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

[Harley]

So @DurhamBorn are we going to have that final crack up, is this it, and has it further to run?!!!

PS:  NASDAQ just hit an all time high!

[Harley]

32 minutes ago, DurhamBorn said:

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.

So what asset allocation is that if I may ask?  Mainly (value based?) equity plus a bit of physical PMs?  Probably not bonds eh!  Cash?  I find people's asset allocations more interesting than their stocks and fridge contents!

[Harley]

13 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.

An excellent post.  I would tangentially add the socio-political impacts of the government having the money and deciding how it is spent via the print and tax pincers.  No need to align the two so for example money printing (say for a UBI amongst other things ) matched with a tax on wealth.  We could all become members of the client state, totally reliant on the whims, dictates, and vested interests of those in control.  This is another dimension to your important point about taking things as they are rather than as we would like them.  This is true for the financial, social and political realms.  Probably others I have yet thought through.  So what may I ask, is your approach, your financial "realpolitik"?

[DurhamBorn]

46 minutes ago, Harley said:

So what asset allocation is that if I may ask?  Mainly (value based?) equity plus a bit of physical PMs?  Probably not bonds eh!  Cash?  I find people's asset allocations more interesting than their stocks and fridge contents!

Mostly equity Harley yes,but big weighting to commod equity,some physical PMs,mostly silver,no bonds now,iv sold all my treasuries,they did fantastic over the 3 years.I went down to hardly any cash (about 11%) during the  crash as all ladders hit (mostly in one go falling through 3 at once so a bit lucky) but iv sold some slices now and have around 10 years living expenses in cash.Thats the full cycle living expenses so i dont need to sell any asset or take any divi if i dont want to,i can re-invest etc.My house is paid for,but i dont count that as an asset,i class it as a liability,ie how much to keep/repair,luckily not much as i do most myself and its all done.We also have another property paid for we rent out,zero debt,mostly fix myself,so i can be lowest rent in area if we want,sell,whatever,it cost £14k and it worth around 65k nothing flash but makes £380 a month.

My biggest equity holdings are telecoms (90% bought during March falls,Vod,TEF,BT,Telia in that order of size),Oil/energy,BP,Shell,Repsol,Drax,SSE,then around 8 smaller holdings,Potash,Mosiac,OCI NV,k+S etc,silver miners,spray and pray,then lots of other 0.5% holdings across transports,gambling,etc etc.

Considering i need £12k a year to live very happily im very happy with how things have gone.However long way to go yet and we could get another huge leg down.

 

[Harley]

13 hours ago, Wheeler said:

At least I'm still substantially up on where I was 2 years ago, and with 2 years less life to spend it!

That's an excellent point!

[M S E Refugee]

https://www.youtube.com/user/mikeydoggy

I have followed Mike Norman for a few years who is an MMT fanatic who doesn't care much for the Austrian School.

Not that I have a great deal of knowledge when it comes to economics but MMT sounds far too good to be true.

[Harley]

13 hours ago, Wheeler said:

I don't want to blame any of the negative posts

Oh dear, I wonder if that includes me! 

It's a hard time for me.  Very conflicting, etc.  I bought a bit but nothing like DB.  I'm bearish by nature which over the last buoyant decades has been costly.  But then I'm coming to the end so my priorities are primarily to protect what I have and make enough to subsidise a gentler working life.  But I see the stock rises as more driven by monetary debasement so in cash terms I do feel poorer since 2008 (maybe earlier if I had been paying attention). 

But then on the upside I can see I'm beating myself up and falling for a bit of hindsight and survivor bias.  I went over my opportunities and many (more than should) just failed to provide a buy signal which means either the system does not work at such extremes or we in are in one hell of a fake.  But then I look at monthly data which is showing little.  There is a danger of being blindsided by switching between monthly, weekly, and daily charts at random.  I use monthly charts for long term investing so should stick to them for signals and use the others to only gauge the oncoming monthly direction.

