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spunko

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

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15 hours ago, DurhamBorn said:

Has anyone ever bought on Hargreaves on the phone for stocks they dont quote for online?

I went to buy Nexa Resources tonight,but not available on the platform yet its quoted on the NYSE.A very big zinc producer that should have a bull run in reflation,but also throws of 6 million oz of silver a year.

I have bought a few on the phone. It is quite straight forward but there is a 1% charge but its £20 minimum, £50 maximum.

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1 hour ago, DurhamBorn said:

“Project Defend”: major UK government review looks to end strategic dependencies. The Times reports that “Boris Johnson has ordered civil servants to draw up plans codenamed Project Defend to end Britain’s reliance on China for vital medical supplies and other strategic imports in light of the coronavirus crisis.” The initiative, led by Dominic Raab, the foreign secretary, could lead to the government intervening to support the “repatriation” of key manufacturing capabilities such as pharmaceuticals as part of a new national resilience framework.

https://www.thetimes.co.uk/edition/news/boris-johnson-wants-self-sufficiency-to-end-reliance-on-chinese-imports-bmlxnl8jl

Note it doesnt say - Non UK suppliers. Just China.

 

 

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https://www.cnbc.com/2020/05/22/imf-says-banks-will-struggle-to-be-profitable-through-2025.html

KEY POINTS
  • In a new report Friday, the IMF said banks across nine advanced economies will struggle to generate profits through 2025.
  • Banks’ earnings have already been hit hard by the economic shock of the coronavirus pandemic.
  • The IMF said the economic downturn will “test banks’ resilience” as they face loan losses and tighter margins from low interest rates.

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3 hours ago, DurhamBorn said:

“Project Defend”: major UK government review looks to end strategic dependencies. The Times reports that “Boris Johnson has ordered civil servants to draw up plans....

Good luck.  They're going to have to fight some powerful paid for vested interests in the Establishment.

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2 minutes ago, Harley said:

Good luck.  They're going to have to fight some powerful paid for vested interests in the Establishment.

Cummings does seem to be up for that scrap.

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2 hours ago, Harley said:

OK, FWIW and apologies, but one of those posts to help clarify my mind and spur me on to do it a bit more!

I loved ETFs when they first came out.  Way before they became so popular.  So much better for me than the funds, etc.  I traded them quite well (trading sectors) too.  I then got serious about investing/personal finance so set up a floor (SIPP based permanent portfolio) and an upside fund (ISA income).  Both were ETF based.  Then along came the KID nonsense, the relatively poor performance of the income ETFs , and increasing concerns on the unique risks of ETFs (spurred on by one failure).  So I've been moving away from ETFs but still have some and will probably always do so in my SIPP (using a conservative provider who does not lend securities).  My approach to the equity section of my SIPP now is to select target industries on the basis of macro trends (as often discussed here) and identify, through fundamental analysis, the top best three companies in each sector.  These companies have to deliver at least the average dividend of the top 15 or so companies in the sector, but other factors are also important such as debt levels and cash flows.  I use technical analysis to time the purchases.  So this is more of a total return focus.  My income portfolios (I manage a few) are 100% FTSE100/250 high div companies and are down badly.  They also contain companies likely/are cutting dividends under as much political pressure as anything else.  My mistake was to look for so many companies in a relatively small pool so ended up going into sectors I really did not like and should not have done.  I'm now looking at going more global with new ISA cash to provide a geo spread of those sectors I like and hopefully into countries with less pressure to cut the divs.  This will hopefully also enable me to hedge future sterling falls.   

Thanks Harley, so will you be turning mostly Japanese to get those divis, I hear Japan are/will be the divi king (emperor)?

When you say '...does not lend securities', in relation to etfs, are you referring to things like swaps and derivatives?

 

The US are lucky with their choice of etfs, I hear they can even buy, alongside the well known 'factor' etfs, equal weight ones, unsure of their actual name but where a fund invests equal amounts across say all 70 of biggest companies and rebalances 6-monthly; apparently back testing shows better performance than merely replicating the market ratio values of individual co's, like most standard vanilla etfs do. (I think I have made a mess of describing these)

Edited by JMD

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6 minutes ago, Harley said:

Good luck.  They're going to have to fight some powerful paid for vested interests in the Establishment.

