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

[Green Devil]

1 minute ago, Loki said:

Thanks for that Green Devil - so you're not convinced about it holding together to September? What's your plan when the markets open on Monday?

No idea. I was expecting it to dip so bought some puts. Since then its just gone up.

 

[Castlevania]

2 hours ago, Errol said:

That's because it's total nonsense. They are basically just making it up.

Points 4 and 5 are quite pertinent. Points 1-3 are the usual Guardian fluff (best skipped).

https://www.theguardian.com/business/2020/jun/05/us-unemployment-may-jobs-report-five-key-points

[Loki]

11 minutes ago, Green Devil said:

No idea. I was expecting it to dip so bought some puts. Since then its just gone up.

 

The S&P hit David Hunters 3100 mark so it will be interesting to see what happens

[Ellandback]

This isn't sustainable is it, I bought oasis petroleum 5 hours ago when it was up 38% on the day and it's just closed 126% up. It felt all sorts of wrong buying it especially with cattle prods talk of an oil pullback earlier. It's currently down 12% after hours... Helluva drug.

[Wheeler]

11 hours ago, NogintheNog said:

Anyone see the interview on Channel 4 news last night with economic historian Niall Ferguson and professor of economics at Stony Brook, Stephanie Kelton. She's advised Democrat presidential candidate Bernie Sanders – as well as the progressive Congresswoman Alexandria Occasional-Cortex. She’s now advising Joe Biden’s campaign.

The interview is here;

https://www.channel4.com/news/economist-stephanie-kelton-on-us-unemployment-crisis-the-only-game-in-town-is-the-federal-government

Any thoughts???

I haven't watched the video, I admit, but Kelton is the current face of Modern Monetary Theory (MMT), which is ironically not modern. I prefer to call it Magic Money Tree.

It's popular with the "free money" crowd of socialists mainly because we are in the deflation phase that lets the government/central bank print money and spend. 

Conventional monetary policy requires the government to borrow the money on the open market. The main advantage to this is that the market can signal whether the spending is too much by requiring a higher interest rate on the bonds. This constrains the governments in their borrowing. It also restricts consumer price inflation in that higher interest rates tend to reduce the amount of discretionary spending available.

MMT doesn't use this mechanism. The main principles are that that the government prints (via the central bank) the money needed for spending. If/when inflation kicks in then the government raises taxes to remove the excess money. Note that taxes aren't used to fund government spending, this is done purely by printing the money. 

My issues with this are:

• Inflation stats are lagging so this is like driving a car where the effect of the controls - steering, accelerating and braking - are delayed by 5 seconds. Imagine how hard it would be to make progress. For MMT they would spend and then see that inflation was above the target 6 months later and start to think about raising taxes to reduce it. 
• When inflation kicks in, spending won't reduce. They will try and stop it by raising taxes to take the excess money out of the system. Can you imagine a politician trying to justify raising taxes when spending doesn't change?
• If they can't reduce the money supply by taxation and destruction of the tax receipts then you head down the route of hyperinflation.
• See Zimbabwe, Argentina and Venezuela for recent MMT attempts.

However, the key to investing is to work with what is happening/will happen and not with what you want to happen. Clearly the government and central banks have started down the road of print and spend so it is a case of trying to work out a way to protect yourself from the shit storm that will come. If they go conventional then expect interest rates to rise to fight the inflation (see Volcker in the 80s) or taxes to rise if they go MMT.

 

 

[MrXxxx]

6 hours ago, TheCountOfNowhere said:

Mistakes I've made over the last few weeks:

1) Selling out of Easyjet too soon

2) Selling some check Shell shares to cut my losses

3) Accidentally buying shares from the wrong country

4) Not buying enough

5) should have sold everything as soon as it became clear things were going into lockdown.

6) Never buy the nameless ahre

7) Never buy bank shares

The only question is...will the virus come back with a bang.  We should be watching.

Oh well, that puts the little one I had today into perspective! :-) :-) :-)

[DurhamBorn]

It always best to ignore daily moves,and even more never try to look for a "reason" and connect the news to moves.Today everyone is saying the market went up because of the job numbers,how unexpected etc.The market did not do that.It went up because from March 8th onwards the Fed started to prime the plumbing and kept increasing liquidity and at some point with a lag that would leak into the economy.Back in March this thread was full of people saying everything was going to zero and to sell sell sell.Luckily people who had put the effort in and were prepared were buying,and buying heavily.I bought more between March 10th and 16th than at any other time since i was 14 years old and im 49 now.Never fight the Fed.Holding off then would of cost me 12 years living expenses.Iv top sliced many stocks today that were up between 50% and 66% because they had become too big a holding.I bought some others that i wanted more of that hadnt moved much and raised some more cash.