A good time for some productive soul searching.  I've concluded I made a few errors, not a massive catastrophic one, and even did a few things right given my own personal circumstances.  At the risk of boring y'all (but helps me sort things out):

- Despite my primary objective of wealth preservation, I should have traded the weeklies to gain some alpha.  Interestingly though, my returns would not have been as big as the headlines because my buy signals would have kicked in a few weeks later.  Good but not headline fantastic. 

- Maybe I need to be more efficient.  I had other commendable commitments rightly competing against these financial ones, especially any thoughts of trading.  But I have to challenge myself whether this in part was caused by not being as efficient as I could have been (which TBF could have included less DOSBODS!).  But that also plays to how I wish to run my life! 

- Maybe I need to be more disciplined.  I missed some opportunities in all the excitement through not doing the mundane stuff (e.g. weekly stock monitoring). Partly because of my focus on the macro picture and other priorities, but also that's a bit of me!  Oh, to be a "Completer Finisher"!

- Maybe I should have trusted my system more!  Interesting to note my (monthly) system never produced buy signals on many stocks.  That is, despite the falls, there was no clearing event and many stocks were technically still in a bull.  So I should have added to a number of positions, plus a few targets!  I would have played a blinder if I had.

- I made a similar mistake to 2008/9, thinking the market would go down more a la 1929 (which it fleetingly did), but now we have a new monetary world.  Sure, maybe a bigger secondary fall will come but so will a lot more and the game can play out for much longer.  But then maybe I will accept this prolongation at precisely the wrong time (i.e. when it finally changes!).

+ I did not panic or rush in.  I realised it was possibly too late to sell.  That's a very good test of discipline (or idiocy, depending on your portfolio objectives).  One has to remember that for every sale there eventually has to be a buy of something and selling is a lot easier!  Sure I have buyers remorse but, thanks to a balanced portfolio, I have not lost (at least) nominal wealth.  I now have more confidence in my asset approach!

+ The dividends from my income portfolios have been badly hit so maybe gains are (for at least now) a more important source of the income I need.  I was moving towards value investing (having maxed out on the income portfolio side of things) and now have the focus and direction to proceed.

+ Events have shown a number of weaknesses in what I thought were sensible income stocks (e.g. BHP and BAT yes, TUI no).  Clearly I went too far in my search for FTSE income stocks with a bit of justification creep. I should have switched to overseas stocks for future buys earlier, which I will now do, especially given my bearish views on sterling.      

+ Events have provided me with a mock test of what things could be like come the big one!  This maybe just the tremor.  If so, the big one maybe isn't that far ahead so thanks for the dry run.  Lessons to be learnt, specific actions and plans to be undertaken with immediate effect, etc. 

+ Events have made me pause and invest time in taking stock of the intermediate macro picture (no my system does not drive my life, just provides some discipline!).  That's where the best money is made and kept in the longer term.  I have now internalised a number of key nascent thoughts which are emboldening me to act accordingly (as is writing here!).    

+ My partner has taken more of an interest and is providing a very useful source of support and a somewhat different but complementary second opinion.  I just need to move her on from "nag" to "nudge"!

+ Intermediate to long term (important!), cash is trash, cash is trash, cash is trash, cash is trash, cash is trash, cash is trash, cash is trash, cash is trash, cash is trash, cash is trash......!

+ I have the miles to know the sun is always rising somewhere in the investing universe!

Of course, I'm talking like it's all over and a done deal.  It's not! 

[Harley]

1 hour ago, DurhamBorn said:

......have around 10 years living expenses in cash.....

Ta.  This in particular got me thinking.  Sure I have kept a cash reserve but not necessarily in the right places.  For example, in my SIPP and ISAs but how could I access that especially if they change the drawdown, etc rules or the banks they use pop?  I need 100% liquidity for this, OK possibly in low risk and liquid investments rather than pure cash, but the definitions of these could change.  I better have another look at this area, which also plays to my prior comment about really understanding my chosen Permanent Portfolio (i.e. 25% cash but no point in an inaccessible SIPP if one of the underlying rationales is living money).

[Wheeler]

19 minutes ago, Harley said:

Oh dear, I wonder if that includes me! 

Not at all @Harley. One of the best things about this thread for me are posts that make me go away and think. It doesn't matter whether I agree with the points made or not, anything that has me mulling it over while out walking is a good post.

