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

[Loki]

11 hours ago, Harley said:

PS:  And not years.  Serious stuff will start to happen in months.  "Years" is our coping strategy. 

You really think so Harley? In line with the next drop David Hunter etc say is due in September, a sector rotation as durhamborn thinks is possible, or something else?

[No One]

7 hours ago, DurhamBorn said:

Exactly.Most people are macro tourists only.They are mistaking whats going on as the end of a business cycle when it is the end of a long dis-inflation cycle.That difference is critical.Last time the CBs kept the banks going.This time they are full on monetizing government debt.Right now its not really showing as inflationary because they are simply trying to hold up demand from collapsing.However this is only stage one.The next stage is the government creating the demand and paying for it with printed money.Yes it will show as debt/borrowed,but it will expand broad money by a lot.Iv said it before,but they are going to print back all the deflation of the past 40 years.All of it.There will be a dash for real assets soon enough.Could be more falls first,might not be,but quality assets that take a lot of capital to build out will fly higher.The MSM and almost every market analyst  are crowing that you want asset light companies,low assets,lots of tech.I think they are going to be proved hugely wrong.

Growth etc will get a huge shock when input costs rise much faster than they can pass on and margins start to fall.Tesla for instance is trading at 6x turnover at the end of the cycle.

 

Wait what the fuck?

 

are you saying that house prices will shoot up again ? 
 

so my Odds of ever owning have just vanished 

[Loki]

7 minutes ago, No One said:

Wait what the fuck?

 

are you saying that house prices will shoot up again ? 
 

so my Odds of ever owning have just vanished 

I think he means infrastructure type assets.  How will people pay for even more expensive houses with inflation running once we get into the next cycle?

[Castlevania]

More potential gold mining M&A. I’m hoping if the merger does happen that POG won’t be taken private

https://www.telegraph.co.uk/business/2020/05/31/mining-giants-petropavlovsk-ugc-explore-merger/

[JMD]

14 hours ago, sleepwello'nights said:

Uhh?

Can't square that with the turmoil the US created in the Middle East.

I do think that GW Bush was the last president to have an interest in international affairs. A US 'engagement' ME policy would have had long term goals and would have sought to involve other nations, the US didn't care to achieve any of that - it was just short term oil security they wanted at the time, not any more I would add. I would also disagree with you that the US created the 'ME turmoil', rather it is the Saudi (Sunni, kingdom) vs Iran (Shia, theocracy) conflict for religious domination of the region, that also includes the sponsoring of the Muja ha'din terror franchise. The West has had its reformation (something not appreciated by the West), Islam has not, this will be a very big problem for this decade.                                                                                                                                             US friction with nato, United Nations, climate agreements, trade deals, world health org., did not start with Trump (even Obama had begun blocking 'free' trade with China and others). America, especially with its domination of the Americas, is pretty much self sufficient. What that is isolationist policy means for us in Britain is I think very scary. Can we get into NAFTA I wonder?

[Sugarlips]

6 minutes ago, No One said:

Wait what the fuck?

 

are you saying that house prices will shoot up again ? 
 

so my Odds of ever owning have just vanished 

You make a good point that we may need to refine the definition of real assets.

From what I’ve read it’s the precious / base metals & miners as well as companies with strong balance sheets and future demand like the big telcos.

The real estate aspect is less clear as there many types, regions, purposes and reasons for holding.

 @Harley mentioned buying rural land a couple of pages back - agricultural so to me it’s logical this going to retain its value. I assume valuations are not as stretched as the cities. Maybe there will be a rush of city folk fleeing post-CoVID?

@DurhamBorn has said the south east is stuffed as all the over-leveraged middle class workers get handed their P45’s

Other posters have said they want to leverage up some debt (I assume a mortgaged house but could be wrong) and hold precious metals against it as a hedge either in the hope of debt forgiveness or an explosion in PM prices vs fiat (or both) but what they are planning to buy and where is unclear.

