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

[MrXxxx]

15 hours ago, sancho panza said:

very six months, banks in the RBL would assess the progress the company made on its drilling and exploration program (e.g. capex). And the greater the progress (e.g. more money spent), the more reserves could be derisked. The value of the RBLs was assessed on the proven portion of the reserve book. Banks usually took 65 cents on the dollar to whatever the proved reserve value was. And since banks didn't assess producers on its cash flow or free cash flow generation, but rather the reserves. Companies found out that the more they borrowed and spent on proving the reserves, the more money they could borrow

This reminds me of a film I watched about how the Fed destroyed the Japanese economy...I posted it on here not so long ago but can't remember the name...something to do with Ninjas I think?

[MrXxxx]

17 hours ago, DurhamBorn said:

The only ways"money" in reality liquidity is destroyed in a western style Fiat economy is when the central bank destroys reserves.Reverse QE.The other way is when debt is liquidated in that someone loses,but the CBs try to front run this,as they are doing now by filling the pipes.They are trying to put in slightly more than is destroyed.

The sector that would suck in the massive amounts of liquidity and the biggest market in the world is the US treasury market.However as the Fed is front running now that would only be a short term move.Once the market sniffs inflation both techs and bonds will be selling off together.That is when the money will flow to commods and commod like sectors and is what will really drive the structural inflation.The economy wont lead inflation higher,the market will bid up commods that then feed into inflation.Once it starts it will be self feeding.The Fed will be loathe to run rates higher than inflation,so bonds will keep selling off as will tech.

Schlumberger pulling out of shale is another massive signal.Those guys know their market better than any city type.

Ignore short term prices,oil is going to $200 minimum,likely $300+ in the cycle,and the majors will make it to see those prices.

 

Reminds me of the scene in Schindlers List where Oscar is negotiating with his Jewish backers who are talking about being paid in German Mark rather than products and he says "Pots and pans, something you can hold in your hands, something you can trade for food"

[MrXxxx]

17 hours ago, sancho panza said:

key thing with having the funds under your control is that the msitakes are yours and not someone leses

Thanks SP, this was the point I was making...if you have a SIPP you are in full control but the majority are in a company DC pension with few if any options apart from a traditional stocks/bonds lifestyle route that works on the basis of the two components being diametrically opposed...recently we have found this not to be the case, so if you are close to retirement a BK event could wipe you out/leave you with the double whammy of a smaller than expected pension in a high inflation environment...

...hence my comment if the person had a few options within their plan to switch out into the cash option (or part cash/bonds) where the capital is preserved/safer for say 6-12 months (,the likely period the BK will happen in) to preserve their gains at a high, and once bottomed out to switch back in to a stocks or srocks/bond option....obviously this is less of an issue for someone far off of retiring as their pension and the contents within have time to recover, although didn't it take the markets 30 years to recover after the Great Depression?

....this seems the logical approach to me rather than doing nothing and being a `sitting duck` to the machinations of the economic cycle. 

[wherebee]

8 minutes ago, MrXxxx said:

Thanks SP, this was the point I was making...if you have a SIPP you are in full control but the majority are in a company DC pension with few if any options apart from a traditional stocks/bonds lifestyle route that works on the basis of the two components being diametrically opposed...recently we have found this not to be the case, so if you are close to retirement a BK event could wipe you out/leave you with the double whammy of a smaller than expected pension in a high inflation environment...

...hence my comment if the person had a few options within their plan to switch out into the cash option for say 6-12 months (,the likely period the BK will happen in) to preserve their gains at a high, and once bottomed out to switch back in to a stocks or srocks/bond option....obviously this is less of an issue for someone far off of retiring as their pension and the contents within have time to recover, although didn't it take the markets 30 years to recover after the Great Depression?

....this seems the logical approach to me rather than doing nothing and being a `sitting duck` to the machinations of the economic cycle. 