 

[Wheeler]

2 hours ago, Harley said:

An excellent post.  I would tangentially add the socio-political impacts of the government having the money and deciding how it is spent via the print and tax pincers.  No need to align the two so for example money printing (say for a UBI amongst other things ) matched with a tax on wealth.  We could all become members of the client state, totally reliant on the whims, dictates, and vested interests of those in control.  This is another dimension to your important point about taking things as they are rather than as we would like them.  This is true for the financial, social and political realms.  Probably others I have yet thought through.  So what may I ask, is your approach, your financial "realpolitik"?

I'm assuming that I'll never qualify for any assistance from the state, unless the state pension is still available in 2030 and isn't means tested. I just try to make sure I'm not stuck with the bill. 

I'm wanting to move to a better house than my current hovel; somewhere with a garden to grow a bit of food. I'd be aiming to do that in the next 2 to 5 years so I can prepare for the end of the cycle. That would leave me with maybe 20 to 25 years of hopefully good health to see out my days.

As a bonus, my asset allocation is as follows with the planned percentage in brackets:

• Cash   21.8% (12%)
• Gold    8.2% (10%)
• Silver  9.0% (10%)
• Oil stocks   6.9% (9%)
• Energy stocks   3.4% (7%)
• Telco  3.2% (4%)
• Transport  3.2% (7%)
• Consumer  2.5% (4%)
• Finance  1.6% (2%)
• UK fund  2.2% (2%)
• Gold miners  19.5% (12%)
• Silver miners  17.9% (18%)
• Commodity stocks  0.7% (3%)

I'll aim to rebalance at the end of the year but I hate selling anything so I'm hoping the PM miners end up being 80% of the portfolio by 2026! 

The reason for 12% in cash (a third in indexed linked certificates) is to have enough to live on for 10 years without relying on dividends. I don't want to go back to work.

 

[Talking Monkey]

3 hours ago, Harley said:

So @DurhamBorn are we going to have that final crack up, is this it, and has it further to run?!!!

PS:  NASDAQ just hit an all time high!

I think it has further to run, especially if the Fed continuing to QE along with more of the economy coming back online. I think however there is a low probability of some of the more extreme melt up scenarios. At some point though the glamour stocks will have to face reality and I expect the indexes to be a fair way below where they closed Friday, I think the big kahuna is yet to happen, what we had in March was not it

[Loki]

13 minutes ago, Talking Monkey said:

I think the big kahuna is yet to happen, what we had in March was not it

I don't know if this is circular reasoning but the reason I agree that although it was a massive event, it was not 'it', is because we are already back to 'normal' levels on the stock markets. 

Surely the BK will leave most of the market on the floor for months? Years?

That said I am debating cashing everything in once the S&P hits the ~4000 mark as I wonder if things will be too chaotic for an orderly sector rotation.  

(He already called for S&P to 3100, which it did on Wednesday) 

 

[Talking Monkey]

4 minutes ago, Loki said:

I don't know if this is circular reasoning but the reason I agree that although it was a massive event, it was not 'it', is because we are already back to 'normal' levels on the stock markets. 

Surely the BK will leave most of the market on the floor for months? Years?

That said I am debating cashing everything in once the S&P hits the ~4000 mark as I wonder if things will be too chaotic for an orderly sector rotation.  

(He already called for S&P to 3100, which it did on Wednesday) 

 

I started selling some on Friday, by 3800 I expect to be mostly sold out. 

[Harley]

Don't trust me data but if correct then slightly interesting to see how the key Vanguard regional ETFs have performed YTD through this crash:

The UK has not done (relatively) well.  Just as well the currency has shot up to compensate (not!).

The UK FTSE fell the hardest and, despite the second best recovery, it's current relative value fell the most so having the worst YTD performance by a mile.

Currencies aside, maybe support for a more internationally diversified portfolio.

Also, questions my start of year thesis that the FTSE was relatively safer as it had gone up the least over the years!

[nirvana]

5 hours ago, Harley said:

I find people's asset allocations more interesting than their stocks and fridge contents!

