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


spunko

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9 minutes ago, Sideysid said:

It depends. I average in all our ISAs (monthly allocation saving on trading fees) into whichever reflation stocks have taken a hit recently, BP, RDSB, Vodafone, energy, BAE systems, Potash, Rolls Royce etc as masses of capital wasn’t built up in there in the beginning (although the initial amount has doubled thanks to FRES)

With my pension I take a different approach. I sold the US heavy equity fund this week after the SP500 made a ATH. I was pretty much all in a cash fund back when the first leg down hit in March. I then put 50% of that fund into the US equities and a FTSE 100 fund in the drop (when it nudged at 5000) with half aside if it continued. US fund is now ridiculously like nothing happened.

I’ve kept the FTSE one as well as a diversified fund with energy and gold miners exposure (with 100% monthly contributions) as the FTSE is still undervalued.  So now got a fair whack in the cash fund awaiting the topple of the FAANGs (later this year after the election maybe). I’ll then use that to buy back into US and global equity funds with a smaller proportion in a small caps fund.
 

 

Do you mean you'll go into the FAANGS if they drop 20%?

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18 hours ago, ThoughtCriminal said:

DB

 

Do I recall correctly that you said BAT were the best positioned in the sector in terms of exposure to vapes etc? 
 

Just thinking in terms of a hedge in case vaping grew at expense of tobacco

You also have heat not burn. PMI are the market leader with heat not burn. They’ve been heavily pushing IQOS in developing countries where vaping hasn’t really taken off and where people still smoke like chimneys.

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Im pretty much allocated after March and its just a case of top slicing a few here and there and adding that to the dividends flowing in to top up other areas.I sold a few Playtech yesterday (15%) even though i think they will treble or be taken over.They were up 150% from where i bought them in March and i had bought a big holding.I had some divis as well from BAT VOD and others sat there so that was split between Repsol,Shell,TEF and BT.

Id rather the stocks im after didnt go up,as iv still got a good dividend flow and as im working at the moment im about to start flowing money into my SIPP again to take my income down to £12.5k and my partner is now doing the same.Iv still got a cash holding if another big shoe drops.Iv also allowed my wages to top up my cash holdings.Thats for when i leave this job if i dont want to turn the dividend income tap full on.

Getting silver right has been fantastic for us all and provided lots of extra capital.

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1 hour ago, wherebee said:

Do you mean you'll go into the FAANGS if they drop 20%?

No, only that a lot of my global pension funds choices (limited list) are more weighted in the FAANGs. The March dip (COVID crash) hardly effected them, but a second sell off could be much bigger once the economic impact is felt (GFC v2) later this year.

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10 minutes ago, Castlevania said:

You also have heat not burn. PMI are the market leader with heat not burn. They’ve been heavily pushing IQOS in developing countries where vaping hasn’t really taken off and where people still smoke like chimneys.

I think thats where Imperial made the big mistake and needs sorting.BAT have a fantastic device in GLO and have 20% of the market in Japan.I expect that to do really well.Not sure on how those things are taxed though ?

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One for the telecoms watchlist maybe..  Ciena ( Ticker CIEN ).  They're in optical networks, high speed switches etc. Some discussion here :- ( starts 12:10 ish ).  Decent earnings growth apparently, and they could be well positioned to benefit from the switch away from Huawei..

They also talk about their general market view which is still bullish, mostly for political reason.. stimulus, election year etc. 

 

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32 minutes ago, DurhamBorn said:

I think thats where Imperial made the big mistake and needs sorting.BAT have a fantastic device in GLO and have 20% of the market in Japan.I expect that to do really well.Not sure on how those things are taxed though ?

I’d imagine in line with normal cigarettes. 

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Just doing some reading on QE and MMT, and have a question. Could it be argued that MMT is economically (and politically) a `halfway house` between Capitalism and Communist as:

a) the state has direct control over inflation (towards Communism) through printing/taxation rather than indirectly via interest rates (towards Capitalism I.e availability of private capital),

b) the state has direct control over efficiency of capacity/production (towards Communism) via printing/spending rather than indirectly via supply/demand (towards true Capitalism).

Hopefully this makes sense as I am trying to get my head around it?!