My next action is to pull what little pensions I have out of the schemes here in Australia and into a self managed pension fund where I can make specific allocations....

so much organising to do, so little time.

[Chewing Grass]

On 02/07/2020 at 10:32, sancho panza said:

energy is often seen by economists as a function of the economy but posits that actually you should see the economy as a function of energy.

Remembering the 'Energy Economy' I had a little look.

You have to really root around to find the right chart but if you scrape around you can find out that energy generation/consumption (electricity) is down 7% YOY July/August.

Ofgems charts are badly organised but contain decent data and are well presented.

https://www.ofgem.gov.uk/data-portal/all-charts?page=4

[Jesus Wept]

37 minutes ago, MrXxxx said:

....obviously this is less of an issue for someone far off of retiring as their pension and the contents within have time to recover, although didn't it take the markets 30 years to recover after the Great Depression?

25 years + to recover approximately.

However ONLY if you bought BEFORE the crash in 29’.

IF you bought 3 years AFTER the 29 crash at the bottom in 32’ or even halfway down in 30’ the recovery was much quicker. (X 10 in 25 years on the DOW).....

In fact if I remember rightly ‘August 1933 holds the record for the highest % gain of the DOW in history - at about 25%. 

Timing is everything.

That’s why I am trying to stay disciplined and only buy after the coming crash - when no one is posting about stocks and everyone thinks the stockmarket is a place to throw your money away.

(mind I am so tempted with some of the smacked down big oil.... BP, XOM, Repsol, RDSB et al......but I will wait). More upside in me saving cash and waiting for the hopeful ‘deflationary bust’......if it ever comes..... 😬

[jamtomorrow]

1 hour ago, Vendetta said:

25 years + to recover approximately.

However ONLY if you bought BEFORE the crash in 29’.

IF you bought 3 years AFTER the 29 crash at the bottom in 32’ or even halfway down in 30’ the recovery was much quicker. (X 10 in 25 years on the DOW).....

In fact if I remember rightly ‘August 1933 holds the record for the highest % gain of the DOW in history - at about 25%. 

Timing is everything.

That’s why I am trying to stay disciplined and only buy after the coming crash - when no one is posting about stocks and everyone thinks the stockmarket is a place to throw your money away.

(mind I am so tempted with some of the smacked down big oil.... BP, XOM, Repsol, RDSB et al......but I will wait). More upside in me saving cash and waiting for the hopeful ‘deflationary bust’......if it ever comes..... 😬

I think it's *very* hard to tell what will happen in next 6 to 12 months.

My sense is we're at or near a bifurcation point in system behaviour, because of how liquidity coming down from CBs will interact with the insolvency chasm opening up in the "real economy".

I suppose I'm thinking of that interaction as the "Big Kahuna", but I don't think anyone can tell from here whether that will play out as a rapid systemic collapse, or whether the liquidity will flood the economic landscape before we all fall into the insolvency maw. It just seems we've reached a point where system behaviour is highly sensitive to initial conditions (i.e. mathematically chaotic).

At the back of my mind is the niggling concern that the Fed might have gotten this one badly wrong by moving *too* quickly. By dodging the part where firms go bust in large numbers, assets remain tied up in firms with shafted balance sheets, and liquidity gets misallocated into forebearance operations rather than economic activity/velocity. But we'll see.

Meantime, I'm aiming for 50/50 - if there's no systemic crisis, I still want to end up 50% allocated in reflation assets, hence slowly laddering into oilies, telcos, potash too if the value improves a bit.

The other 50% sits on the sidelines so I can back up the truck and/or just "have choices" if there's systemic crisis and sudden demand for cash. And if there isn't, the missed opportunity represented by failing to allocate that 50% is just the cost of having a resilient plan (or imperfect knowledge).

