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

[DurhamBorn]

@Barnsey im always surprised David making short term calls as he would be the first to admit thats not what a macro contrarian does.However he does know liquidity is what matters and every set back means more liquidity.

Asia is doing fine and moving into full production while the west seems to be lost at sea.The irony is the massive mistakes being made here in the UK mean we will see higher inflation than others down the line.

Boris locking down shops just before xmas who have all their xmas stock arrived while leaving schools open is crazy.Utter lunacy.Might get the Royal Mail divi back next year though 

[BurntBread]

31 minutes ago, sleepwello'nights said:

Is there any chance the market may have already priced in the effect of lockdown 2. There were significant drops in prices the last week or two.

Apart from some of the UK transports, I think most of the companies mentioned here are either driven by global demand (oil, precious and base metal miners), and so UK (and even European) politics will be a relatively small part of their outlook; or are part of the essentials / "new essentials" (agriculture, energy infrastructure and telecoms infrastructure).

For that reason, my guess is that UK lockdown won't have a big effect. However, as I've said up-thread, I'm not especially fussed either way right now, and, like you, I'm holding through the current turmoil.

[Harley]

11 hours ago, DurhamBorn said:

In a dis-inflation the people closest to the consumer gain the margin.In a reflation the people farthest away gain the most.

Indeed.  I've been wrestling with implementing the detail of this though.  I'm trying to allocate industrial sectors accordingly but how hard should I be as they cover a spectrum from "extractors" to "sellers to the consumer"?  Those two extremes are relatively easy, it's the stuff in the middle that's vexing.

These would be my first pass at "extractors":

Chemical Manufacturing
Chemicals - Plastics & Rubber
Coal
Crops
Fish/Livestock
Non-Metallic Mining
Gold & Silver
Construction - Raw Materials
Forestry & Wood Products
Oil & Gas - Integrated
Oil & Gas Operations
Oil Well Services & Equipment
Iron & Steel
Natural Gas Utilities
Electric Utilities
Water Utilities
Metal Mining

Thoughts?

PS:  I'm working on this to come up with a model.

[Harley]

8 minutes ago, DurhamBorn said:

Asia is doing fine and moving into full production while the west seems to be lost at sea.The irony is the massive mistakes being made here in the UK mean we will see higher inflation than others down the line.

Part of the tectonic rebalancing between East and West which has been underway for a while.  Cycles within cycles, dolls within dolls.  Such periodic ratcheting rather than just a smooth transition (linear, exponential or whatever) seems a normal progression for such changes.

[Harley]

40 minutes ago, sleepwello'nights said:

I'm not looking forward to what will happen to share prices next week as the impact of lockdown 2 is digested. However my dividend income has fallen so I might as well hold on and wait for the rising tide of inflation. Better than locking in the capital losses and incurring dealing fees on top.

This is something I have been wrestling with or at least have to keep telling myself.  I bought some shares (in my income portfolio) for dividends to replace an annuity (with its dire rates).  So I care about the div income rather than capital.  Sure they cut the divs back, but so have most so why dump the shares, to do what with?  And, as we saw with RDSB, the divs may come back.  What things have shown is that I stayed div hunting in the FTSE too long as bough stuff I should not have.  I should have been looking internationally when the obvious FTSE candidates were bought.  I didn't because the broker I had was really UK only.  I had some regional ETFs but IMO such trackers are not good enough and I need to stock pick a broad base of stocks.  I've changed all that but now need to decide what to do with the legacy ones I should not have bought.  I'll leave them on the "naughty step" and sell out if they recover more in a few years.  But regardless, I'm now looking at a total return rather than a pure income focus to harvest a mix of divs and gains.  This maybe was always the best approach but certainly more so now as we see the end of cycles and trends play out.  And where do my screeners show the majority of value?  Asia, etc.

[Harley]

11 hours ago, DurhamBorn said:

Im shocked how bad this government is though.

I seriously believe the plan is to run into the arms of the IMF and whatever they have planned for us all.  Only this week they commended the UK on what they are doing, saying they doing it better than everyone else!

PS: Note Lagard is ex-IMF.

[Loki]

34 minutes ago, Harley said:

Indeed.  I've been wrestling with implementing the detail of this though.  I'm trying to allocate industrial sectors accordingly but how hard should I be as they cover a spectrum from "extractors" to "sellers to the consumer"?  Those two extremes are relatively easy, it's the stuff in the middle that's vexing.