Markets arent linear,they whipsaw weak hands and hurt as many people as they can.Bear markets see big falls and then violent increases along the way and are very difficult to navigate.However as they progress its highly likely some sectors have already bottomed and wont retest the lows,while other areas have a long way to go down.

The Fed is still engaged,but the risk is they take their foot off the gas if odd bits of data show things improving.Its vital they monetize between $10 and $20 trillion,stopping at $6 or $7 trillion would be a disaster.The dollar should still keep falling,and the action today says the market expects more from the Fed and good numbers are outliers.If the dollar gets above 99 again (im not expecting it) another big leg down in risk assets is on the table.

 

 

[DurhamBorn]

@Wheeler 

Exactly where they are going,thanks for adding that to the thread Wheeler,id advise everyone to read it a couple of times.Everything is pointing to them following the MMT route and its crucial to invest ahead of it.If you have any more thoughts on how an MMT expansion might turn out it would be great to hear them.Lags,outcomes etc

[Loki]

4 minutes ago, DurhamBorn said:

It always best to ignore daily moves,and even more never try to look for a "reason" and connect the news to moves.Today everyone is saying the market went up because of the job numbers,how unexpected etc.The market did not do that.

This is so true - they're not being rational, they're rationalising 

[Green Devil]

16 minutes ago, DurhamBorn said:

Never fight the Fed.Holding off then would of cost me 12 years living expenses.Iv top sliced many stocks today that were up between 50% and 66% because they had become too big a holding.I bought some others that i wanted more of that hadnt moved much and raised some more cash.

Markets arent linear,they whipsaw weak hands and hurt as many people as they can.Bear markets see big falls and then violent increases along the way and are very difficult to navigate.However as they progress its highly likely some sectors have already bottomed and wont retest the lows,while other areas have a long way to go down.

The Fed is still engaged,but the risk is they take their foot off the gas if odd bits of data show things improving.Its vital they monetize between $10 and $20 trillion,stopping at $6 or $7 trillion would be a disaster.The dollar should still keep falling,and the action today says the market expects more from the Fed and good numbers are outliers.If the dollar gets above 99 again (im not expecting it) another big leg down in risk assets is on the table.

 

 

After watching this play out, the thing you need to take from that is this.

They crash the market.

Then they buy up cheap.

Then they print money.

Which gooses the market, pumps inflation and assets that are an inflation hedge.

Rinse and Repeat.

If you learn one thing as a result of this, it should be this.

[Wheeler]

7 minutes ago, DurhamBorn said:

It always best to ignore daily moves,and even more never try to look for a "reason" and connect the news to moves.Today everyone is saying the market went up because of the job numbers,how unexpected etc.The market did not do that.It went up because from March 8th onwards the Fed started to prime the plumbing and kept increasing liquidity and at some point with a lag that would leak into the economy.

 

I use the stocks app supplied by Apple to look at the prices of various stocks and they added curated news to it in one of their updates. I hate this and wish I could turn it off. One thing that is useful (to me) is that you often get contradictory articles from the same source but several hours apart. For example from Bloomberg saying FTSE rises due to government policy alongside another saying FTSE falls due to government policy but separated by a few hours. It just makes me realise that the vast majority of financial "news" is complete bullshit and should be ignored.

7 minutes ago, DurhamBorn said:

Back in March this thread was full of people saying everything was going to zero and to sell sell sell.Luckily people who had put the effort in and were prepared were buying,and buying heavily.I bought more between March 10th and 16th than at any other time sinci was 14 years old and im 49 now.Never fight the Fed.Holding off then would of cost me 12 years living expenses.Iv top sliced many stocks today that were up between 50% and 66% because they had become too big a holding.I bought some others that i wanted more of that hadnt moved much and raised some more cash.

Markets arent linear,they whipsaw weak hands and hurt as many people as they can.Bear markets see big falls and then violent increases along the way and are very difficult to navigate.However as they progress its highly likely some sectors have already bottomed and wont retest the lows,while other areas have a long way to go down.