Very much so,its going to get interesting.The economy is nowhere near large enough now to support the demands on it.Its incredible the amounts of parasites sucking the host dry.Its like the poverty industry.The civil servants push and push to get more and more for the "disadvantaged" so both they and them end up cushy,while the working tax payer pays for it.So far though the Tories arent looking very much up for it.They are failing at every turn.

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10 hours ago, DurhamBorn said:

eople 50 who were expecting equity release in 10 years and pension drawdown from their lifestyle type funds are going to be destroyed this cycle.

The thing is there are people where I work on such funds where they have the option to do a taper into bonds from 55 or stay 100% in stocks...what will they do?...nothing, and so they will automatically end up in the `safe` option of bonds and cash!

 

...and to add, if I hadn't discovered a site like this about five years ago I would still be one of them...blissfully ignorant until it was too late.

Edited by MrXxxx

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7 minutes ago, Bricormortis said:

https://www.theguardian.com/environment/2020/may/22/uk-approval-for-biggest-gas-power-station-europe-ruled-legal-high-court-climate-planning

Drax overcomes a legal challenge from environmentalists to build Europe's biggest gas fired powered station in Yorkshire. ( may still have to fight against an appeal )

Yeah and i expect it to be converted to hydrogen at some point in the future.

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https://www.liverpoolecho.co.uk/news/uk-world-news/national-holidays-shearings-fall-administration-18299134

Lots going bankrupt,but really sorry to see these go under.My parents enjoyed many a holiday with them and they were always very good value.The irony is its likely their UK holidays would of proved very popular over the cycle.National Express will gain of course and if i was one of the big coach companies id be running the rule over the business.

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Just now, Loki said:

@DurhamBorn What's your gut feel on another round of covidbucks for the self employed?

Tough call,they might pay for June and maybe July then thats it.I dont think they understand the size of the job losses coming.They built the economy for 40 years on the service industry + tax credits during dis-inflation,then decided the bankrupt half if it.Lots of my friends etc enjoying the furlough in their hot tubs and gardens like its a lovely holiday.The deficit is going to run at £200 billion even after the end of "lockdown".

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3 minutes ago, DurhamBorn said:

Tough call,they might pay for June and maybe July then thats it.I dont think they understand the size of the job losses coming.They built the economy for 40 years on the service industry + tax credits during dis-inflation,then decided the bankrupt half if it.Lots of my friends etc enjoying the furlough in their hot tubs and gardens like its a lovely holiday.The deficit is going to run at £200 billion even after the end of "lockdown".

Thanks mate.  Working in construction I'd like to think I'm in a good position for the infrastructure side of the cycle...might have to get out of office fit outs though!

Be nice to get one more round of state sponsored Britannia in though. (Don't judge me, I've been honest on my tax returns so got a decent grant!) 

Edited by Loki

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4 minutes ago, Loki said:

Thanks mate.  Working in construction I'd like to think I'm in a good position for the infrastructure side of the cycle...might have to get out of office fit outs though!

Be nice to get one more round of state sponsored Britannia in though. (Don't judge me, I've been honest on my tax returns so got a decent grant!) 

Working in construction also. We heard today of a local builder going into administration. It's going to be tough but the stronger leaner firms will survive. You are correct regarding diversity (or choosing the right sector). Retail fit out for example is not the place to be!

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7 hours ago, JMD said:

When you say '...does not lend securities', in relation to etfs, are you referring to things like swaps and derivatives?

Some (most) ETF providers lend out their holdings for a bit more cash.  You can see the details for say iShares for each ETF detailed on their website.  This introduces a number of risks.

https://www.dosbods.co.uk/topic/6958-financial-risk-management-case-hardening/?do=findComment&comment=323114

Edited by Harley

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13 hours ago, Castlevania said:

Or use a buying agent. 

