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

[DurhamBorn]

3 hours ago, Loki said:

I'm always unsure about posting ZH links in this thread but this does seem relevant

https://www.zerohedge.com/economics/getting-out-dodge-after-exiting-loans-and-hiking-mortgage-standards-jpmorgan-stops

Basically they have exited the home equity loan "HELOC" business, raised its mortgage standards, and halted all non-Paycheck Protection Program based loan issuance for the foreseeable future

Credit creation from housing is now deflationary,its a distribution cycle,more will be paid back or defaulted than borrowed.The consumer is dead,and that means the biggest ticket items go.Housing debt,car loans,holidays,in that order.

Governments will step in instead.Instead of capital flowing to Chinese factories it will flow into domestic based new assets.

Its going to be really interesting to see how housing works out in the UK.Highly likely mortgages will want 20% deposits.HTB loans will be interesting,a lot/most might end up on the banks SVR.Good luck with that in a few years as rates start to go up.

 

 

[Loki]

4 minutes ago, DurhamBorn said:

Credit creation from housing is now deflationary,its a distribution cycle,more will be paid back or defaulted than borrowed.The consumer is dead,and that means the biggest ticket items go.Housing debt,car loans,holidays,in that order.

Governments will step in instead.Instead of capital flowing to Chinese factories it will flow into domestic based new assets.

Its going to be really interesting to see how housing works out in the UK.Highly likely mortgages will want 20% deposits.HTB loans will be interesting,a lot/most might end up on the banks SVR.Good luck with that in a few years as rates start to go up.

 

 

That all makes complete sense, thanks.  Will the SVR make that much difference if the monthly rate stays similar? (So longer term rather than higher monthly payment) A house here (S.E) is just as unaffordable at 500k as 400k

[DurhamBorn]

34 minutes ago, Loki said:

That all makes complete sense, thanks.  Will the SVR make that much difference if the monthly rate stays similar? (So longer term rather than higher monthly payment) A house here (S.E) is just as unaffordable at 500k as 400k

Well you can fix at 2.64% with TSB but their SVR is 3.59% so if you come offa 5 year fix and have no equity and cant re-mortgage your looking at a more than 33% increase in interest payments.It also means your trapped not able to fix in a rising rate cycle.

[Loki]

2 minutes ago, DurhamBorn said:

33% increase in interest payments

OOF.

I suppose it depends what industry people work in, as to how badly screwed they are.  

[DurhamBorn]

There's hydrogen mentioned again.As i said back in the thread SSE own a lot of the wind farms off the Humber,Drax right near where the electricity comes onshore.Very likely they convert part of the site to hydrogen.

https://sse.com/newsandviews/allarticles/2020/04/sse-thermal-to-help-develop-worlds-first-zero-carbon-cluster/

the consortium had been successful in securing funding to launch its plans through Phase One of the Industrial Strategy Challenge Fund.
The consortium is focused on using emerging carbon capture and storage (CCS) and hydrogen technology to decarbonise energy and industry in the Humber region

[Transistor Man]

4 hours ago, DurhamBorn said:

There's hydrogen mentioned again.As i said back in the thread SSE own a lot of the wind farms off the Humber,Drax right near where the electricity comes onshore.Very likely they convert part of the site to hydrogen.

https://sse.com/newsandviews/allarticles/2020/04/sse-thermal-to-help-develop-worlds-first-zero-carbon-cluster/

the consortium had been successful in securing funding to launch its plans through Phase One of the Industrial Strategy Challenge Fund.
The consortium is focused on using emerging carbon capture and storage (CCS) and hydrogen technology to decarbonise energy and industry in the Humber region

I like the sound of this project. Very worthwhile.

It reminds me of a project I worked on called Europairs—  which had good aspects, but was a nonstarter due to the impracticalities of the nuclear part.