[sancho panza]

On 02/09/2020 at 12:13, Cattle Prod said:

Nudging $22 Trillion, as of 9th July, up 13% since then, so just shy of 25 trillion dollars. It was around $6.6 Tn in 2000, and with an ~80% dotcom style bust you would 'lose' $20 tn of capital from the Nasdaq. A modest 50% is $12.5 Tn. Jump in if my thinking is flawed guys, but this money is not 'lost', right? Derivatives will cancel each other out, but this 25 Tn is the the actual stock value as I understand it, and for every loser in a market there is a winner, and the money will have to find a home. Some will sit as cash for a while as Vendetta says, but the bargains in OPTIMiSM will be screaming at them all the while.

Something is lost.There are two sides to the transaction.

This isn't jsut about money but about money and stores of value/asset based wealth.

For example,you have an estate with 10 houses on,all bought £100,000.The builder takes his £1million cash and the homeowners are sat on assets/stores of value worth £100,000 each. Ergo £2milion in assets(50% cash,50% asset).

Ten years later,one of the home owners sells their hosue for £50,000.marginal price sets asset prices.Ergo builder still has his £1million cash but homeowners sat on assets worth £500,000.The reverse could happen obviously.

It's a simplistic model but I think it demonstrates that there can be situations where it is lose/lose.

80% off Nasdaq would have severe consequences for consumer spending in the USA espcailly in a fractional banking system that has abandoned cash as it's base.

[sancho panza]

23 hours ago, JMD said:

CP, great analysis and charts btw - however, perhaps i misunderstand your question (and i am maybe the least qualified to answer it here) - but its my understanding that it is 'wealth' that cannot be created/destroyed (not money). Money after all is created all the time by the Fed! How wealth is measured (by the wealthy) changes over time and is a clever and dark art!

Where did the 'money-flow go' (excuse my clumsy terminology) is a different question... i thought it went into derivatives? I suppose compare the $70trn total world stock market value  vs  the $1000trn derivatives market. Derivatives is 'funny-money' i know so can't compare directly (but many tax-havens and other places to filter/hide cash), the phrase 'inmates in charge of the asylum' springs to mind, perhaps there is no real sense to be made of it all!

Wealth gets created and destroyed on a daily basis.

Ref derivatives,I hear that they 'net off' a lot but the reality is that if they did exactly that,then there'd be no point having them.As with all markets there are winners and losers and every now and then there are counterparties that default.

What's meant I suspect is that the big players round off their books and their profit lies for them in the bid offer.The smaller players probably represent the bulk of the losers except @MvR

[reformed nice guy]

1 hour ago, jamtomorrow said:

I think it's *very* hard to tell what will happen in next 6 to 12 months.

My sense is we're at or near a bifurcation point in system behaviour, because of how liquidity coming down from CBs will interact with the insolvency chasm opening up in the "real economy".

I suppose I'm thinking of that interaction as the "Big Kahuna", but I don't think anyone can tell from here whether that will play out as a rapid systemic collapse, or whether the liquidity will flood the economic landscape before we all fall into the insolvency maw. It just seems we've reached a point where system behaviour is highly sensitive to initial conditions (i.e. mathematically chaotic).

There could also be another "black swan" event. A new virus worse than china-flu?

A simple black swan could be the re-unification of north and south Korea. Do you invest in German bonds with a negative interest rate or invest instead in a Korean bond of 5+% which is being used by a well run, relatively transparent South Korean firm to do basic things like build motorways, factories or lay basic infrastructure?

Something like that would suck a lot of liquidity out of the west

[Popuplights]

5 hours ago, MrXxxx said:

And with the UK breaking free of the EC legislation in 2021it will make the job even easier....Environmentally before joining the EC the UK was the dirty man of Western Europe, looks as though we will be it once again.

We burned no coal for power generation for months this summer. The Germans still burn lignite. You are looking in the wrong place.

