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

[NogintheNog]

 

Posted 1 hour ago

11 hours ago, sancho panza said:

Prob not by the end of the day

 

I think a few of these are essential ingredients of a balanced portfolio. In the good times they'll under-perform compared to everything else, but in times like this they out-perform.

I only have a few of them, and Franco-Nevada are missing from that list!

 

[sleepwello'nights]

The theory is all very well, could a major geo-political dispute render our attempts to protect ourselves ineffective.

I'm wondering whether the potential backlash against China would involve confiscation of their assets in Western economies to recoup some of the financial losses and result in a global war against the Chinese?

[DurhamBorn]

1 hour ago, MrXxxx said:

OK, I understand the second bit of this post (reflation bit), but despite reading again and again, I can't get my head around what this bit means/how it works...anyone care to explain again?

My understanding of disinflation is a slowing down of the inflation rate...its a process, how can it be consumed?...I can understand how inflation can be used to erode a debt but disinflation is acting in the opposite way.confused!?

By the expansion of productive capacity over the cycle making things cheaper.Those factories and supply chains are now sat there doing nothing,they have already consumed all the liquidity since 1982 .A lot has found its way into housing as well.The only real thing costing more and why it will suffer most.

Where a lot of people go wrong,they think inflation comes when everything expands,it doesnt,it comes when everything shuts.

The reason we get inflation in this new cycle is because the money will be forced down a small area of the economy.Instead of billions of consumers making small choices on products etc we will have governments making  a few choices.

 

[Don Coglione]

6 minutes ago, sleepwello'nights said:

The theory is all very well, could a major geo-political dispute render our attempts to protect ourselves ineffective.

I'm wondering whether the potential backlash against China would involve confiscation of their assets in Western economies to recoup some of the financial losses and result in a global war against the Chinese?

Reparations are already being discussed...

The Coronavirus is, in itself, geopolitical. 

The fall-out is likely to see some highly unusual geopolitical plays.

If anything, I reckon the above merely reinforces the thrust of this thread.

[DurhamBorn]

7 minutes ago, Ponty Mython said:

Reparations are already being discussed...

The Coronavirus is, in itself, geopolitical. 

The fall-out is likely to see some highly unusual geopolitical plays.

If anything, I reckon the above merely reinforces the thrust of this thread.

It does,more supply chains coming back,re-tooling etc and China will have to invest as well to counter the loss.Industrial cycle ahead.

[Jesus Wept]

23 minutes ago, DurhamBorn said:

By the expansion of productive capacity over the cycle making things cheaper.Those factories and supply chains are now sat there doing nothing,they have already consumed all the liquidity since 1982 .A lot has found its way into housing as well.The only real thing costing more and why it will suffer most.

Where a lot of people go wrong,they think inflation comes when everything expands,it doesnt,it comes when everything shuts.

The reason we get inflation in this new cycle is because the money will be forced down a small area of the economy.Instead of billions of consumers making small choices on products etc we will have governments making  a few choices.

 

This is so true.

The money / liquidity has been moving from one asset bubble to the next - Tech stocks (Dotcom bubble) to housing (housing bubble) then to metals then back to housing then to oil (oil bubble and collapse) then to land then back to housing then back to stocks...... on and on it goes..... moving from one asset class to the next....

Where will it go next? 

I totally see what DB means when everything shuts down and growth slows to a halt - contracts - massive STAGFLATION - is that what you mean? 

[Jesus Wept]

22 minutes ago, Cattle Prod said:

I popped on to post about this, but first can I say what great chat there has been the last few pages. @DurhamBorn your post on the disnflation leaving the doir open to print, that prices will go back to the 80s if not, and oil/potash have already been priced back there...is astonishing. I think I finally fially get it.

On oil, the biggest story no one is talking about is that Saudi yet again has baulked at testing its fabled 12.5 full capacity. I said here that they wouldn't a few weeks ago, because I know they can't. I've hone through their fields, its just not there, how do 99.99% of analysts keep missing this? They pump out their storage to get to 12m, so that's a fake number. I reckon they can do 11.5m bu turning on all their old wells, stressing the reservoirs, only possible for a short time. I said 3 months max, its probably less.

Saudi plays this game because the myth of the spare capacity gives them a seat at the big boys table. I said on my very first post here that they have no spare capacity other than the short term pulse you just saw. It's been tested twice since then, failed both times. Huge, huge implications for the next oil cycle when the market cottons on to this.

So they ran to the table to make a deal. Yes, they couldn't sell it either, and underestimated demand loss, but they are not nearly as strong as they made themselves out to be a few weeks ago. And that moron MBS declared a production level of 13.5m by fiat, I'd love to hsve seen the Aramco guys face who had to go educate him. Russia is not going to give it away for free either, despite the "negative prices" idiots out there.