The Fed is still engaged,but the risk is they take their foot off the gas if odd bits of data show things improving.Its vital they monetize between $10 and $20 trillion,stopping at $6 or $7 trillion would be a disaster.The dollar should still keep falling,and the action today says the market expects more from the Fed and good numbers are outliers.If the dollar gets above 99 again (im not expecting it) another big leg down in risk assets is on the table.

 

 

I added a bit in March but I was put off by second guessing my plan that I'd formulated over the past couple of years. I don't want to blame any of the negative posts but they did influence me a bit to think I should have sold in January. I've always been a non-contrarian so changing my mindset is quite a struggle. I've got a plan but I struggle to make myself stick to it!

Today is a down day for me as I'm heavily into the PMs and miners but I'm trying to think of it as an opportunity to add to my miners even though I'm heavily into them! At least I'm still substantially up on where I was 2 years ago, and with 2 years less life to spend it!

[DurhamBorn]

3 minutes ago, Wheeler said:

I use the stocks app supplied by Apple to look at the prices of various stocks and they added curated news to it in one of their updates. I hate this and wish I could turn it off. One thing that is useful (to me) is that you often get contradictory articles from the same source but several hours apart. For example from Bloomberg saying FTSE rises due to government policy alongside another saying FTSE falls due to government policy but separated by a few hours. It just makes me realise that the vast majority of financial "news" is complete bullshit and should be ignored.

I added a bit in March but I was put off by second guessing my plan that I'd formulated over the past couple of years. I don't want to blame any of the negative posts but they did influence me a bit to think I should have sold in January. I've always been a non-contrarian so changing my mindset is quite a struggle. I've got a plan but I struggle to make myself stick to it!

Today is a down day for me as I'm heavily into the PMs and miners but I'm trying to think of it as an opportunity to add to my miners even though I'm heavily into them! At least I'm still substantially up on where I was 2 years ago, and with 2 years less life to spend it!

Miners are going a lot higher i think.Im very happy to be quite heavy in silver miners.

[Loki]

9 minutes ago, DurhamBorn said:

Miners are going a lot higher i think.Im very happy to be quite heavy in silver miners.

I needed to see this 

[Lightscribe]

On 11/03/2020 at 10:50, Sideysid said:

The 5950 zone was my first tranche back in of around 10%. I'll be following it down averaging in with an estimate in the big one down into the 4k zone. Theres a 3 day delay in transferring funds so this isn't ideal.

QE will have the markets up and down like a whores draws, so I'll use my ISA to ride the volatility whilst still holding the reflation infrastructure stocks. 

Managed to time this quite well and got 50% of my cash fund in my pension to my FTSE 100 tracker fund at 5000 when it nudged into the 4k zone. Still got some of the cash fund left for if we have a double bottom come October time. 
 

Still have added a few years earlier retirement so far with the rebound, but it’s been far too quick based on QE unicorns and rainbows. I’m tempted to try and time another dip.

[Sugarlips]

40 minutes ago, DurhamBorn said:

Miners are going a lot higher i think.Im very happy to be quite heavy in silver miners.

Can you remind us DB are you using the spray and pray strategy with the silver miners or is it buy the one with the most Oz in the ground?

I've got a pretty comprehensive list of Aussie silver mines here, I'm just paralyzed by the choices, do I average in to a few and hope a rising tide will float the dogs as well 😁

https://smallcaps.com.au/silver-stocks-asx-ultimate-guide/

[Hardhat]

I think it was @Errol who said that anything under $5k gold is still cheap... I'm not intending to trade miner plays at all at this point, just buy dips and accumulate for when we see the real moves in gold... personally I'm willing to speculate on these current moves being relatively minor compared to the next 5-7 years.

[DurhamBorn]

3 minutes ago, Sugarlips said:

Can you remind us DB are you using the spray and pray strategy with the silver miners or is it buy the one with the most Oz in the ground?

I've got a pretty comprehensive list of Aussie silver mines here, I'm just paralyzed by the choices, do I average in to a few and hope a rising tide will float the dogs as well 😁

https://smallcaps.com.au/silver-stocks-asx-ultimate-guide/

I mostly buy ones that were beaten down and have the biggest beta to silver.They hammer you hard if silver falls,but outperform if it runs.I dont care about crap management,crap reserves,floating extra equity etc.I do like them to have big exploration prospects,simply because in a bull people start to big up prospects as if they are already mines and if a few do hit during a bull they multi bag.I dont go into a lot of research into the sector into indivudual companies,i spend about 15 minutes looking at each one.In other areas i spend a lot of time.Truth is if silver runs i expect some 3x in the short/mid term,and maybe a few 10x to 50x in a full cycle run.Il take a kick in the nuts if not,but i can live with that.