[DoINeedOne]

I have a headache after watching this great video just so many numbers thrown around

[sancho panza]

19 hours ago, Cattle Prod said:

I like to think that a moderate oil spike will trigger the BK, but that's what happened last time, and history doesn't repeat, but rhyme, eh?! However it happens, I expect a quick down and up as we will have the supply problem carried over from the Corona crash. And the CBs are likely to turn on the hose to keep demand up. Then, a steady grind up to a ~$200+ level, where it may plateau for a few years, sucking money out of the world, pushing out inflation eventually helping to bring on the end of the cycle to the late 20s.

It's also worth noting that the 2008 oil spike is now $174 inflation adjusted, with a subsequent 4 year plateau of around $125. Scarcely believeable, but oil is just not optional, not a discretionary spend, and you have to pay the going rate. So the numbers of $200/$300 DB mentions are not far fetched at all.

as per DB's thanks ,much apprecaite the education.

ref oil price triggering BK,I'm in that camp with what I see as good reason.Clearly there are a lot more variables than oil but still correlation causation  etc.

Of the last three recessions,each has been preceded by a 50% + rise in the oil price.

As per our recent discussion on dollar weakness,one of my triggers for selling dollar hedges and buying dollars is a rising oil price.Hence,for where we are now,we're set for BK psot an oil price rise past $80 or so(and/or copper>$3.60,GSR <45,DXY<85,cable>$1.65,UST>2%).May sound ambitious but I see a key part of fed not being able to print HAS  to be heighenting infaltion expectations of which I think oil rising will play it's part.As long as the Fed can print the credit event/BK is unlikely.

You say history doesn't repaert but I'm going to throw some timelines out here.Using monthlies.

Early 90's recession

Oct 1998 Oil bottoms monthly close $13.58,intraday $12.28

July 1990  US recession starts with oil at $20.69

Sept 1990 oil peaks at monthly close $39.51

Oct 1990 oil intraday peak $41.15

Oct 1990 S&P 500 bottoms

March 1991 US recession ends with oil at $19.63

 

Tech Bubble bursting

Dec 1998  Oil bottoms at $10.35,turns up

Mar 2000  US recession starts with Oil at $26.90

Aug 2000 S&P500 monthly peak

Sep 2000 Intraday oil peak at $37.80

Nov 2000 US recession ends-Greenspan put.

Nov 2000 Oil peaks on monthlies at $33.82

Aug 2002 S&P bottoms on the monthlies

 

2008 Recession

Jan 2007 Oil bottoms on the monthlies at $58.14

Oct 2007 S&P peaks on monthlies

Dec 2007 US enters recession with Oil at $95.98

June 2008 Oil peaks at $140-monthlies

Feb 2009 S&P bottoms

June 2009 US recession ends with oil at $69.89

 

2020's recession

April 2020 oil bottoms on the monthlies at $19.56

 

 

[sancho panza]

18 hours ago, Democorruptcy said:

Rather than not pay rent and face an eviction notice that will mean the next rental might be lacking a landlord reference, why wouldn't tenants in the UK apply? It gives them 5 years breathing space at 1%.

It's going to reduce the supply of rentals and/or properties for sale.
 

 

and @Underwhelmed the devil is in the detail.this won't be govt laons at 1%.

not noly will they struggle getting tenants to tkae it,but they'll struggle to get any thrid parties involved under 15% I suspect.

If you can't pay your rent,then borrowing the moeny and going bust thereafter is one option.Otherwise claiming housing benefit and coming to a working agreement with your LL is much more liekly.that agreement will most likely be a haircut for the LL.

LL's going to be getting hosed for the covid months.

I've been renting for years and never been asked for a LL reference.

from the link

[sancho panza]

 

2 hours ago, jamtomorrow said:

I think it's *very* hard to tell what will happen in next 6 to 12 months.

My sense is we're at or near a bifurcation point in system behaviour, because of how liquidity coming down from CBs will interact with the insolvency chasm opening up in the "real economy".

I suppose I'm thinking of that interaction as the "Big Kahuna", but I don't think anyone can tell from here whether that will play out as a rapid systemic collapse, or whether the liquidity will flood the economic landscape before we all fall into the insolvency maw. It just seems we've reached a point where system behaviour is highly sensitive to initial conditions (i.e. mathematically chaotic).

