one was to go - downhill. (more in Iraq and UAE, but down overall). Russia has plenty left to develop, they are playing a much longer game.

- If hedge funds bought 533Mb in Q4 in the hope of shale collapsing, it's the first I've heard of it. There was no one in the MSM at least discussing shale problems till very recently. Q4 is too early, it's going to be a slow process (though sentiment may change quickly).

I was fully allocated in Shell, but I've decided to redeploy and add, along with XOM, Repsol, Total, BP, Equinor. As Harley says, I see these as annuities. If Shell wants to pay me 9.2% for the rest of my life, I'm happy with that. In fact 9.2% compounded is more than I've assumed for long term growth in my portfolio!

I've not seen Total discussed much here, but they already have a high % of revenue coming from green energy. And they have pointedly refused to go near shale, even at the height of the mania.

Edit (I'm on satellite internet, very spotty)

- I'd like to see where he is getting $30bbl as a long term average. I often see these numbers bandied about on long term trends without adjusting for inflation. If $30bbl is the mean reversion today, most of the industry would shut down. There would be a fast and violent cure for those prices. Even if that is the long term average, it is the average of all the 'low hanging fruit', all the easy to produce oil. The market will have to increasingly pay a higher price to get oil, which is of the reason for all the volatility in the last 20 years - the tug of war between the cost of production, and the effect of high prices in economies. Yamani in 2000 almost called the secular bottom in the market with his comments, he clearly didn't see the coming volatility and price swings. And they still didn't diversify their economies!

I psoted the Hodges to make me test my current confimration bias towrds buying oil.I know it's something you're wary of too.So thanks for your extensive reply.

Hodges is a very bright guy but he has historically been very early with his calls.

A lot of what you say makes sense to a layman like myself.I jsut have to be careful at the mo as we're investing way more heavily into oil than I anticipated a year ago or even in Aug 19 when I started purchasing small amounts in the majors and took up positions in FCG/XOP/XES.Friday alone we invested 2% porfolio value into BP/RDSB/XOM/EQNR.I was chatting to a family member over the weekend and was getting them to run over my logic for the trades because it's they seem so unbelieveably cheap(could get cheaper yet) and I've been caught in value traps before.

my logic is

a) supply isn't linear as you say,there's a limit to what'll get produced at a certain price.Demand has been going up over decades.

b) lower prices results in reductions in exploration which take longer to build back up post price resurgence.

c) corona virus.Even if all the worst prognostications come true,(I dont think they will at all),world population won't drop below it's 2013 level.Increasing numbers of whom want transport

d) climate change/electric cars etc being much overhyped as it's nowhere near ready to step in and replace oil/gas probably for at least a decade if not longer.Even if western govts reign in demand,that wil liekly be happily taken up elesewhere.

 

i thinkt eh solution for us is stay in the big oilies because the smaller caps need careful studying and have a better chance of making it through this current drop.

[DurhamBorn]

34 minutes ago, sancho panza said:

I think there's a real chance of a sell off driving the price that low(more likely $30 imho).My attitude has changed over the last few months and I've adjsuted us by selling FCG/XOP/OIH/COPX postions and moving that into yellow stuff and big oil because theyre the least complex trades out there.

Looking at the weekly charts of previous oil sell offs,there 's often a 30% sell off from the main reisstance points.The problem I'm having is that with the steepness of the drop it's hard to get an idea of where the resistance point is for this timeframe but even if it's $50,that makes $35 likely.

Well it's panned out so well for the Bank of Japan.................................who now own 40% of all ETF's iirc.

Iv avoided the service companies mostly though nibbling at Schlum and own only a couple of smaller oil/gas plays for small stakes.They both ran through ladders 2 and 3 but i ignored and havent bought.IF i was 30 id of bought in the smaller companies as the ladders hit,but im not chasing capital gains,im chasing income that can hold above inflation by 2028 and the big companies are more likely to get through things.My oil target was $43 and i havent done any work on it because i cant really price sentiment at the moment,its off the scale.Iv looked back through calls on commods and the worst over shoot down was on the big miners in 2016 where they ran down another 30% from first ladder buy.If that was repeated it would signal Shell at around £12.50.My longer term oil call still says below $20 and even below $15 for a very short spike,that couple be a few days,or even a few minutes.