So a small correction, Vendetta. Neither Russia nor Saudi have ever pumped 12.5m, though they'd have you belueve it with all the numbers floating around. Market sold the news, and may do so again, but for all the controlled OPEC shenanigans, free market capitalism is silently doing its job. On Friday alone we saw another 30 rigs shut down in the Permian, and Shell deferring north sea capex (protecting its divi).

Everyone ignored Mexicos attempt to be relevant, as they are in structural decline and will organically cut anyway. That day is not here yet for Saudi, but it's getting closer all the time. With no spare capacity to flaunt, they are just another big producer.

Very interesting - top post. I will post later as some ‘gardening’ to do. Nice and sunny today! 😁

[DurhamBorn]

@Cattle Prod what sort of reserve profile does Repsol have?.I really like their  structure and i know they have really good gas reserves and some good recent finds,just wondered on oil.Iv have them 3rd biggest energy holding and might increase it a bit.

[MrXxxx]

2 hours ago, DurhamBorn said:

By the expansion of productive capacity over the cycle making things cheaper.Those factories and supply chains are now sat there doing nothing,they have already consumed all the liquidity since 1982 .A lot has found its way into housing as well.The only real thing costing more and why it will suffer most.

Where a lot of people go wrong,they think inflation comes when everything expands,it doesnt,it comes when everything shuts.

The reason we get inflation in this new cycle is because the money will be forced down a small area of the economy.Instead of billions of consumers making small choices on products etc we will have governments making  a few choices.

 

Thanks DB, now I have `got it`...you'll have to excuse me, bit `slow` with some of the theory unless you make it bloody obvious.

[DurhamBorn]

As we now look forward into the cycle its time to look at cross market work more.We know the de-complex trade will do fantastic over the cycle.Energy,potash,other inputs.However no portfolio could ever just hold these things as it would be far too risky.There are other areas that the cycle will put rocket fuel under,mainly as they are the backbone,the tool to unlock productivity gains .That sector is the telecoms.

The market hates them right now.Although telcos have seen explosive growth they havent been able to monetize a lot of it.Mainly because other tech companies have used their assets to create the profit and they havent had their share.On top of that they have had to invest massive amounts of capital,some building networks,some consolidating the industry more.They also have had legacy issues like pension deficits,spectrum fees etc.Being unable to force up prices has meant its been hard for free cash flow to increase fast due to depreciating the assets without the growth in income.

The market thinks this is for good,after all everyone has a phone who wants one.Competition will keep prices down.However they miss the massive change coming.Soon it wont be people who have a Sim,it will be everything having one.Inflation will force companies to keep their costs down.Each truck will be monitored,every door in a shop,window,fridge,car,even pairs of shoes.Costs will be shaved everywhere.The beauty for the telcos is its all going over their networks.Even better big tech cant take all the profit this time,because a lot will rely on clouds on the edge of the network,not distant data centres.

This explosion in use will come at the same time as investment slows,and also as prices can start to rise slowly,pulling away from those depreciation charges.It also means as the inflation grows,building anything to compete with the big guys now will simply not happen.

Now telcos have too much debt.Vodafone and Telefonica especially,and they might/will take a hit as economies are whacked after this virus/end of cycle hit.Dividends might have to be cut for a while to de-leverage quicker.They also will be facing much higher rates later in the cycle,so its crucial they have a good debt structure so that they can de-leverage and not have to roll over too much.They should be one of the few sectors able to do that though.

Where a lot of sectors will see huge growth simply because they are inflation loving,the telcos might be an area that are structurally undervalued,and as a sector including dividends might deliver 400% returns against around 100% for inflation.

If Shell holds its divi's those 15% returns from the buys at £9.20 might be well worth putting into the telco sector.

 

[Loki]

I like your staged updates as you see the cycle move on 

Can't say I'm enthusiastic about the "internet of things" as they call it, but that's for another thread. 

[DurhamBorn]

30 minutes ago, Loki said:

I like your staged updates as you see the cycle move on 

Can't say I'm enthusiastic about the "internet of things" as they call it, but that's for another thread. 

Companies will all be looking to cut costs during an inflation and it will be a key driver for many areas.Even if it only adds 10% to the amount of sims,that will nearly all flow to free cash.The cycle will help high fixed cost companies.Not all,but most.I think that will be the main story of the cycle.

[Loki]

What are your thoughts on airlines?

I'm torn between them being consumer-focused (easyjet) and also part of the globalism which may start to unwind as manufacturing returns, but also an ingrained part the travel infrastructure now.  Apologies if you've already covered, I try to make sure I read all your posts but sometimes miss one 

[Errol]

Lots of good webinars here - https://ttmygh.com/hmmminars/ . From Grant Williams of 'Things that make you go Hmmm'.

Gold webinar filmed on 9/4/20.

[Loki]

2 minutes ago, Errol said:

Lots of good webinars here - https://ttmygh.com/hmmminars/ . From Grant Williams of 'Things that make you go Hmmm'.