At the back of my mind is the niggling concern that the Fed might have gotten this one badly wrong by moving *too* quickly. By dodging the part where firms go bust in large numbers, assets remain tied up in firms with shafted balance sheets, and liquidity gets misallocated into forebearance operations rather than economic activity/velocity. But we'll see.

Meantime, I'm aiming for 50/50 - if there's no systemic crisis, I still want to end up 50% allocated in reflation assets, hence slowly laddering into oilies, telcos, potash too if the value improves a bit.

The other 50% sits on the sidelines so I can back up the truck and/or just "have choices" if there's systemic crisis and sudden demand for cash. And if there isn't, the missed opportunity represented by failing to allocate that 50% is just the cost of having a resilient plan (or imperfect knowledge).

super turn of phrase in bold JT.Sums it up nicely.

Sensible policy sitting on a chunk of cash here,even though we're only 20% cash.

I think the Fed had to move quickly but as ever,you have to look at whose really benefited from the bail outs and it's not really been the velocity of money.see below.Another junkie runs out of stuff to put in their arm.There are laods of these debt junkies jsut soaking up fed liquidity.

Looking at the UK the big firms have done well but a lot of smaller ones haven't.main St will liekly get bitten when furlough ends.

https://wolfstreet.com/2020/08/31/e22bn-hedge-fund-h2o-majority-owned-by-natixis-ordered-to-freeze-funds/

H2O Asset Management — a UK-based hedge fund, majority-owned by French investment bank Natixis — just gated a series of its funds due to illiquidity of its holdings. On Friday evening, France’s chief market regulator, Autorité des marchés financiers (AMF), instructed the firm to close three of its funds due to “valuation uncertainties” resulting from their exposure to unlisted securities linked to the controversial German financier Lars Windhorst.

Besides the three funds indicated by AMF, H2O closed another five funds containing holdings of similarly illiquid assets, with the result that roughly half of the asset management firm’s entire portfolio of assets — €21.7 billion, according to the company’s website — is now under wraps. Trapped investors cannot access their funds, and will be unable to do so for at least the next four weeks,

Yet even as the value of its holdings plunged, its hedges went awry and one of its major clients cancelled its contract, H2O still clung to one hope: that central banks would step in and save the day by re-pumping the prices of the high-risk asset classes it likes to hold, such as junk bonds. “Even though the end of the tunnel is not visible yet, the lights have been turned on by central banks and governments,” H2O said in March.

Six months on, central banks and governments have more than delivered. Many asset classes have regained their previous value, in spite of the damage in the real economy. But even this unprecedented bailout still wasn’t enough to solve H2O’s problems, given the gating of the funds on Friday evening.

[MrXxxx]

5 hours ago, Vendetta said:

everything.

That’s why I am trying to stay disciplined and only buy after the coming crash - when no one is posting about stocks and everyone thinks the stockmarket is a place to throw your money away.

(mind I am so tempted with some of the smacked down big oil.... BP, XOM, Repsol, RDSB et al......but I will wait). More upside in me saving cash and waiting for the hopeful ‘deflationary bust’......if it ever comes

I think this is the thing...cost of time being out of the market vs finding yourself `holding the baby` when the market crashes...I think the safest option is buying wisely (which I assume we all do anyway)  anf focussing on `sound` unloved stocks that are near their lows, that way they are less likely to fall so far...in addition, thinking back to March`s mimi crash, the ultra low prices were only there in a very small window so you are unlikely to get everything at `rock bottom`/the all time low price.

[Democorruptcy]

1 hour ago, sancho panza said:

and @Underwhelmed the devil is in the detail.this won't be govt laons at 1%.

not noly will they struggle getting tenants to tkae it,but they'll struggle to get any thrid parties involved under 15% I suspect.