These would be my first pass at "extractors":

Chemical Manufacturing
Chemicals - Plastics & Rubber
Coal
Crops
Fish/Livestock
Non-Metallic Mining
Gold & Silver
Construction - Raw Materials
Forestry & Wood Products
Oil & Gas - Integrated
Oil & Gas Operations
Oil Well Services & Equipment
Iron & Steel
Natural Gas Utilities
Electric Utilities
Water Utilities
Metal Mining

Thoughts?

PS:  I'm working on this to come up with a model.

Great list.  The only thing I can think of is construction - Heavy machinery/plant (Hydrogen fuelled?)

[Democorruptcy]

27 minutes ago, Harley said:

I seriously believe the plan is to run into the arms of the IMF and whatever they have planned for us all.  Only this week they commended the UK on what they are doing, saying they doing it better than everyone else!

PS: Note Lagard is ex-IMF.

Just did a search because I couldn't think of the chief's name. She keeps a low profile (at the moment!) but Kristalina Georgieva might be someone we see a lot more of in the future.

 

[Harley]

Does anyone screen stocks using the "Price to Tangible Value" ratio? Using it for the first time is a bit like that moment in the Matrix film with it all suddenly becoming clear. 

It shows the ratio between share price and the value of tangible assets on the balance sheet.  Tangible assets are total assets less total liabilities less intangible assets such as goodwill and intangibles (such as patents, licenses, "brand value", etc).

I've mentioned before how many (especially US) companies have loaded up their balance sheets with intangibles.  Using this screening variable, a lot of companies disappear leaving a more tasty list!  And many disappear because without these intangibles they have negative equity!  Scary!

Now a high ratio is arguably OK for some companies such as software where very few assets are needed and there is a lot of intellectual capital.  But this thread likes real assets, especially cheap ones so I quite like the bias!

Unfortunately some companies some of us like also get excluded.  Such as say BATS.  It does not have a ratio because it has a negative "Tangible Book Value/Share" almost equal to it's share price.  That is, if you buy a share, you are buying a lot of "air" in asset terms.  Looking at its MRQ balance sheet:

Total Equity (£69b) = Total Assets (£152b) less Total Liabilities (£83b)

But, of those Total Assets, £127b are intangibles, which when excluded gives a negative equity of £58b.

The one redeemer I can think of is maybe much of it's fixed assets have been depreciated.  But that is not brilliant (maybe OK as a sunset "Cash Cow" business though).

[Harley]

30 minutes ago, Loki said:

Great list.  The only thing I can think of is construction - Heavy machinery/plant (Hydrogen fuelled?)

Yep, I have a whole load of "producers" to deal with.  They take in stuff from the "extractors" and produce stuff either for other producers, or for "sellers" (to the consumer), or to both.  Some will have pricing power, assets, etc some not.  That's the hard bit.  But in terms of priorities and KISS.....

PS:  My base assumption is you want to be as close to the left ("Extractors") as possible in this chain, with maybe cherry picking a few mid-point "producer" industries. 

[planit]

52 minutes ago, Harley said:

Does anyone screen stocks using the "Price to Tangible Value" ratio? Using it for the first time is a bit like that moment in the Matrix film with it all suddenly becoming clear. 

It shows the ratio between share price and the value of tangible assets on the balance sheet.  Tangible assets are total assets less total liabilities less intangible assets such as goodwill and intangibles (such as patents, licenses, "brand value", etc).

I've mentioned before how many (especially US) companies have loaded up their balance sheets with intangibles.  Using this screening variable, a lot of companies disappear leaving a more tasty list!  And many disappear because without these intangibles they have negative equity!  Scary!

Now a high ratio is arguably OK for some companies such as software where very few assets are needed and there is a lot of intellectual capital.  But this thread likes real assets, especially cheap ones so I quite like the bias!

Unfortunately some companies some of us like also get excluded.  Such as say BATS.  It does not have a ratio because it has a negative "Tangible Book Value/Share" almost equal to it's share price.  That is, if you buy a share, you are buying a lot of "air" in asset terms.  Looking at its MRQ balance sheet:

Total Equity (£69b) = Total Assets (£152b) less Total Liabilities (£83b)

But, of those Total Assets, £127b are intangibles, which when excluded gives a negative equity of £58b.

The one redeemer I can think of is maybe much of it's fixed assets have been depreciated.  But that is not brilliant (maybe OK as a sunset "Cash Cow" business though).

I agree that method can give you a different and interesting list to identify some good investment opportunities. But using that as a rule on whether or not to invest a company seems like suicide, you are going to remove every hi tech and fast growing company that has good IP. Or anyone who has bought up another company and has goodwill on the balance sheet.