Despite the predicted significant incoming inflation, being able to borrow so low now on a long term fix is one way of securing your shelter - assuming the future value is secondary to protecting your family from the vagaries of the rental market, so long as you can be confident in servicing the debt, just buy well (freehold, low maintenance, safe area etc)

[JMD]

14 hours ago, Fully Detached said:

I've always like James Ferguson since I started reading Moneyweek way back when. His thought porcesses seem logical and consistent to me, none more so than in this podcast. He used almost exactly the same words as I put to my wife - if I could see back in March that the lockdown was an economic disaster being launched against a disease of relatively unknown severity, then the government and their experts could too - so why do it? I guess I was simply slow to catch on, but I believe I now have my answer. The question is whether or not they will be successful, or perhaps more accurately, how long it will take for them to be successful.

Trump initially wanted to ignore cv19, calling it just another flu. But he did a 360, so guess that his advisers re-educated him.

[DurhamBorn]

36 minutes ago, No One said:

Wait what the fuck?

 

are you saying that house prices will shoot up again ? 
 

so my Odds of ever owning have just vanished 

No,i dont count houses as real income creating assets.In this stage of a cycle they become a liability.They are going down,but there might be a lag,patience,let the cycle unfold.

[JMD]

15 hours ago, Fully Detached said:

Yes, exactly - the bit in bold is the bit we don't know about yet. Common sense would say that nobody in their right mind would borrow in the upcoming climate, but given the covid-19 forgiveness trend and the never ending capacity for joe public to completely bewilder me, I'll be keeping a close eye on take-up.

Perhaps this will create the unusual conditions - and so become the stimulus for - that final (unexpected?) meltup?

[DurhamBorn]

13 minutes ago, JMD said:

I do think that GW Bush was the last president to have an interest in international affairs. A US 'engagement' ME policy would have had long term goals and would have sought to involve other nations, the US didn't care to achieve any of that - it was just short term oil security they wanted at the time, not any more I would add. I would also disagree with you that the US created the 'ME turmoil', rather it is the Saudi (Sunni, kingdom) vs Iran (Shia, theocracy) conflict for religious domination of the region, that also includes the sponsoring of the Muja ha'din terror franchise. The West has had its reformation (something not appreciated by the West), Islam has not, this will be a very big problem for this decade.                                                                                                                                             US friction with nato, United Nations, climate agreements, trade deals, world health org., did not start with Trump (even Obama had begun blocking 'free' trade with China and others). America, especially with its domination of the Americas, is pretty much self sufficient. What that is isolationist policy means for us in Britain is I think very scary. Can we get into NAFTA I wonder?

No need,the commonwealth is self sufficient,and India,Australia and Canada will be wanting/needing to exchange materials and food for British arms.China might be huge,but it starves if you torpedo any cargo ship entering.They couldnt even put the holes in the right place half the time when i used to import from there so i doubt they would ever be able to hunt down a dozen hunter killer subs.I guess they could lorry grain from Ukraine and Russia,but Russia would very much like China weakened.

[JMD]

15 hours ago, sleepwello'nights said:

This is the reason why most of us go to work; human nature. I cannot see any alternative. Currently those that go to work are supporting more and more who have no work available or who choose to rely on the support of the taxpayer. This is breeding resentment. Hence the disparagement towards the benefit classes. It is also becoming recognised that benefits aren't just paid to the low skilled, the lazy or those gaming the system but also to the owners of capital. The complaints against BTL owners on here and TOS are recognition that housing allowances ostensibly paid to the benefit classes are in effect being paid to landlords, many of whom were wealthy in their own right long before the legislative changes to the rental sector in the 1990s.

The nature of work has changed in that there are more and more "service sector" non-jobs growing to fill the vacuum the disappearance of real jobs has left. 

Economists promoting a citizens income (CI) hypothesize that it can be achieved by making the population owners of shares in the productive companies and industries and that the CI is their dividend receipts. It might sound theoretically possible but history shows us that it doesn't work. The aristocracy in Rome grew their wealth from the exploitation of the populace. The widows of soldiers killed in wars couldn't survive on the land they owned and had to sell it and find other means of support. Over time two classes emerged the plebians and the patricians.

Communism was another attempt more recently that failed as we know. You pretend to pay us and we pretend to work. Money is an illusion but one we need.

I'd be interested to hear of a conceptual leap that overcomes the problems inherent in devising an alternative to exchanging your labour for compensation.