[Wheeler]

On 04/06/2020 at 10:55, Loki said:

Might be interesting for some.  Long term momentum perspective

 

The momentum idea in this podcast is very interesting. Basically he is comparing the monthly price for gold or silver to the average over the last 36 months. When the monthly close breaks out of the channel, either up or down, it tends to indicate how the price will go over the next few months.

I've uploaded the monthly prices from https://www.indexmundi.com into a spreadsheet and tested it out and it does seem to work historically. 

TL;DR - he is predicting that gold has broken out and if silver gets a monthly close above around $18.49 then it is on the way up too.

[Loki]

Thanks @Wheeler! Great work

[Wheeler]

5 minutes ago, Loki said:

Thanks @Wheeler! Great work

Thanks. I am on my fifth pint so I'm not sure if it will make sense tomorrow.

[JMD]

7 hours ago, Knickerless Turgid said:

Don't call the Finns Scandis!

I was trying to be inclusive!?, but your correct and Nordic would have been more accurate. Everyone looking for an 'identity 'these days - or, it seems to me anyway, more accurately a striving for 'difference'.                                                                                                                                               I think my point still holds though, recent political differences between these outwardly very cultured and civil people's (Scandinavian/Nordic) is stark enough, but the further back you go the more surprising their violent interrivalry. Rather depressingly It reminds me that tribalism isn't restricted to Africa, something I think the founders of the EU were well aware of. Unfortunately they forgot that consensus politics can only be built slowly from bottom up, and not grandiously from the top down. 

[Bricks & Mortar]

10 hours ago, Wheeler said:

I haven't watched the video, I admit, but Kelton is the current face of Modern Monetary Theory (MMT), which is ironically not modern. I prefer to call it Magic Money Tree.

It's popular with the "free money" crowd of socialists mainly because we are in the deflation phase that lets the government/central bank print money and spend. 

Conventional monetary policy requires the government to borrow the money on the open market. The main advantage to this is that the market can signal whether the spending is too much by requiring a higher interest rate on the bonds. This constrains the governments in their borrowing. It also restricts consumer price inflation in that higher interest rates tend to reduce the amount of discretionary spending available.

MMT doesn't use this mechanism. The main principles are that that the government prints (via the central bank) the money needed for spending. If/when inflation kicks in then the government raises taxes to remove the excess money. Note that taxes aren't used to fund government spending, this is done purely by printing the money. 

My issues with this are:

• Inflation stats are lagging so this is like driving a car where the effect of the controls - steering, accelerating and braking - are delayed by 5 seconds. Imagine how hard it would be to make progress. For MMT they would spend and then see that inflation was above the target 6 months later and start to think about raising taxes to reduce it. 
• When inflation kicks in, spending won't reduce. They will try and stop it by raising taxes to take the excess money out of the system. Can you imagine a politician trying to justify raising taxes when spending doesn't change?
• If they can't reduce the money supply by taxation and destruction of the tax receipts then you head down the route of hyperinflation.
• See Zimbabwe, Argentina and Venezuela for recent MMT attempts.

However, the key to investing is to work with what is happening/will happen and not with what you want to happen. Clearly the government and central banks have started down the road of print and spend so it is a case of trying to work out a way to protect yourself from the shit storm that will come. If they go conventional then expect interest rates to rise to fight the inflation (see Volcker in the 80s) or taxes to rise if they go MMT.

 

 

Thankyou for this post.  It's excellent.  Really made something click with me. 
I've been aware of the lefty MMT proponents, and how they're getting excited, thinking their dreams are coming true.   But I've been in the camp of thinking we're just getting conventional economics,  and interest rates would be the main tool again to reduce the inevitable inflation when it comes.
I was also aware the main difference with MMT was they'd seek to control inflation with taxes.  It was only after you laid it all out, the lightbulb came on.  Why on earth wouldn't they?  Which government doesn't fancy higher taxes?
This is where the inflation lag comes in.  If they go for higher taxes, and inflation doesn't do what its supposed to, (because taxpayers exist to minimise the tax they pay, perhaps)... then they have to start with the interest rates, somewhat later than they should have.