 

Basically you could end up with all the old fashioned companies that have done nothing over the last few years and who investors think are going nowhere, in fact they are run so badly they are not using their shareholder equity and plant properly. From that you need to dig out a couple of gems.

[DurhamBorn]

3 hours ago, Harley said:

Indeed.  I've been wrestling with implementing the detail of this though.  I'm trying to allocate industrial sectors accordingly but how hard should I be as they cover a spectrum from "extractors" to "sellers to the consumer"?  Those two extremes are relatively easy, it's the stuff in the middle that's vexing.

These would be my first pass at "extractors":

Chemical Manufacturing
Chemicals - Plastics & Rubber
Coal
Crops
Fish/Livestock
Non-Metallic Mining
Gold & Silver
Construction - Raw Materials
Forestry & Wood Products
Oil & Gas - Integrated
Oil & Gas Operations
Oil Well Services & Equipment
Iron & Steel
Natural Gas Utilities
Electric Utilities
Water Utilities
Metal Mining

Thoughts?

PS:  I'm working on this to come up with a model.

I think thats a great list and would make a fantastic portfolio for the cycle.Id add in telcos though.I know it seems they are direct consumer stocks,but they own the thing needed for the service.There is huge liquidity building in the system,once its unleashed inflation will start.Im really looking forward to inflation moving because then the BOE will have to stop QE,gilt yields will head higher and government will be forced to slash spending on consumption (welfare/state wages etc)

[Rave]

On 31/10/2020 at 09:22, DurhamBorn said:

Its a 100% certainty at some point in the future.The problem in the UK is that our benefits system is so lucrative half the population would see big welfare cuts with UBI.The other big problem is housing.

 

It would be, not to put too fine a point on it, completely fucking insane to implement a UBI without also implementing a Land Value Tax. Without LVT, the UBI will flow pretty much in its entirety to landlords/banks. @Barnsey

[JMD]

16 hours ago, Chewing Grass said:

So 61,000 mostly somewhat premature deaths if you believe the accuracy of that figure and £845 billion that's £13.8 million per death. Do we have a new value for, on average, a Pensioners Life.

Actually the NHS does assign values. I think the NICE calculation for each 'qaly' year is it being worth £30,000. They up that figure for end of life care, but I'm sure not to £13M!!

[DurhamBorn]

29 minutes ago, Rave said:

 

It would be, not to put too fine a point on it, completely fucking insane to implement a UBI without also implementing a Land Value Tax. Without LVT, the UBI will flow pretty much in its entirety to landlords/banks. @Barnsey

Agree,Labour want a UBI by getting shot of the tax allowance,but thats crazy and defeats the object.The answer as you say is a LVT.The beauty of one of them as well is you can use it to leverage wildlife policy etc.Keeping 50 sheep on 1000 acres would be done away with and native woodland planted etc if you tier the payments.The grouse shooting estates wont like it though of course.

[JMD]

5 hours ago, Harley said:

Indeed.  I've been wrestling with implementing the detail of this though.  I'm trying to allocate industrial sectors accordingly but how hard should I be as they cover a spectrum from "extractors" to "sellers to the consumer"?  Those two extremes are relatively easy, it's the stuff in the middle that's vexing.

These would be my first pass at "extractors":

Chemical Manufacturing
Chemicals - Plastics & Rubber
Coal
Crops
Fish/Livestock
Non-Metallic Mining
Gold & Silver
Construction - Raw Materials
Forestry & Wood Products
Oil & Gas - Integrated
Oil & Gas Operations
Oil Well Services & Equipment
Iron & Steel
Natural Gas Utilities
Electric Utilities
Water Utilities
Metal Mining

Thoughts?

PS:  I'm working on this to come up with a model.

They all look good to me - apart from the utilities, I think they have had their time in the sun and are ripe for political interference or even nationalisation. In fact it is part of my next cycle risk factors that sectors like water, power companies,etc, will be regulated/nationalised by governments in search of votes.