 

[sancho panza]

17 hours ago, DurhamBorn said:

Yes there is a risk,though i think its more if the Fed doesnt do enough.They have un-limited ability to print and the government have un-limited ability to spend.

The consumer is finished so there is no need for a strong currency to aid in keeping import prices down.The spending will be from government and that will kick in inflation.

We should see spending/debt shoot higher from govenrments,CBs keep monetizing,capital markets sniff inflation so start to push prices up of real assets,that then makes the market allocate the liquidity to industrial areas and feed the inflation.

Very difficult given the nature of how the cycle ended,though in lots of ways much better,because governments have been handed a once in a lifetime chance to inject massive amounts,pull back supply chains etc.

 

I think you've got to the centre of the issue that I was looking at without me realising it.For my thesis to hold,the Fed has to get busy and stay busy.That was what was concerning me with the Wolf St report really,hints of a drop of in demand for repo's.Also,it's very difficult to predict the way consumers will react to something like Le Covid which has possibly changed attitudes to debt in less than a month.

 

8 hours ago, DurhamBorn said:

Credit creation from housing is now deflationary,its a distribution cycle,more will be paid back or defaulted than borrowed.The consumer is dead,and that means the biggest ticket items go.Housing debt,car loans,holidays,in that order.

Governments will step in instead.Instead of capital flowing to Chinese factories it will flow into domestic based new assets.

Its going to be really interesting to see how housing works out in the UK.Highly likely mortgages will want 20% deposits.HTB loans will be interesting,a lot/most might end up on the banks SVR.Good luck with that in a few years as rates start to go up.

 

 

This is one of the key planks of Fisher's debt deflation theory which seals the deflationary vicious circle of debt repayment shrinking people's abilities to earn income.

Psychologically,we could well have passed the point where consumers change from trying to expand housing leverage to maximise returns to reducing leverage to maximise financial security.

Intersting times.

[Castlevania]

20 hours ago, Loki said:

Is this big news or just hype?

https://www.goldmoney.com/research/goldmoney-insights/the-looming-derivative-crisis

 

Mainly hype. Since the financial crisis there’s been a load of legislation that have made derivatives far safer. Most derivative contracts now require daily posting of collateral. For uncollateralised derivatives you have to hold a load more capital which disincentives writing them and all the big banks have derivative counterparty exposure trading desks that hedge their uncollateralised derivative risks. In addition when dealing with other banks all the contracts have to go through central clearing houses which mitigates a lot of the risk.

Derivatives played a big part in the financial crisis, this time around I don’t think it’s a problem. The place to look is at the loan books of said banks, there’s a lot of money that’s been lent that will never be paid back.

[DurhamBorn]

4 hours ago, Transistor Man said:

I like the sound of this project. Very worthwhile.

It reminds me of a project I worked on called Europairs—  which had good aspects, but was a nonstarter due to the impracticalities of the nuclear part.

 

I think for the UK this will be a huge part of the next cycle,and i mean huge.Im expecting them to do similar things on Teesside.Equinor are also involved.So you have SSE with the wind assets out at sea.Drax the huge power plant (than can convert to hydrogen in part or whole longer term) and Equinor with their gas experience.Looks like they are looking to make hydrogen from gas with the wind power over night.

Im expecting to see electric arc furnaces built maybe  on Teesside.The Uk has a chance to turn all its night time wind into hydrogen and then cheaply power industry.No other European country is in as good a position.

BP is doing similar in Holland.

[Loki]

@Castlevania thanks for translating the hype into understandable reality 

[Bricks & Mortar]

56 minutes ago, DurhamBorn said:

I think for the UK this will be a huge part of the next cycle,and i mean huge.Im expecting them to do similar things on Teesside.

I think it's shaping up for Methil as well.  The town isn't much improved since the Proclaimers sang about it.  There's 2 very large windfarms planned either side of the Forth estuary mouth,  an experimental hydrogen scheme at Methil, and lots of vacant dockland to expand into.  For now, the hydrogen scheme is being run by SGN, who you can't buy shares in.  But they're 33% owned by SSE, with the remainder funded by Ontario Teachers pension fund, Ontario municipal pension fund, and Abu Dhabi investment fund.