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The ‘US stockmarket capitalisation’ to ‘GDP’ ratio has historically been a marker for stockmarket collapses and recessions: the Dot-com bubble in 2000 and real estate bubble in 2007 being the last two. The graph below suggests the US stockmarket might be a little over-valued at present?  
 

Must be a new paradigm now caused by the Trillions of $$$$ of dollars injected by the Fed? 

 

964732EF-C9D1-44B6-BE58-5525B2AC7B76.jpeg

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P/E ratio is pretty high. Just surpassed Black Tuesday 1929 crash P/E ratio of 30.15.

4th highest P/E ratio of all time. It may suggest the stockmarket is over valued? 

Must be a new paradigm due to the trillions of $$$ pumped in by the Fed? 

232E0369-2675-403A-81E8-C13B44CBAA85.jpeg

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3 hours ago, Vendetta said:

P/E ratio is pretty high. Just surpassed Black Tuesday 1929 crash P/E ratio of 30.15.

4th highest P/E ratio of all time. It may suggest the stockmarket is over valued? 

Must be a new paradigm due to the trillions of $$$ pumped in by the Fed? 

232E0369-2675-403A-81E8-C13B44CBAA85.jpeg

The PE ratio is skewed even more as well this time by "growth" stocks.Many companies have the lowest PEs in their history,or very close due to the market thinking dis-inflation and very low rates are here forever.

We do have the issue of debt as well.Some companies are trading at 6 times free cash flow,but 13 x equity+debt.The key though is if they have structured the debt right now (as the Fed is holding down the long end to help with) they should be able to repay the lot over the cycle.

If we take something like Telefonica they have about 35billion of debt but 3 billion a year of free cash after dividends.IF inflation does feed into prices as we are expecting then that debt should be mostly re-paid over the cycle.

CBs are holding the curve down so viable companies can re-finance,then invest at a higher return than cost of capital.They arent aiming for high inflation,but they are aiming for inflation higher than rates over the cycle.My road map expects around 38% destruction of debt/savings over the cycle at base rate +0.5% returns.

Fixed income might do worse.Pensions in draw drown will be a huge issue half way through the cycle,and a disaster by the end i suspect.

 

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1 hour ago, DurhamBorn said:

The PE ratio is skewed even more as well this time by "growth" stocks.Many companies have the lowest PEs in their history,or very close due to the market thinking dis-inflation and very low rates are here forever.

We do have the issue of debt as well.Some companies are trading at 6 times free cash flow,but 13 x equity+debt.The key though is if they have structured the debt right now (as the Fed is holding down the long end to help with) they should be able to repay the lot over the cycle.

If we take something like Telefonica they have about 35billion of debt but 3 billion a year of free cash after dividends.IF inflation does feed into prices as we are expecting then that debt should be mostly re-paid over the cycle.

CBs are holding the curve down so viable companies can re-finance,then invest at a higher return than cost of capital.They arent aiming for high inflation,but they are aiming for inflation higher than rates over the cycle.My road map expects around 38% destruction of debt/savings over the cycle at base rate +0.5% returns.

Fixed income might do worse.Pensions in draw drown will be a huge issue half way through the cycle,and a disaster by the end i suspect.

 

Great stuff DB. Really informative. 
 

@DurhamBorn - do you think public sector pensions will take a hit, say changes in the rules etc? 

Will rising IR’s from 2025 (?)  start a bear market for many years to come ? 

Or only bearish for some stocks and our MPOTIS stocks will be alright? 
 

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Noallegiance
5 hours ago, MrXxxx said:

Just doing some reading on QE and MMT, and have a question. Could it be argued that MMT is economically (and politically) a `halfway house` between Capitalism and Communist as:

a) the state has direct control over inflation (towards Communism) through printing/taxation rather than indirectly via interest rates (towards Capitalism I.e availability of private capital),

b) the state has direct control over efficiency of capacity/production (towards Communism) via printing/spending rather than indirectly via supply/demand (towards true Capitalism).

Hopefully this makes sense as I am trying to get my head around it?!

It could be argued that both a and b are shit whatever they're labelled.

I like option c of ditch the state back to minimal action in preserving freedom along with common law policing and let people live via their choices.

Radical.

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1 hour ago, Vendetta said:

Great stuff DB. Really informative. 
 

@DurhamBorn - do you think public sector pensions will take a hit, say changes in the rules etc? 