I asked myself the same questions after the 2007 crash. Depressing how nothing changed. But what angers me is that none of this was even discussed.                                                                                                                                     Have you read 'The Ragged trousered philanthropists'? It is a take on what English socialism might look like.          I think the Mondragon company in Spain shows how a collective can be succcesfuly run.

[JMD]

12 hours ago, DurhamBorn said:

Its pretty much a 40/60 lifestyle type fund.Only difference is they seem to hold a decent wedge of cash and a few other assets.I worry that these funds will struggle in an inflation cycle.They might manage to stay level,but with fees and a draw down amount of 4% they will still empty quite quickly.Most people hold them through IFAs and they tend to charge between 1.5% and 2.2% fees on top.2.2% fees on a fund holding over half in bonds yielding less than that doesnt look a good idea to me.

DB, what type of asset is the 'corporate bond' in that portfolio? Isn't it just company debt? 30% allocation too.

[JMD]

1 hour ago, JMD said:

I do think that GW Bush was the last president to have an interest in international affairs. A US 'engagement' ME policy would have had long term goals and would have sought to involve other nations, the US didn't care to achieve any of that - it was just short term oil security they wanted at the time, not any more I would add. I would also disagree with you that the US created the 'ME turmoil', rather it is the Saudi (Sunni, kingdom) vs Iran (Shia, theocracy) conflict for religious domination of the region, that also includes the sponsoring of the Muja ha'din terror franchise. The West has had its reformation (something not appreciated by the West), Islam has not, this will be a very big problem for this decade.                                                                                                                                             US friction with nato, United Nations, climate agreements, trade deals, world health org., did not start with Trump (even Obama had begun blocking 'free' trade with China and others). America, especially with its domination of the Americas, is pretty much self sufficient. What that is isolationist policy means for us in Britain is I think very scary. Can we get into NAFTA I wonder?

Btw, for clarity - i mean George Bush senior, 88-92. Not his son.

[JMD]

13 hours ago, Harley said:

Does anyone hear anything about Bush and co anymore?  Is Bush still alive and has he retreated to that massive ranch in South America with the rest?  Wars go on but lower key through proxy and more clearly directly for economic/business ends (no need to BS when it's all covert).  Not so much the old nation proxy but the private security, cyber, and economic proxies.  Some people are making some serious money right now while some monkeys are doing it for peanuts.  Depends on who you are and who your client is.

Bush senior died in 2018. Bush junior still around, did we ever get to the bottom of pretzel-gate?

[DurhamBorn]

21 minutes ago, JMD said:

DB, what type of asset is the 'corporate bond' in that portfolio? Isn't it just company debt? 30% allocation too.

Yes company debt.Usually they mix up government debt and private in them and its hard to tell how much.US treasuries are a bit different to a lot of corporate debt.

Given rates are even around 3% or less on decent corporate it doesnt take many defaults to make nominal losses,and with fees and inflation on top....

[JMD]

12 hours ago, Harley said:

Thanks for that.  I really appreciate the contributions to what is a tough but essential topic.

For me, I'm mostly in cash and PMs.  Indeed over in PMs due to their relative gains.  I'm currently changing the PM mix away from a few holdings and ETFs.  I hold gold:silver at quite a low ratio so may scale that back and trade silver instead.

I have NS&I stuff and reclassified that from bonds to cash but will move them back.  Ok not 100% bonds but close, indeed better, enough.  I will get as much cash I can out of my pension and find a safer home for it.  I am currently using cash to invest in things I need while they are available and cheap.  I need land but not the overpriced stuff for the townies.

I'm not fully out of traditional bonds.  I have a small traditional pension fund along the lifestyle ones DB mentioned.  TBF, it did it's job over the last few months but I agree with DB and don't expect that to continue.  I will always hold some bonds but that class will need to include other things to get to 25%.

That leaves equity.  I'm looking to invest in our target sectors overseas.  Only value plays and I have a comfortable selection approach for that.  One exception is I'm warming to add tech, robotics and AI as the onshoring will provide opportunities (rather than the jobs people think).  I'm still expecting/hoping for a downturn but as SP recently emphasised, this is a mixed basket with sector shifts, etc below the surface.  Another reason for me to largely stay away from index funds.