Im starting to think the oil sector is where tobacco was when Clinton got in.Everyone said the industry was finished.However the companies delivered 1000%+ profits after that.Countries will have no choice but to invest like crazy soon and instead of them talking about the Paris accord,they will be talking about how to counter Chinese warships in the Pacific,and securing energy supplies when their currency is shot.

 

[Barnsey]

 

[Democorruptcy]

19 minutes ago, Cattle Prod said:

There is indeed a long lag when exploration is cut, we are seeing the effects of a cut in exploration spending from 2014-2017 now. There is very little spare capacity in the world, it'll be very interesting if Saudi's spare capacity, pumping for a limited time, becomes offset by reductions in US output, which will be for an unlimited time.

Agree with you on big oil, from the very start here I recommended staying away from small-medium (>$5bn market cap) companies. It's not a small company game, and you can't trust them. Look what happened to Tullow since I said that -overegged their production forecast, and  had the market destroy their value. That's all it takes. I have one or two small company inverstments, but I know them very well, either having worked for them or closely with them.

The Saudi's aren't having a good week...

Arrests of Saudi Arabian Princes Reportedly a Warning Against Possible Coup Attempts

Quote

 

The Wall Street Journal first reported the arrests, quoting unidentified sources allied with the royal court as saying the princes were plotting a palace coup that would halt the rise of the crown prince. The Journal has since reported that the sweep broadened to include dozens of Interior Ministry officials, senior army officers and others suspected of supporting a coup attempt.

https://time.com/5799173/saudi-arabia-royal-family-arrests/

 

[Harley]

17 hours ago, Cattle Prod said:

@Harley or others please do tell me what chart crimes I am committing!

IMO, looking at something from a variety of angles has gotta be good.  Using inflation (but which measure and how trusting?) depends on what you're looking for in your analysis.  Using all sorts ratios can be useful for spotting relationships as you are doing here, although the gold:silver one is struggling a bit right now (or is it!)!  I generally don't bother to restate figures except into my home currency (GBP) given that is the currency they want me to pay council tax!  Also to assess investment performance as it is often the currency, not my ability, which is the investment hero!  Gold is the best UOM I have (which acts a my proxy for currency movements and inflation) but even that's probably manipulated over the intermediate term.  Even so, it's a stark reminder of the devaluation of all currencies, especially GBP.  Makes a bit of a mockery of HPI and her obsessives.

I tried to analyse the technicals for oil (excl. inflation) but it's a tough one, especially for then extrapolating to the equities.  I've never seen much of a decline from a technical POV in that there has only been one buy point on the WTI monthly for me.  That was Mar16 and that was weakish.   The Dec18 low was not a buy signal for me but what I call a fake (suckers) one.  We are now however at the historic lowest of technical lows (using the fast stochastic with the slow catching up) on the monthlies.  MACD has gone a lot lower in the past but from a far higher price.  I'm hoping we are getting close to a trend change but accept there could be a few more twists and turns on the charts before then.  There are lot of things the price has to work off since 2016.  Alas, the current triangle, if it runs it's full course (unlikely) indicates towards the end of 2021!.  I will however be tentatively buying soon though (already maxed on Shell and BP for a couple of income accounts).  If nothing else, as a hedge for my heating oil! 

But I dearly hope my age is working for me and we are seeing a "repeat" (or rhyme!) of 2000 across all markets where the smart money was looking ahead.  Alas that probably means the opposite and the Fed ends up owning Google, etc.  But like viruses, you can't beat nature in the long run.  I bought an old stone house and, despite trying to be green as much as a could, learnt to respect raw BTUs!     

[TheCountOfNowhere]

Invests can go up as well as up... 

 

https://www.google.com/amp/s/www.bbc.co.uk/news/amp/uk-51790242

 

Tgis crazy bastatds is saying they will make sure no one lossea money. 

I think he means, they will maje sure the banks dont lose out. 

 

There's only one way thats going ti happen. 

 

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