Gold webinar filmed on 9/4/20.

I will watch that now, that's the one benefit of now being off work and on 'lockdown'

[Don Coglione]

1 hour ago, Loki said:

What are your thoughts on airlines?

I'm torn between them being consumer-focused (easyjet) and also part of the globalism which may start to unwind as manufacturing returns, but also an ingrained part the travel infrastructure now.  Apologies if you've already covered, I try to make sure I read all your posts but sometimes miss one 

Run far, far away.

And when you get there, keep running.

[Loki]

26 minutes ago, Ponty Mython said:

Run far, far away.

And when you get there, keep running.

Tell me how you really feel!! 

1 hour ago, Errol said:

Lots of good webinars here - https://ttmygh.com/hmmminars/ . From Grant Williams of 'Things that make you go Hmmm'.

Gold webinar filmed on 9/4/20.

That was bloody brilliant.  Very watchable guests and great info.

[M S E Refugee]

1 hour ago, Loki said:

What are your thoughts on airlines?

I'm torn between them being consumer-focused (easyjet) and also part of the globalism which may start to unwind as manufacturing returns, but also an ingrained part the travel infrastructure now.  Apologies if you've already covered, I try to make sure I read all your posts but sometimes miss one 

Instead of trying to turn housing into airport runways I see a trend of turning airport runways into housing.

[Loki]

2 minutes ago, M S E Refugee said:

Instead of trying to turn housing into airport runways I see a trend of turning airport runways into housing.

I think you were making an analogy (if that is the term - and a good one too) There but just in case i have misinterpreted, would the possible ground contaminants rule this out?

My grandad used to help farm what is now Heathrow apparently.  I wonder if we'll end up wondering if it was all worth it.

[Iamcynical]

10 minutes ago, Loki said:

I think you were making an analogy (if that is the term - and a good one too) There but just in case i have misinterpreted, would the possible ground contaminants rule this out?

My grandad used to help farm what is now Heathrow apparently.  I wonder if we'll end up wondering if it was all worth it.

A lot of small airfields have been turned into shit housing/commercial building  estates over the years.  I believe it's because they are classed as brownfield even though they are mainly still fields.  Its been a big loss to the general aviation community actually, and very short sighted in terms of training future pilots.  On that note, I think we might be witnessing the death of very low cost flights with this huge global downturn 

[Loki]

Flying and transiting an airport has become so unpleasant I wouldn't particularly miss it.  Last three times have been for work, so costs not an issue for me.  The loss of skills and jobs from your general aviation area is a shame though.  As is those crappy estates even existing.  

[Iamcynical]

I've got a ppl and flying is great if not rather expensive.  But it's such a pain in the arse to hire a plane and go anywhere for a weekend or whatever.  Most of the general aviators are getting on a bit now, I guess primarily because they're the generation with the disposable income to afford it.  Shame really.  But yes, proper flying with Ryanair et al is shit. 

[MrXxxx]

3 hours ago, DurhamBorn said:

They also have had legacy issues like pension deficits

But is this not the issue for one in particular I.e DB pensions?..With gilts/bonds being so weak and them having to hold these will the matter/liability not get worse going forward rather than better?

[Transistor Man]

3 hours ago, DurhamBorn said:

The beauty for the telcos is its all going over their networks.Even better big tech cant take all the profit this time,because a lot will rely on clouds on the edge of the network,not distant data centres.

This explosion in use will come at the same time as investment slows,and also as prices can start to rise slowly,pulling away from those depreciation charges.It also means as the inflation grows,building anything to compete with the big guys now will simply not happen.

Now telcos have too much debt.Vodafone and Telefonica especially,and they might/will take a hit as economies are whacked after this virus/end of cycle hit.Dividends might have to be cut for a while to de-leverage quicker.They also will be facing much higher rates later in the cycle,so its crucial they have a good debt structure so that they can de-leverage and not have to roll over too much.They should be one of the few sectors able to do that though.

Where a lot of sectors will see huge growth simply because they are inflation loving,the telcos might be an area that are structurally undervalued,and as a sector including dividends might deliver 400% returns against around 100% for inflation.

This area has become big 

This advanced 5G telecoms infrastructure has become very important where I work - especially the space/ satellite(!) aspect, as that’s where we have a lot of experience.

The driver is autonomous vehicles. 

https://www.theengineer.co.uk/uk-space-o2-5g-satellite-cav/

Similarly, Vodafone are now involved with Avellon to put up 5G satellites. 

https://www.telegraph.co.uk/technology/2020/03/03/vodafone-joins-space-race-build-5g-broadband-satellite-network/

 

 

[DurhamBorn]

21 minutes ago, MrXxxx said:

But is this not the issue for one in particular I.e DB pensions?..With gilts/bonds being so weak and them having to hold these will the matter/liability not get worse going forward rather than better?

Yes,in the short term worse,but inflation will help at rates increase.