If you can't pay your rent,then borrowing the moeny and going bust thereafter is one option.Otherwise claiming housing benefit and coming to a working agreement with your LL is much more liekly.that agreement will most likely be a haircut for the LL.

LL's going to be getting hosed for the covid months.

I've been renting for years and never been asked for a LL reference.

In the link I posted it says 1%

Quote

 

Once the loan is accepted, the money will be paid directly to the landlord or agent and tenants will be able to pay back the amount over five years.

The APR level (Annual Percentage Rate) of interest on the loan will be 1%, ministers said, and there will be no maximum amount but the scheme will cover rent arrears only.

The scheme will be managed by the Wales Council for Voluntary Action and be delivered via credit unions.

 

It's just Wales so far but with cross party support I thought it was worth mentioning, after you said stepping in on the LL's side would be politically untenable.

[JMD]

2 hours ago, sancho panza said:

Wealth gets created and destroyed on a daily basis.

 

SP, excuse me coming back at you, but what you say above has got me rattled! I do of course realise you were referring to 'financial wealth', but given this blog's ethos regarding a potential end-of-decade economic meltdown/reset i think 'financial wealth' is far too limiting in concept. I hope i am not drifting (entirely?) off topic - i don't think so because the concept of 'what is wealth?' is i think very relevant to this blog.      

Anyway I admit that if i were to 'believe' what you wrote above it would really mess with my anthropological mindset! The concept and the utility of 'wealth' didn't pop into existence sometime between the caveman and the Medici's, its always existed. It also takes different forms - For example, spending wealth to buy a child an education is not destroying wealth, but transferring it into a different form of value, i.e. future work potential, skills or influence for the child. Wealth is also an extremely political concept, with the most wealthy people themselves deciding on what/how wealth is measured.

If you consider my above thoughts somewhat 'overblown', then i'm afraid i go full retard(!) with my next statement... Wealth, like energy, cannot be destroyed, only transferred. Energy is a fundamental building block of the universe, and wealth is a fundamental building block of society.   

I find the subject interesting?! But I shan't bang on. If the following quote intrigues you, you might like to use the below link to read more (copy it into browser). 

'Wealth is that which mediates what is valuable now to what is anticipated as valuable in the future...'

https://www.tandfonline.com/doi/full/10.1080/02757206.2018.1460600?scroll=top&needAccess=true

 

[Harley]

On 02/09/2020 at 00:59, wherebee said:

So no, I am not going to jump in to join you, thanks

But where to safely stash the cash until after the BK?  Cash = banks (via brokers).  Short term bond funds split according to the countries/currencies planning on investing in?  Are short term bond funds/ETFs safe and will they remain liquid?

[Jesus Wept]

1 hour ago, MrXxxx said:

I think this is the thing...cost of time being out of the market vs finding yourself `holding the baby` when the market crashes...I think the safest option is buying wisely (which I assume we all do anyway)  anf focussing on `sound` unloved stocks that are near their lows, that way they are less likely to fall so far...in addition, thinking back to March`s mimi crash, the ultra low prices were only there in a very small window so you are unlikely to get everything at `rock bottom`/the all time low price.

Is this the crash starting....? 😁

[Harley]

Just ordered heating oil at 27p a litre.  Was almost twice that last year (although a bit closer to winter).  I have to go back some for anything like 27p.  Can't last.  Wish I had another oil tank.  For me, buying oil companies is as much to help hedge and fill that tank in the future!  Maybe the same for food producers and others?

[Harley]

On 01/09/2020 at 14:05, DurhamBorn said:

Dollar index under 92 now so starting to head into range im still seeing 88 as a likely area though 85 might be in play.

Nice thing about some brokers is you can sell GBP for say USD and hold that independently of the stock buying.

[Loki]

12 minutes ago, Vendetta said:

Is this the crash starting....?

If you have to ask...

[Jesus Wept]

Just now, Loki said:

If you have to ask...

My man Hunter does not think so.....

[Loki]

@Vendetta Yep, when it happens we'll know!