[JMD]

5 hours ago, Harley said:

This is something I have been wrestling with or at least have to keep telling myself.  I bought some shares (in my income portfolio) for dividends to replace an annuity (with its dire rates).  So I care about the div income rather than capital.  Sure they cut the divs back, but so have most so why dump the shares, to do what with?  And, as we saw with RDSB, the divs may come back.  What things have shown is that I stayed div hunting in the FTSE too long as bough stuff I should not have.  I should have been looking internationally when the obvious FTSE candidates were bought.  I didn't because the broker I had was really UK only.  I had some regional ETFs but IMO such trackers are not good enough and I need to stock pick a broad base of stocks.  I've changed all that but now need to decide what to do with the legacy ones I should not have bought.  I'll leave them on the "naughty step" and sell out if they recover more in a few years.  But regardless, I'm now looking at a total return rather than a pure income focus to harvest a mix of divs and gains.  This maybe was always the best approach but certainly more so now as we see the end of cycles and trends play out.  And where do my screeners show the majority of value?  Asia, etc.

I agree with you re getting Income from Asia, but what are your thoughts on currency exchange risk? It's something that concerns me, but in terms of pound vs Asian currencies over say next 5-10 years, is it just a unknowable risk that has to be accepted?

[JMD]

1 hour ago, Rave said:

 

It would be, not to put too fine a point on it, completely fucking insane to implement a UBI without also implementing a Land Value Tax. Without LVT, the UBI will flow pretty much in its entirety to landlords/banks. @Barnsey

I used to think LVT was an interesting concept/tax. But do you think it is still relevant? Todays economy and profits are not derived from land, agriculture as once was the case. Housing will be more and more provided by government so private landlords will become pretty niche. Personally I think the retail banks, currently on life support, will have their plug pulled this cycle. As I think their role will be vastly diminished by government crypto, etc. Btw, am not trying to pull apart your argument, and would be interested in your thoughts.

[Harley]

1 hour ago, JMD said:

They all look good to me - apart from the utilities, I think they have had their time in the sun and are ripe for political interference or even nationalisation. In fact it is part of my next cycle risk factors that sectors like water, power companies,etc, will be regulated/nationalised by governments in search of votes.

Utilities have been a concern to me but not for the reasons you cite, which are probably valid too.  My concern is approached via their financials and wondering if they have much room, your comment about regulation being a double wammy.  IMO the government will have to control the price of essentials to prevent people kicking off and that may include some form of nationalisation.  Maybe I should be less concerned about them not coming up in my screens.  Some say they are the new bonds (the old ones being increasingly unfit for purpose).

[Harley]

1 hour ago, JMD said:

I agree with you re getting Income from Asia, but what are your thoughts on currency exchange risk? It's something that concerns me, but in terms of pound vs Asian currencies over say next 5-10 years, is it just a unknowable risk that has to be accepted?

It may be a bit late (although IMO probably not) but investing outside Sterling would have been a good move over the years!  I see the path as continued down, Brexit or not.  The question is will it devalue relatively more than other currencies.  IMO, a bit yes, but there is a western world problem, not just a UK problem.  I tend to look at all those currencies against equity backed by real assets, so less of which currency but which asset class. 

[Harley]

3 hours ago, DurhamBorn said:

I think thats a great list and would make a fantastic portfolio for the cycle.Id add in telcos though.I know it seems they are direct consumer stocks,but they own the thing needed for the service.There is huge liquidity building in the system,once its unleashed inflation will start.Im really looking forward to inflation moving because then the BOE will have to stop QE,gilt yields will head higher and government will be forced to slash spending on consumption (welfare/state wages etc)

Maybe I'm doing mental gymnastics to get the outcome I want but I see telcos as a bit like a utility and so a special kind of producer, far to the left in the chain, almost an extractor.  Like a water utility, they take assets (as does a miner) and extract something elemental like fresh water, only transmissible bytes.  Thinking about it that way, one defining thing about "extractors" is they are at the start or very early on in the value add chain with few predecessors other than enabling assets.  They extract from elemental nature.  IMO telcos fit that definition.  All one example (along with say Bitcoin) where we may need to refine/update our traditional "investing" thinking. 

[JMD]

1 hour ago, DurhamBorn said:

Agree,Labour want a UBI by getting shot of the tax allowance,but thats crazy and defeats the object.The answer as you say is a LVT.The beauty of one of them as well is you can use it to leverage wildlife policy etc.Keeping 50 sheep on 1000 acres would be done away with and native woodland planted etc if you tier the payments.The grouse shooting estates wont like it though of course.