Makes a lot of sense.WHen I buy a car,I pay the mechanic I've been at for 25 years to take a look and then give him a cut of whatever he saves me off the asking on top of his turn up fee.

I amazes me how people purchase something as life changing debt wise as a hosue and then scrimp on good legal/buying advice.

I spend a lot for us on info/data services.The good stuff is worth every penny including my monhlty donation to wolf richeter.

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12 hours ago, DurhamBorn said:

Yes there is,and i admit i do very very little work on house prices because they dont affect me.The only work i do is more low level and out of interest,plus the fact i promised my partner a holiday home on the coast if silver hits a certain level xD.

The difference with the 70s though is house prices are starting from a much higher level,and we started the 70s as an industrial waged country,so wages grew with the inflation.We arent in that position now.Rates are going to increase faster than wages mid cycle,a 4% SVR might be a 33% increase where wages go up 7%,the next year at 6% is another 50% increase where wages go up 8% etc.Its servicing the debts that will be the problem.

The more we get nearer to what's coming the more it starts looking like the 70's ie credit deflation/price inflation.WE hevan't even had the oil price spike yet.

HAard to see how labour will have much pricing power in the next few years.

12 hours ago, Talking Monkey said:

I've thought about the wage inflation a lot and beyond the minimum wage moving up I can't see huge increases on the higher tiers. Automation and tech along with offshoring (I still expect it to continue) will suppress wage inflation. I can't see the white collar worker on say 35K having his wages keep up anywhere near the rate of inflation

This is what could turn this into a depression.Huge chunks of the country have 'hope' as the main strategy.

9 hours ago, BearyBear said:

https://www.cnbc.com/2020/05/22/imf-says-banks-will-struggle-to-be-profitable-through-2025.html

KEY POINTS
  • In a new report Friday, the IMF said banks across nine advanced economies will struggle to generate profits through 2025.
  • Banks’ earnings have already been hit hard by the economic shock of the coronavirus pandemic.
  • The IMF said the economic downturn will “test banks’ resilience” as they face loan losses and tighter margins from low interest rates.

I think that's replicated in the share prices for even the more qulaity stocks.I can currently buy Barclays for less then I paid back in 1991.

ANd thsi is before we get the alrge scale defaults on CRE/mid grade and below corporate debt

image.png.5d4d6f55f51952d0b7206d474d5afdd6.png

8 hours ago, DurhamBorn said:

Very much so,its going to get interesting.The economy is nowhere near large enough now to support the demands on it.Its incredible the amounts of parasites sucking the host dry.Its like the poverty industry.The civil servants push and push to get more and more for the "disadvantaged" so both they and them end up cushy,while the working tax payer pays for it.So far though the Tories arent looking very much up for it.They are failing at every turn.

Without being overly political,it's hard to disagree.Churchill oversaw a world war that culminated in the victory against totalitarianism.Boris has been cajoled by Porf Magoo at Imperial College into shutting down society to such an extent that a load of old dears with covid would be sent back into care homes to reinfect the rest and kids with near zero risk of dying from covid would be scared to go to school due to the fear spread by Prof Magoo.

The comparison finishes there for me.

Boris taking on tax credits/triple lock/migrant crisis/1%/unions....................no.

1 hour ago, Barnsey said:

Whitbread worth laddering into?

WTB got rid of the costa jewel in the crown.Not sure Premier Inn is worth that much.from investing.com

'The Company is organized into a single business segment, Premier Inn. Premier Inn provides services in relation to accommodation and food both in the United Kingdom and internationally. The Company's restaurant brands include Beefeater, Brewers Fayre, Table Table, Cookhouse & Pub, Bar + Block, Premier Inn, hub and Thyme. The Company operates over 800 Premier Inn hotels and over 80,000 rooms across the United Kingdom. Its subsidiaries include Whitbread Group PLC, Premier Inn Hotels Limited, Premier Inn Kier Limited, Silk Street Hotels Limited, Elm Hotel Holdings Limited, Brickwoods Limited, Duttons Brewery Limited, and Silk Street Hotels Limited.'