Will rising IR’s from 2025 (?)  start a bear market for many years to come ? 

Or only bearish for some stocks and our MPOTIS stocks will be alright? 
 

They’re planning on changing all indexation to CPIH from RPI.

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16 minutes ago, Castlevania said:

They’re planning on changing all indexation to CPIH from RPI.

Including DB pensions and that will see deficits fall overnight by a lot.Public sector is still a massive gravy train,but might see changes.My partners boss gave voluntary redundancy to a guy at 55 massive pay out,then advertised the job with a slightly different job title and took on a new person.Council tax payers fleeced for £30k plus allowing early pension.The fiddling in councils is endemic.

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Democorruptcy
2 hours ago, DurhamBorn said:

CBs are holding the curve down so viable companies can re-finance,then invest at a higher return than cost of capital.They arent aiming for high inflation,but they are aiming for inflation higher than rates over the cycle.My road map expects around 38% destruction of debt/savings over the cycle at base rate +0.5% returns.

Fixed income might do worse.Pensions in draw drown will be a huge issue half way through the cycle,and a disaster by the end i suspect.

 

Re this coming inflation. What figure do you have in mind?

Say we get 10%, per £1k pot you need to make around £100 to retain purchasing power. However obviously you don't have to risk the whole pot to make your £100. A 100% return on just 10% of the pot makes the £100 or a 50% return on 20% of the pot, etc. A holding in the oilies might do the lifting? A lot is made of not holding cash in a period of inflation - though if rates rise - there's nothing wrong with having he surplus cash to pick up bargains others cannot afford? Tax efficiency on returns must matter more, the more inflation rises?

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For those like me that have been following @DB (et al) thesis on the macro outlook for the next ten years (2yr deflation collapse then ramping inflation) but didn't really understand `where it is coming from` can I suggest this read (especially pt 2 at the bottom):

https://www.lynalden.com/quantitative-easing-mmt-inflation/

...for me it has now all `fallen into place`....although it did take a couple of reads (usual for me...bit `slow`).

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22 minutes ago, Democorruptcy said:

Re this coming inflation. What figure do you have in mind?

Say we get 10%, per £1k pot you need to make around £100 to retain purchasing power. However obviously you don't have to risk the whole pot to make your £100. A 100% return on just 10% of the pot makes the £100 or a 50% return on 20% of the pot, etc. A holding in the oilies might do the lifting? A lot is made of not holding cash in a period of inflation - though if rates rise - there's nothing wrong with having he surplus cash to pick up bargains others cannot afford? Tax efficiency on returns must matter more, the more inflation rises?

roughly 65% to 80% over the cycle compounded.Im aiming to make inflation+.Tax efficiency is huge,and im looking at that a lot now.

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Democorruptcy
4 minutes ago, DurhamBorn said:

roughly 65% to 80% over the cycle compounded.Im aiming to make inflation+.Tax efficiency is huge,and im looking at that a lot now.

Well we all want inflation+, I was just keeping the figures simple! I hope they don't go after ISAs.

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On 21/08/2020 at 13:19, Harley said:

Fortunately there are a lot of US stocks!  Some reasonable payers in the beaten up sectors right now and plenty of market liquidity to make a difference in prices in any sector rotation.  Plus a weaker USD atm.  I really must take a look!

Edit:  Just did a quick screen.  Out of 8,145 ordinary stocks on the US markets, there are 290 companies over $1bn market cap yielding over 4.5%, although presumably this may not allow for any cancelled divs going forward.  Many are in potentially macro attractive industries such as oil and gas.  Warning, 56 are OTC market stocks!  374 (73 OTC) stock if you're happy with a 4% yield.  459 (85 OTC) if you're also happy with a market cap of $500m up. 

Edit:  Or getting tough, only 34 (16 OTC) if you want over 4% yield, min $1bn cap, a Quick Ratio over 1 and a Debt to Equity ratio of less than 100% (!, but most are well below).  The OTCs  like Equinor can often be bought elsewhere.  Reduce that down to a 3% yield you get 69 stocks (26 OTC) and things start getting really interesting macro industry wise.

Thanks for you earlier reply Harley. A total return strategy is a great risk/return strategy I think, particularly if married with next cycle reflation stocks (assuming our reflation thesis is correct of course). The stats you show here are fascinating, especially for anyone patiently waiting until a market correction before buying. Are there any trends in the stocks your filtering options are finding? Ie sectors, bluechips or is it pretty random?