DB, whatever the rights/wrongs of UBI, don't you think it will happen because it is one of the big political levers governments can pull to help stop social chaos that would follow from mass unemployment? I'm thinking the 'temporary' job support schemes already underway will be made permanent, with companies being encouraged to create millions of part time jobs (over time this would nearly double the number of f/t jobs) with government UBI topping-up the difference to enable people to support themselves.                                                                                           Also on the other subject you mention, I don't understand the point you make about land utility regarding sheep vs native woodland (not trying to over simplify your argument). But aren't those two uses more to do with government farming subsidies, which I think are already changing. Rewilding and having more wolves (which tangentially would also get rid of those sheep!) Is something I'd approve of but can't this be done more effectively under continued private ownership rather than government schemes and planning and LVT's. I hate to mention recent gov. efforts re covid, but central decision making is mostly politicaly focused, and rarely practical?

[Harley]

5 hours ago, planit said:

I agree that method can give you a different and interesting list to identify some good investment opportunities. But using that as a rule on whether or not to invest a company seems like suicide, you are going to remove every hi tech and fast growing company that has good IP. Or anyone who has bought up another company and has goodwill on the balance sheet.

 

Basically you could end up with all the old fashioned companies that have done nothing over the last few years and who investors think are going nowhere, in fact they are run so badly they are not using their shareholder equity and plant properly. From that you need to dig out a couple of gems.

That's some really good feedback thanks as it has given me something to consider and feed back into my approach (of which PTBV is but one of several metrics). 

My initial reaction is there is indeed a trap out there by slavishly following just this metric (or indeed any single one) but it's not necessarily as stark as it may appear.  As mentioned, it's very company/sector specific but there are some companies in sectors where they simply should not have such a metric.  And as a valuation metric (given its link to the share price) it's exactly "old fashioned companies that have done nothing over the last few years" (price wise) that I'm looking for as we rotate sectors at the cycle end!  Avoiding the dogs of course! 

I only looked at it yesterday so have some more work to do but I think it could aid my approach which is to find relatively cheap asset rich companies, producing positive and growing operating cash flows, with cash flow covered dividends, etc and only running debts against equity to invest in cash producing assets (so not divs, buy backs, etc).  I'm more focused on the less highly valued non-tech sectors, etc to front run the sector rotation I see coming (has come) where I would expect to see a lower PTBV so a high PTBV would be a red flag needing a persuasive case to accept over another industry player.

It all does highlight how the various metrics come into and go out of fashion/relevance to reflect current cycles and trends.

 

[JMD]

56 minutes ago, Harley said:

Utilities have been a concern to me but not for the reasons you cite, which are probably valid too.  My concern is approached via their financials and wondering if they have much room, your comment about regulation being a double wammy.  Maybe I should be less concerned about them not coming up in my screens.  Some say they are the new bonds (the old ones being increasingly unfit for purpose).

Harley, I should have added that I used to say myself that utilities were a 'replacement bond' type asset. I now think that utility type companies - like the water/electric over here - and Google/Facebook/amazon in US - will be first in the firing line from government. The reasons for doing this will vary, and the consequences that follow will sometimes be positive, sometimes negative. But the agenda will be about resetting 'unfair' monopolies... Might it be that 'First they came for the utilities...'!!!                           ...So for me now 'total return' is the main game in town.

[JMD]

6 hours ago, Harley said:

Does anyone screen stocks using the "Price to Tangible Value" ratio? Using it for the first time is a bit like that moment in the Matrix film with it all suddenly becoming clear. 

It shows the ratio between share price and the value of tangible assets on the balance sheet.  Tangible assets are total assets less total liabilities less intangible assets such as goodwill and intangibles (such as patents, licenses, "brand value", etc).

I've mentioned before how many (especially US) companies have loaded up their balance sheets with intangibles.  Using this screening variable, a lot of companies disappear leaving a more tasty list!  And many disappear because without these intangibles they have negative equity!  Scary!

Now a high ratio is arguably OK for some companies such as software where very few assets are needed and there is a lot of intellectual capital.  But this thread likes real assets, especially cheap ones so I quite like the bias!

Unfortunately some companies some of us like also get excluded.  Such as say BATS.  It does not have a ratio because it has a negative "Tangible Book Value/Share" almost equal to it's share price.  That is, if you buy a share, you are buying a lot of "air" in asset terms.  Looking at its MRQ balance sheet:

Total Equity (£69b) = Total Assets (£152b) less Total Liabilities (£83b)

But, of those Total Assets, £127b are intangibles, which when excluded gives a negative equity of £58b.

The one redeemer I can think of is maybe much of it's fixed assets have been depreciated.  But that is not brilliant (maybe OK as a sunset "Cash Cow" business though).

For the type of next cycle, asset owing companies we talk about here that sounds a good idea. Can you give a couple examples of companies with 'good' Price to tangible asset value ratios? I suppose a good/bad ratio depends very much on the sector you are looking at?