I'm looking to make my own silver bullets, any info gratefully received 

[nirvana]

18 hours ago, Wheeler said:

It's popular with the "free money" crowd of socialists

what about the right wing 'free money' crowd of bankers who've just received a massive handout?

This massive inflation that will eventually feed through, what happens if it never gets reported properly? They've managed to 'hide' house inflation for long enough

Example, ok fuel gets really expensive but electric cars get pushed onto the masses so they just stop using 'fuel' in the 'inflation basket' 

[nirvana]

there's a chart doing the rounds (sorry didn't save it) that shows a correlation between the FED balance sheet and the S&P

So basically as long as the Fed keep printing it'll go directly to the stock market...

Don't be surprised if the stock markets doubles again before it explodes....but acknowledge it will explode BIG TIME so have an 'exit plan' at the ready

I personally believe when this 'explosion' happens it'll take all markets with it, oil, gold, silver, crypto just like it did in Feb/March but willing to listen to arguments to the contrary?

[Loki]

3 minutes ago, 5min OCD speculator said:

I personally believe when this 'explosion' happens it'll take all markets with it, oil, gold, silver, crypto just like it did in Feb/March but willing to listen to arguments to the contrary?

You could be right, but to anyone waiting till then to buy physical I'd say good luck!  

In March I learned that by the time you really want some, it's too late. (And March wasn't even 'it')

 

[Sasquatch]

1 minute ago, Loki said:

You could be right, but to anyone waiting till then to buy physical I'd say good luck!  

In March I learned that by the time you really want some, it's too late. (And March wasn't even 'it')

 

That is a very very good point.

I watch prices of gold and silver coins at our local auction houses. Prices are super high at the moment. Sovereigns going for £400, one ounce silver coins for £30 each. Up to March I could occasionally buy a sovereign below £300. Prices on ebay are crazy (and can you trust the seller?)

[DurhamBorn]

3 minutes ago, 5min OCD speculator said:

there's a chart doing the rounds (sorry didn't save it) that shows a correlation between the FED balance sheet and the S&P

So basically as long as the Fed keep printing it'll go directly to the stock market...

Don't be surprised if the stock markets doubles again before it explodes....but acknowledge it will explode BIG TIME so have an 'exit plan' at the ready

I personally believe when this 'explosion' happens it'll take all markets with it, oil, gold, silver, crypto just like it did in Feb/March but willing to listen to arguments to the contrary?

Everything at first,but silver recovered in 3 weeks,i doubt Amazon will recover back to $1.4 trillion in 3 weeks,or ever.Fed are 1/3 through i think,but the question is do we get another shoe to drop before we get the rest.?More and more liquidity is building,money supply is roaring up and the CBs are helping governments move massive amounts of private debt onto government and CB balance sheets that will be quietly parked in the attic room where then the cleaner loses the key.It will remain there gathering dust and tiny coupons.

They are trying to reset the economy and remove the leverage as quickly as they can.Liquidity is being right sized higher than debt deflation.Dinner is about to be served,a lovely inflationary one.

[Harley]

2 hours ago, Wheeler said:

As a bonus, my asset allocation is as follows with the planned percentage in brackets:

.......

Interesting thanks.

I use a Floor versus Upside Fund approach to control risk and reward.  Floor comprises essential retirement funds (so lower risk) and Upside comprises discretionary retirement and current funds (so higher risk).  The Floor versus Upside split is based on ongoing estimates of required future essential living costs, lifespans, contingencies, etc and how much discretionary income I can afford to have now and in retirement to live comfortably but reasonably frugally.  Also a Current (cash based) fund for working capital.

My targets:

. Floor Fund (Permanent Portfolio based):

  . 25% Equity (value based in my previously mentioned sectors)

  . 25% Bonds (government as part of the Permanent Portfolio but......!)

  . 25% Hard Assets (PMs, etc)

  . 25% Cash (short term bonds, etc)

. Upside Fund (Income and trading based):

  . 80% Equity (income)

  . 10% Anything (tradable)

  . 10% Cash (float)

. Current

  . 100% cash (working capital)

In terms of performance:

. My floor funds are below their targets for equity and bonds and over for hard assets and cash.  This reflects my prior focus on building my upside funds and a quandary on bonds.