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https://news.sky.com/story/bt-group-board-on-alert-for-15bn-takeover-approaches-12054366

This sort of thing is interesting,not because it might come off (£1.50 a share is half what they will be probably in 8 years),but because it shows how undervalued whole sectors are at the end of this cycle.Governments in lots of ways have created massive problems.The best way for governments to stop their telcos getting taken out is to allow a higher return on equity deployed and thats exactly what i think will happen.Hopefully there is no bid as id rather not have the profit as it might re-rate the sector and stop higher profits longer term.

 

 

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leonardratso
40 minutes ago, DurhamBorn said:

https://news.sky.com/story/bt-group-board-on-alert-for-15bn-takeover-approaches-12054366

This sort of thing is interesting,not because it might come off (£1.50 a share is half what they will be probably in 8 years),but because it shows how undervalued whole sectors are at the end of this cycle.Governments in lots of ways have created massive problems.The best way for governments to stop their telcos getting taken out is to allow a higher return on equity deployed and thats exactly what i think will happen.Hopefully there is no bid as id rather not have the profit as it might re-rate the sector and stop higher profits longer term.

 

 

Your not kidding, this looks apt from the article. A lot of them really are rather weak with a weak govt to boot.

"City bankers believe the coronavirus crisis has exposed the financial frailty of many of Britain's most important companies, and anticipate a string of bids for them during the months ahead."

 

 

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9 hours ago, MrXxxx said:

Just doing some reading on QE and MMT, and have a question. Could it be argued that MMT is economically (and politically) a `halfway house` between Capitalism and Communist as:

a) the state has direct control over inflation (towards Communism) through printing/taxation rather than indirectly via interest rates (towards Capitalism I.e availability of private capital),

b) the state has direct control over efficiency of capacity/production (towards Communism) via printing/spending rather than indirectly via supply/demand (towards true Capitalism).

Hopefully this makes sense as I am trying to get my head around it?!

I understand what and why you are asking. But I changed my mind about how to judge those ideologies some time back. For me, anything larger scale than local/regional companies and I smell manipulation - It's human nature, and the bigger you go the more rank the manipulation becomes. Adam Smith (the man, not the silly think tank I hasten to add) informed us how markets work, their optimal size, etc, back in the day when even economic philosophers had true wisdom. But then again perhaps I am waxing lyrical about theories that cannot be put into practice in the real world? Anyway my point would be that if forced to compare, today's Western capitalism and yesteryears USSR's communism, both are all about massive state control. MMT might be half way between these two ideologies, but it is also the idiot child of one or both of them, so I don't expect it to aspire to much. Btw I don't view these systems as inherently evil, just far too complex to work, and see them more as vanity projects. I don't know if that helps at all, I think I maybe perhaps have just demonstrated my own biases - I do admit to having become over time a libertarian and now 'dought' even democracy these days (ie it seems to perpetuate ever greater nihilists to rule over us, a very dangerous concept that must surely end in massive failure, who knows maybe that's been pencilled in for 2028!). 

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6 hours ago, Vendetta said:

Great stuff DB. Really informative. 
 

@DurhamBorn - do you think public sector pensions will take a hit, say changes in the rules etc? 

Will rising IR’s from 2025 (?)  start a bear market for many years to come ? 

Or only bearish for some stocks and our MPOTIS stocks will be alright? 
 

Vendetta, I'm not too proud to ask!!, and i guess I really should know, but for mpotis - what does the 'm' and 'I' stand for?

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5 hours ago, Noallegiance said:

It could be argued that both a and b are shit whatever they're labelled.

I like option c of ditch the state back to minimal action in preserving freedom along with common law policing and let people live via their choices.

Radical.

Doesn't sound radical to me. How we might get there is the real discussion point (for other blogs of course) i think. Unfortunately far too much propaganda, false ideology and division flying around these days. For example, in terms of propaganda, I'd start with advertising (Google Freud's nephew Edward Bernays, the father of public relations), but when I say start, I'd actually ban it, is that radical - or is that the natural reaction and rejection to Bernays manipulative ideas? After advertising, could start looking at the public schooling system... oh dear, there is a long slog ahead!

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