Then there's all that stuff I'm doing off the financial grid to get me where I want/will be in the coming years. That's been my primary focus to date.  Don't ask please as each to their own (requirements).  Then I'm going back to proper trading once all that's done.

 

Interesting Harley. I am personally struggling to get my allocation right. But i hear more commentators saying that physical PM's are a replacement for bonds. Some similarly include bitcoin in this same argument. I think I agree - but am not happy to not earn a divi from my PM's. I do expect PM's to fly to the moon(?) - however in case they don't behave as expected, I have begun overweight in silver and will exchange for gold when gold/silver ratio tightens. My target is 50%gold/50%silver, and hope this provides a (cheaper) way to accumulate more gold compared to simply purchasing it at outset.                                                                                                                                                                                     What target sectors overseas are you looking at?

[JMD]

10 hours ago, sancho panza said:

Thats the movement at the margins we're looking at.Russia had structural issues that lent themselves to revolution.Their 1% didn't see it coming.

It's amazing how much of the 20th centruy might have been differnet if at key poitns more adept people had been in place.

History shows us though that the type of soldiers that run armies during peacetime aren't often the right sort to lead armies through wars(Norman Dixon-Psychology of Military Incompetence 1994).

Pointing out the obvious here but working/middle class savers got wiped out in 1920 Russia.

I think we're approaching a similar inflaection point where big geo political changes are going to happen-CHina/US cold war looks baked in.Chinese revioltuion?????

President Xi made himself president for life. To me that signals there is no one at the top Chinese Table that shares Xi's vision or that Xi trusts to handover to. I liken China to the old USSR, historically it is 15 main provinces forced into servitude over milennia, but many still maintaining own language and culture, with some hostile to the ruling urban elites (the Muslim minority being just the most visible), especially with the ever growing wealth inequalities. So yes I think a Chinese revolution. The so called 'chinese miracle' is really just a schizophrenic melding of the worst of the totalitarian communist system with the worst of the consumerist/indebted capitalist system. I know Asians have a slightly higher IQ than Europeans, but how can such a system survive? After all, we keep hearing about political division and corruption, so I assume there are many more frictions that go unreported.

[Fully Detached]

7 hours ago, JMD said:

Perhaps this will create the unusual conditions - and so become the stimulus for - that final (unexpected?) meltup?

Maybe. Problem is, these meltups are like trains - you stand on the platform wondering where the hell the one was that was due ten years ago and all of a sudden another one blasts through on the opposite side of the station. All you can do is buy a coffee and a grotty bacon roll and hope they keep you going until you get on and find a seat. 

[MrXxxx]

15 hours ago, Festival said:

Good luck with the approach Harley i agree with what many points particularly regarding overpriced land. Now white collar workers can live further from work the land scarcity premium must reduce in many places.

I am 55 next year and will be taking 25% of the pension tax free - some will go back into ISAs the rest will be cash. I'm concerned about govt restricting access either by age or making access less tax efficient to take.  

Mmmm, interesting...until recently although concerned about pension reforms and the government `moving the goalposts` I reassured myself with the fact that legislation takes time, and so we would all have ample warning Having seen how they have operated recently (I.e post-Brexit/Coronavirus) with legislation I am no longer so confident.

[MrXxxx]

6 hours ago, DurhamBorn said:

Yes company debt.Usually they mix up government debt and private in them and its hard to tell how much.US treasuries are a bit different to a lot of corporate debt.

Given rates are even around 3% or less on decent corporate it doesnt take many defaults to make nominal losses,and with fees and inflation on top....

So is this not an even stronger argument for ignoring bonds and putting the investment in a reliable, defensive stock divi payer?

[MrXxxx]

6 hours ago, JMD said:

For me, I'm mostly in cash and PMs.  Indeed over in PMs due to their relative gains.  I'm currently changing the PM mix away from a few holdings and ETFs.  I hold gold:silver at quite a low ratio so may scale that back and trade silver instead.

This is prompted by @Harley post above and one I hear this many times from goldbugs I.e. ""PMs are only PMs when you have them in hand" but 

a) if the PM etf is allocated whats the issue?, 

b) PM etf have lower costs and are easier to trade, and

c) holding a worthwhile quantity of PMs at home is not feasible security wise, vaulting is required...as a `small` holder getting it out although theoretically possible isn't really realistic.