Edited by sancho panza

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hattip kaplan

 

to be fair,we're not positoned too dissimilarly ie oil price up/dollar down,buy UST's/big kahuna/buy stocks.

 

https://seekingalpha.com/article/4347067-2-crashes-to-come

Summary

Conditions are looking ripe for a crash on two fronts, first in bonds, and then in stocks.

Inflation expectations are too low and a rally in oil could lead to a bounce in inflation, signaling the crash No. 1 in bonds.

Bonds are signalling conditions like another period – early 1987 – that could lead to a similar meltdown. This is crash No. 2.

I do much more than just articles at The Lead-Lag Report: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

The function of economic forecasting is to make astrology look respectable. – John Kenneth Galbraith

Well, we’ve had it. The market melt-up from the March 23 lows has been significant, with the S&P 500 gaining just over 28% to May 12. I mentioned in The Lead-Lag Report in early March that I thought this was a real possibility, given the conditions for a melt-up in stocks seemed to be appearing even as the world seemingly was ending. And in late March, after the initial rally, I mentioned we were potentially on the verge of a bubble in the making. Now seems like a good time for an update on those thoughts. I believe things are potentially setting up for two crashes to come, with crash No. 1 in bonds, and crash No. 2 in stocks.

39580-15893358486778407.png

Inflation expectations are low right now, but also trending higher, with good reason. It will be hard to have increasing prices when the consumer is petrified of going to shopping malls and a vast amount of people out of work. Sometimes, though, expectations need to be checked against a backdrop. And the context we are in right now is global fiscal and monetary stimulus to a level we have never seen before. Tens of trillions of dollar equivalent has been deployed against the virus. How do you fight a pandemic? Throw money at it. How does inflation react when the economy finally does reopen, and a large portion of job losses are crawled back, as many economists posit with their V-shaped or U-shaped recoveries? And when does the stimulus stop? I think the chances of inflation overshooting the minuscule expectations are high, as conditions are warranting right now. That, along with a spectacular rise in oil prices after going negative in April, will likely lead to more cost-push inflation as gas prices rise from a supply side just as demand starts to increase with the economy opening up around the world. Combined with food shortages and higher prices at groceries, there are real pressures building here.

 

39580-15893358489236875.png

And then there’s the action in credit that's being under concentrated. Spreads have spiked, as shown below, but not nearly to the levels that the economic conditions are reporting. Do we not think there are going to be more bankruptcies in the BBB and BB space? According to yield spreads, we’re nowhere near 2008 levels. The AAA spread has barely moved, and BBB space is at levels that we saw in 2016, in much better economic conditions. I’ve been noting credit spreads as of late in the risk-on, risk-off signals that I alert subscribers to in The Lead-Lag Report on a weekly basis.

39580-15893358497380297.png

A significant spike in inflation and a blowout in credit could lead to a massive bond selloff, or crash No. 1.

39580-15893358492507873.png

39580-15893358492573314.png

However, many say that the bond market is a much better predictor of economic conditions and what the stock market will ultimately do. If you buy into that rhetoric, you better be paying attention. As I mentioned in The Lead-Lag Report, this is the greatest disconnect between stock markets and economic conditions in history, and something must give eventually.

 

When you look at what happened to 10-year bond yields leading up in 1987, you can draw the correlation to what's happening in 2020. For those not paying attention, October 1987 contained a terrible day in stock market history, with Black Monday having a drop of 22.6% for the Dow. Remember that while the Fed can control short-term interest rates, several studies have shown that Papa Powell and the League of Extraordinary Bankers have little control over longer-term bonds.

Look, the stock market could certainly go higher, and bond yields could stay low for some time. Given the amount of liquidity injections, it's not out of the question, and the market can remain irrational far longer than you or I can remain solvent, as the great John Maynard Keynes said. And credit where credit is due, the Fed did act fast, and the fiscal stimulus came much quicker than expected, especially given how polarizing politics have become in the last half decade. It's possible all that this economy needed was a short-term boost, and if given, things could return back to 2019 conditions in a V- or U-shaped recovery, possibly faster than we have ever seen before coming out of a recession. I just think that given the uncertainty, and how financial conditions are flashing warning signs right now, that it's better to be cautious and prepare for the worst.