If I might pick one issue, (quite possible the issue is with my own thinking);  You suggested they might see inflation 6 months after spending.  Inflation lag is something I've been introduced to in the early days of the thread, and done some background reading on.  I use a period of 18-24 months when I think about it.  Of course I went off to check... 
This paper  (table 1 on the penultimate page), shows I might be a little on the high side, but doesn't have anything as low as 6 months. 
Is it possible the table is showing "time to inflation peak", while we are discussing "time to inflation first showing"?  i.e. inflation might really show after only 6 months?
Would welcome views/info on inflation lag.  It could be crucial, as the cycle unfolds.

https://www.lancaster.ac.uk/staff/ecajt/inflation lags money supply.pdf
 

[Wheeler]

36 minutes ago, Bricks & Mortar said:

If I might pick one issue, (quite possible the issue is with my own thinking);  You suggested they might see inflation 6 months after spending.  Inflation lag is something I've been introduced to in the early days of the thread, and done some background reading on.  I use a period of 18-24 months when I think about it.  Of course I went off to check... 
This paper  (table 1 on the penultimate page), shows I might be a little on the high side, but doesn't have anything as low as 6 months. 
Is it possible the table is showing "time to inflation peak", while we are discussing "time to inflation first showing"?  i.e. inflation might really show after only 6 months?
Would welcome views/info on inflation lag.  It could be crucial, as the cycle unfolds.

https://www.lancaster.ac.uk/staff/ecajt/inflation lags money supply.pdf

Thanks B&M. I'm now sober and re-reading all the posts I made last night to see what nonsense I've been spouting! Actually, it does seem to match my thoughts.

The 6 months figure was just plucked out of the air to represent a delay in getting the figures and deciding to take action. I hadn't considered the delay between increasing the money supply and the subsequent rise in consumer prices. Your figures are more realistic and actually have some substance behind them.

For the current environment, I don't think we'll see much inflation for a couple of years as they have deflationary hole to fill first.

[DurhamBorn]

There are lots of things going on at this end of cycle in regards when inflation will start to show.On our road maps we use a formula that includes several inputs.

First is hours worked dropping below trend.We want to see a drop off in production.That shows us that demand is slack.We use a lag of around 9 months on that.Then is there a technology shock.Yes there is.The huge push for green energy has curtailed new investment in oil/gas etc.That has a lag affect.We feel the shortage of oil long before we feel the affects of the new technology.Contrarian,but true.Then you take the size of the actions by the CB,but also how long it is sustained.This amplifies the technology shock.In 2 years if everyone starts raping up production,but the technology shock meant investment stopped in the needed inputs we get a burst,and then prices stop being sticky and jolt higher.

I think we will see the first signs of inflation later this year,and they will start to be clear late spring next year,By 2023 i expect inflation will be at 3%+ and by 2024/5 around the 5% mark.At this point rates will still lag inflation (maybe 2.5%-3% rates) and so people will really start to chase real assets forcing inflation higher.2028/30 is the area where we might see inflation between 12% and 25% and rates hitting 10%.I dont expect inflation to slow at that point until we suffer a huge crash that ends the Fiat currency era.

I think as mentioned above the MMT brigade have control simply because the cycles have come together.They think they can print and control inflation later through tax,less broad money supply etc.The irony is i think MMT is a disaster,yet at this present time they have no choice but to use it because all other roads are closed.As investors we need to get ahead of whats coming,and so far so good.As iv always said,my aim is quite simple.I want to protect my families assets from inflation (or theft in tax) and if in 10 years iv increased the assets by inflation+1% pa then job done.Of course i think/hope to hugely outperform that,but thats the line of success.

So if we accept MMT is the place we are entering,and that can be debated,because it might not be sustained,then we accept inflation is certain,and re-direction of "money" will move more from where the market allocates it,to where governments allocate it.The key here is the market isnt removed,its simply taken a seat in the church behind the governement.

So,if we reach that conclusion,then the question as investors becomes this one.What are governments priorities and likely "wants".?.Where are they going to direct that "money".?.

[TheCountOfNowhere]

Something is clearly not right...Just logged into my share dealing account and it's up 4% now, only shows the US prices after close. 

I'll have that thanks very much.

Had another look, everything I bought before the pandemic is down about 20% and everything since is up about 20%.  Shoulda taken my own advice :-| 

Anyone else think the US market will tank soon ?