So is this `solid` mantra a dogma spread by the bullion boys that people are just regurgitating without much real evidence?

 

In addition, by spreading across several etf`s you are lessening your risk than keeping it all vaulted with one; usually the temptation due to a minimum vaulting fee NOTE I believe I am correct in the belief that PMs don't have the FSCS protection at all?

 

To finish a Q. PM Etfs is it better to keep them in an ISA...my rationale would be yes for PM miners as they have the potential to make a gain on investment, no for gold/silver paper as these are less likely/are an inflation hedge...better to leave the tax-free ISA space for something else.

As always comments/thoughts welcome, DYOR/not financial advice etc.

 

[sleepwello'nights]

9 hours ago, JMD said:

 I would also disagree with you that the US created the 'ME turmoil', rather it is the Saudi (Sunni, kingdom) vs Iran (Shia, theocracy) conflict for religious domination of the region, that also includes the sponsoring of the Muja ha'din terror franchise. 

My perception is that the US, mainly also the UK and France, armed Saudi Arabia and encouraged them. A topic for another thread rather than derailing this one perhaps.

 

[jamtomorrow]

On velocity: chanced on a diagram that neatly summarizes what's bothering me about how the next cycle might be different. It's from this paper: https://necsi.edu/s/econunivers_2.pdf

"Industrial cycle" says to me we'll primarily see velocity in the 'B' (biz to biz) eddy, presumably with some associated velocity in I/R (investments/returns).

I'm confident the ratio W/Y (share of production "captured" by wages) will be the lowest for any such cycle we've ever seen (because mad automation), so consumer velocity C/W is going to be weak (relatively).

What bothers me: to what extent can an industrial cycle "get going" if consumer demand doesn't get swept along like in previous cycles? And: what's the point anyway if the consumer (aka: the general population) only "sees" a diminishing fraction of any velocity uplift?

[sleepwello'nights]

8 hours ago, JMD said:

I asked myself the same questions after the 2007 crash. Depressing how nothing changed. But what angers me is that none of this was even discussed.                                                                                                                                     Have you read 'The Ragged trousered philanthropists'? It is a take on what English socialism might look like.          I think the Mondragon company in Spain shows how a collective can be succcesfuly run.

We successfully ran collectives starting from philanthropic Victorian times. John Lewis was one, The Co-op another. I'm sure there are others I could find with some research.

They never caught on in a big way. Probably because governments after the watershed social changes brought about by WW2 filled that role. 

And here we are. Well fed, well educated, with good health care, infrastructure and housing.

[DurhamBorn]

30 minutes ago, jamtomorrow said:

On velocity: chanced on a diagram that neatly summarizes what's bothering me about how the next cycle might be different. It's from this paper: https://necsi.edu/s/econunivers_2.pdf

"Industrial cycle" says to me we'll primarily see velocity in the 'B' (biz to biz) eddy, presumably with some associated velocity in I/R (investments/returns).

I'm confident the ratio W/Y (share of production "captured" by wages) will be the lowest for any such cycle we've ever seen (because mad automation), so consumer velocity C/W is going to be weak (relatively).

What bothers me: to what extent can an industrial cycle "get going" if consumer demand doesn't get swept along like in previous cycles? And: what's the point anyway if the consumer (aka: the general population) only "sees" a diminishing fraction of any velocity uplift?

The main point is because if it doesnt happen western democratic economies collapse.Consumers are mostly hugely wealthy at the moment.I can buy a large chicken in Aldi for £3.09 for instance.Thats insane compared to all of known history.BUT the backbone of the economy is failing and isnt producing enough wealth.It cant support the demands on it.The consumer will have to accept a distribution cycle.

If Equinor and Drax manage to produce hydrogen from un-used night time wind power then we might be able to re-open an arc steel furnace on Teesside because power is cheaper.Or if there is an abundance of cheap energy at night that arc furnace becomes competitive.Instead of sending all the scrap metal to China they can melt and re-use.No consumer involved at all,but wealth created in the backbone of the economy.