Edit to add -methil, teeside and drax.  Roughly even spaced, about 100 miles apart.  Noted other big wind farms planned/built at East Anglia and Moray Firth.  Need to look out for hydrogen possibilities there too.

 

[Loki]

12 minutes ago, Bricks & Mortar said:

Ontario Teachers pension fund

They get about a bit, I mean I only know the name from already seeing them mentioned in this thread as a New Gold partner. 

[DoINeedOne]

Just finished this a interesting read

[Talking Monkey]

23 hours ago, DurhamBorn said:

$ goes up when there is systemic risk,and as US assets are bought.As the Fed prints and US assets go up in price there is more reason to sell the $ and buy other assets (foreign stocks etc)

My dollar target is 95,then 88.At that point i think we might see the final leg down in the equity markets.

Lots of noise about in the media and blogs that the Fed is now tightening.It isnt.Its trying to get the amounts right while the US government does fiscal injections.The Fed might do less at the repo and short end or even the junk bond area,but at the same time be buying up longer dated treasuries so the federal treasury can issue debt.

In a "normal" downturn the Fed would punch money into the plumbing of the capital markets only,but such is the size of the deflation (as we always said on here) it needs a massive fiscal injection as well over a long time frame.

So the Fed is expanding its reserves,but its doing it two ways.First trying to right size the injection into the capital markets to remove the systemic risk,and secondly buying up treasuries along the curve to in affect monetize the T bills being issued.Fed will be back in the markets doing this for the next 6 months.

DB re your dollar decline target first to 95 then 88, is that due to you seeing two distinct phases in the dollar index decline each led by a different set of drivers, if so could you please elaborate, was just trying to understand that part of your post

[Talking Monkey]

14 hours ago, DurhamBorn said:

Credit creation from housing is now deflationary,its a distribution cycle,more will be paid back or defaulted than borrowed.The consumer is dead,and that means the biggest ticket items go.Housing debt,car loans,holidays,in that order.

Governments will step in instead.Instead of capital flowing to Chinese factories it will flow into domestic based new assets.

Its going to be really interesting to see how housing works out in the UK.Highly likely mortgages will want 20% deposits.HTB loans will be interesting,a lot/most might end up on the banks SVR.Good luck with that in a few years as rates start to go up.

 

 

With the consumer dead I wonder what the high street/retail will evolve to over the next few years. I'm guessing we will see an ever increasing number of empty units. The huge number of takeaways and restaurants we see in every town and city will shrink back. I'm guessing a lot of retail at the medium to high end will go.

[Option5]

1 minute ago, Talking Monkey said:

With the consumer dead I wonder what the high street/retail will evolve to over the next few years.

Tumbleweed.

[Democorruptcy]

23 hours ago, DurhamBorn said:

Yes there is a risk,though i think its more if the Fed doesnt do enough.They have un-limited ability to print and the government have un-limited ability to spend.

The consumer is finished so there is no need for a strong currency to aid in keeping import prices down.The spending will be from government and that will kick in inflation.

We should see spending/debt shoot higher from govenrments,CBs keep monetizing,capital markets sniff inflation so start to push prices up of real assets,that then makes the market allocate the liquidity to industrial areas and feed the inflation.

Very difficult given the nature of how the cycle ended,though in lots of ways much better,because governments have been handed a once in a lifetime chance to inject massive amounts,pull back supply chains etc.

 

How does the governbankment pull off all this unlimited spending without a lot of it going into wages to get the things done? If it goes into wages why are consumers dead? Workers spend their wages?