. I should have allocated more of that floor cash in March (as discussed) but will continue to drip feed in by finishing buying stakes in my remaining targets and let the charts signal further purchases. 

. I need to diversify out of just PMs for hard assets.  Commodity producers in the equity allocation helps but is not sufficient as it is still equity.

. I need a safer home for temporary and longer term cash (short term overseas bonds?). 

. I'm trying to work out what to do with the bond allocation.  This needs more research and lateral thinking. 

. Pretty much on target with the upside funds except I will allocate more to overseas higher yield equity by using future cash and selling any bouncing dogs. 

. That just leaves a resumption in trading once work permits and if as good as in the past(!) I may increase the Upside allocation to that activity.    

Interesting to see PMs (and bonds) sell off and equity go risk on for which I'm currently suffering through not having enough balancing equity.  Reassuring at least! 

All contingent on the impending Emergency Budget and thereafter!

[nirvana]

8 minutes ago, DurhamBorn said:

remove the leverage as quickly as they can.Liquidity is being right sized higher than debt deflation.Dinner is about to be served,a lovely inflationary one.

how are they 'removing leverage'? Isn't all this extra dosh just making the leverage worse? And yes the inflation is lovely when we're making 'loadsamoney'* a week but it'll be a disaster for 'nuclear family' (if that's what they still call em) don't ya think?

14 minutes ago, Loki said:

You could be right, but to anyone waiting till then to buy physical I'd say good luck!  

yes I hear you but I think I'm hedging with silver bullets, baseball bats and stainless steel knives  oh yeah and maybe an electric fence 

*yeah harry enfield

 

[Harley]

1 hour ago, 5min OCD speculator said:

there's a chart doing the rounds (sorry didn't save it) that shows a correlation between the FED balance sheet and the S&P

So basically as long as the Fed keep printing it'll go directly to the stock market...

Don't be surprised if the stock markets doubles again before it explodes....but acknowledge it will explode BIG TIME so have an 'exit plan' at the ready

I personally believe when this 'explosion' happens it'll take all markets with it, oil, gold, silver, crypto just like it did in Feb/March but willing to listen to arguments to the contrary?

Yes, apparently it shows the S&P has risen by the same amount ($6tr?)as the money printing!

[Loki]

I can't be the only one who's thinking just cash everything out at some point when it's all up and buy £xx000s worth of gold Britannia can I?

$9000/oz gold by 2030...I can wait that long and never have to worry about timing a thing, or bank bail ins, or buy outs, or firms going bust, or...

Now tell me why it's a stupid idea. 

 

[JREWING]

5 hours ago, DurhamBorn said:

Mostly equity Harley yes,but big weighting to commod equity,some physical PMs,mostly silver,no bonds now,iv sold all my treasuries,they did fantastic over the 3 years.I went down to hardly any cash (about 11%) during the  crash as all ladders hit (mostly in one go falling through 3 at once so a bit lucky) but iv sold some slices now and have around 10 years living expenses in cash.Thats the full cycle living expenses so i dont need to sell any asset or take any divi if i dont want to,i can re-invest etc.My house is paid for,but i dont count that as an asset,i class it as a liability,ie how much to keep/repair,luckily not much as i do most myself and its all done.We also have another property paid for we rent out,zero debt,mostly fix myself,so i can be lowest rent in area if we want,sell,whatever,it cost £14k and it worth around 65k nothing flash but makes £380 a month.

My biggest equity holdings are telecoms (90% bought during March falls,Vod,TEF,BT,Telia in that order of size),Oil/energy,BP,Shell,Repsol,Drax,SSE,then around 8 smaller holdings,Potash,Mosiac,OCI NV,k+S etc,silver miners,spray and pray,then lots of other 0.5% holdings across transports,gambling,etc etc.

Considering i need £12k a year to live very happily im very happy with how things have gone.However long way to go yet and we could get another huge leg down.

 

Great informative post.

Cheers. One for me to note.