What I see happening here is that government and central bank stimulus will lead to higher inflation, along with oil price’s cost-push, as discussed above. That will lead to a spike in bond yields, much like in the early 1987 period. As stock markets have already rallied so much in 2020, investors will see these relatively attractive bond yields and start to take their profits. That could be the catalyst for crash No. 2, as the disconnect we see in the economy and stock markets is the largest we have ever seen. Add in some heavy algorithmic trading and institutional/pension fund rebalancing, and we could be in for some substantial volatility in the next few months. With what we have experienced in December 2018 and early 2020, would you be surprised to have another massive selloff that “is an overreaction?” The way I see it, there are two crashes to come, first in bonds and then in stocks. I’ve maintained my stance since March that what happens after the crash may be more surprising than the crash itself. Buckle up.

39580-15893358492668445.png

Ideas for your portfolio

Simply, make sure you are diversified properly, but actual diversification. Know that the S&P 500 (SPY) might not be as diversified as you think, with 22.3% in technology and 13.5% in financials alone, with a whopping 15% in just three stocks – Microsoft (MSFT) 5.66%, Apple (AAPL) 5.08%, and Amazon (AMZN) 4.27%. Consider gold (GLD) as an uncorrelated hedge. With your fixed income, reduce your duration exposure via ETFs and/or stick to short-term U.S. Treasuries as opposed to corporates. With your stock exposure, make sure the companies you own are well capitalized, and do not have unreasonable amounts of debt on the balance sheet. It could be a decent time to take some profits off the table of your recent stock winners as well, especially if they are printing new highs. Think of those companies you wished you had taken profits of in February, the Fed has given you a second chance here. Don’t waste it.

Edited by sancho panza

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1 hour ago, Sasquatch said:

Working in construction also. We heard today of a local builder going into administration. It's going to be tough but the stronger leaner firms will survive. You are correct regarding diversity (or choosing the right sector). Retail fit out for example is not the place to be!

Construction here also, I'm employed by a QS practice working with one of the 'big four' supermarkets. CapEx budget has been ominously slashed in comparison to previous years but nobody seems particularity concerned about job losses in the office, perception being that the supermarket industry is recession proof - no one is anticipating a depression obvs.

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12 hours ago, MrXxxx said:

The thing is there are people where I work on such funds where they have the option to do a taper into bonds from 55 or stay 100% in stocks...what will they do?...nothing, and so they will automatically end up in the `safe` option of bonds and cash!

Have to be careful here because derisking as you approach retirement is sensible to ensure that your can crystalise the gains you have hopefully made with high risk equity investments throughout your work life. No one would have wanted to have their pension 100% FTSE 100 invested at the beginning of March with an April retirement due!

So cash is "safe" for a year or two as are short term bonds. Tapering is absolutely right. Just select the right assets!

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7 hours ago, Ellandback said:

Construction here also, I'm employed by a QS practice working with one of the 'big four' supermarkets. CapEx budget has been ominously slashed in comparison to previous years but nobody seems particularity concerned about job losses in the office, perception being that the supermarket industry is recession proof - no one is anticipating a depression obvs.

I have no construction knowledge at all but if I had then perhaps I'd look to build for Aldi and Lidl instead.

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8 hours ago, sancho panza said:

I think that's replicated in the share prices for even the more qulaity stocks.I can currently buy Barclays for less then I paid back in 1991.

ANd thsi is before we get the alrge scale defaults on CRE/mid grade and below corporate debt

image.png.5d4d6f55f51952d0b7206d474d5afdd6.png

 

How about RBS..? Anyone holding since 1988? Using BoE inflation calculator, 720p in 1988 is approx 1950p in todays money.

image.thumb.png.e034474b1401174403d7cb211125c3bc.png

 

I do wonder how banks will perform in inflationary environment..?

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