[DurhamBorn]

2 hours ago, Bricks & Mortar said:

I think it's shaping up for Methil as well.  The town isn't much improved since the Proclaimers sang about it.  There's 2 very large windfarms planned either side of the Forth estuary mouth,  an experimental hydrogen scheme at Methil, and lots of vacant dockland to expand into.  For now, the hydrogen scheme is being run by SGN, who you can't buy shares in.  But they're 33% owned by SSE, with the remainder funded by Ontario Teachers pension fund, Ontario municipal pension fund, and Abu Dhabi investment fund.

Edit to add -methil, teeside and drax.  Roughly even spaced, about 100 miles apart.  Noted other big wind farms planned/built at East Anglia and Moray Firth.  Need to look out for hydrogen possibilities there too.

 

I used to see a nurse from Abercrombie just along the coast from Methil.She had a gorgeous little cottage.I can remember driving up there listening to the first Cold Play album.Happy times.I think Diageo have a big bottling place there as well.

Its interesting the 100 mile split isnt it.Almost like the government is looking at these areas.Methil looks perfect like you say.I think the drive for these things is the massive amounts of wind power wasted at night.Moray will be a big one.SSE spent a lot getting the cabling in there to bring the electric onshore

https://www.ssen-transmission.co.uk/news-views/articles/2019/1/completion-of-caithness-moray-transmission-link/

Could be a perfect place for using gas for hydrogen production.

Iberdrola look a big player in East Anglia for wind.It will be interesting to see where its coming onshore down there and other players.

[Loki]

3 minutes ago, Democorruptcy said:

Workers spend their wages?

And not an unlimited supply of credit  

[DurhamBorn]

17 minutes ago, Talking Monkey said:

DB re your dollar decline target first to 95 then 88, is that due to you seeing two distinct phases in the dollar index decline each led by a different set of drivers, if so could you please elaborate, was just trying to understand that part of your post

95 is where id have a good look again.It might hold there a while and it will depend on if the Fed keeps printing.I expect they will,then down to 88.The printing iv seen so far,plus the $2 trillion to come over the next few months should see 95.

[DurhamBorn]

11 minutes ago, Talking Monkey said:

With the consumer dead I wonder what the high street/retail will evolve to over the next few years. I'm guessing we will see an ever increasing number of empty units. The huge number of takeaways and restaurants we see in every town and city will shrink back. I'm guessing a lot of retail at the medium to high end will go.

Its tough,because a lot of retail might do ok.Close to the consumer,local etc.Its the big ticket stuff that will suffer the most,cars,holidays etc.People wont stop spending,but they will cut back on borrowing to spend.Home Bargains have nothing to worry about etc.

I think whats happened will force rates reform though.Councils are out of control with their tax and spend and will have to be sorted out one way or another.I cant see big council tax increases going down well for instance.

[headrow]

14 hours ago, DurhamBorn said:

There's hydrogen mentioned again.As i said back in the thread SSE own a lot of the wind farms off the Humber,Drax right near where the electricity comes onshore.Very likely they convert part of the site to hydrogen.

 

Drax is 40 miles from the East Coast.

[Bobthebuilder]

24 minutes ago, headrow said:

Drax is 40 miles from the East Coast.

For electrons moving at the speed of light, 40 miles isnt to far.

[DurhamBorn]

1 hour ago, headrow said:

Drax is 40 miles from the East Coast.

its very close to where the main electric cables come onshore,10 miles from the Humber estuary and is also connected to the main gas grids.Best location in the country at the moment for hydrogen production once the offshore wind farms there all get going.

[headrow]

4 hours ago, DurhamBorn said:

its very close to where the main electric cables come onshore,10 miles from the Humber estuary and is also connected to the main gas grids.Best location in the country at the moment for hydrogen production once the offshore wind farms there all get going.

So a network of hydrogen pipelines would have to built from the hydrogen production centre at Drax? Would these pipelines be sent to the big industrial sites along the Humber?

I presume they would build the hydrogen facility at the North End of the Drax site , huge amount of spare land available.