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

[Causeway]

Long time follower here, flushed out by Spunko's genius plan to coax more posts from lurkers on the "DOSBODs public access / the future" thread.

Has inspired me to post a long overdue, big thank you to DB, SP, CP, plus too many acronyms/letters to mention, for this brilliant thread from which i've learnt so much. 

Before finding this gem on ToS i was drip-feeding into Woodford Equity Fund etc, so you saved me there. Also prompted me to take control of my pension - the default lifestyle plan was moving me long US bubble (sell UK low, by FAANG high) and buying me bonds even though still years from retirement.

Since what little i know about finance/investing was all learnt from here, not sure i can add much value. However, I enjoyed listening to this yesterday from Michael Green (the clever guy warning on Grant Williams about the risks from passive investing, hat-tip this thread) by the charts guy from Macro Voices (also hat-tip this thread):

https://www.youtube.com/watch?v=PB47AZDqJm0

Also available on podcasts under "Market Huddle 104". The Michael Green bit is first 75 mins. In it he explains how he thinks high oil prices in 2005 triggered GFC1 and why he thinks retail investors shouldn't chase long volatility (question asked here yesterday). As with Roaul Pal (hat-tip again) he recommends younger investors diversify into tokenisation, although I'm still to find out what they're both talking about.

For us oilies, the charts guy is calling an energy bottom first week December (declaration: the other week a guest was ribbing him that every ship at the bottom of the ocean has a chart on it).

[MrXxxx]

23 hours ago, JMD said:

Excellent question DB!!, I say that because I was kinda asking a similar question a few posts back, but in reference to total return.                                                                                                                                                  Along with getting exposure to the US market, are there good telecoms covering Asia? I'm aware of Telstra and Singtel which look good, but are there other favourite ones? In particular is there a good potential Indian Telco?

What about AAF?...from memory it seemed reasonable in SPs coma scores.

[jamtomorrow]

8 hours ago, DurhamBorn said:

A lot of the cycle calls,in fact most of them on the road map need the transmission of liquidity to change from QE-Bank-loan-goods/services to QE-gilt-handout/investment-goods/service

Interesting timing DB, reminds me of this interesting Twatter thread that floated by the other day. Basic thesis: China pulled the rug from under the Ant IPO because they want to retain near-monopoly control over monetary transmission.

 

[leonardratso]

3 hours ago, sancho panza said:

I've had a butchers on investing.com.I think it'd need someone with @MvR expericne to set that chart up.If he can't then I'll have a search on the web.I've tried looking for the 12 month's futures price on inv.com but could only find the generic WTI futures which I presume is the front month which wouldn't really highlight any of the interactions we're interested in.

key thing is that as you say backwardation is a sign of scarcity in the physical markets in oil.

I need a reliable source for this data if it's a reliable indicator of a turn.I'll psot what I find.

any good

https://www.barchart.com/futures/quotes/CL*0/futures-prices

 

[Loki]

1 minute ago, jamtomorrow said:

Interesting timing DB, reminds me of this interesting Twatter thread that floated by the other day. Basic thesis: China pulled the rug from under the Ant IPO because they want to retain near-monopoly control over monetary transmission.

 

Even the Macrovoices podcast said it was just because he said some hurty words.

This makes more sense. 

[Democorruptcy]

3 hours ago, DurhamBorn said:

Im working full time again,but government keep sending my self employed furlough grants because i was self employed during the timescale and was a sole trader not Ltd.

Its been going into the oilies and of course into my SIPP so i could claim the tax relief as well on the free money 

It's not fair

[arrow]

1 hour ago, Cattle Prod said:

I agree with this, I must have a listen, thanks. I remember it very clearly. Our economies cannot afford expensive oil, they need to be essentially free. There were food riots in developing countries where energy and food (potash was going buck wild too) is a much higher % of their income, and unrest in the US, where again gasoline is a high % of low incomes. We've been on this oil price whipsaw for a while now, and I suspect high oil prices will emd this cycle too. Possibly when the govt can no longer print the money and hand it out to pay for it.

Another GFC would be fine with me, I just hope it's not war. Lack of oil supplies, either domestically, or imported, was a primary driver for German and Japanese belligerence in the 30s (where many see paralleks today) and led directly to WWII.

Well, Japan is till dependent on energy imports as it was back then. Japan imports 90% of its energy. It still hasn't got all its nuclear reactors up and running after Fukushima. Instead of getting 40% of its energy supply through nuclear now, it only has 3% and is hoping for 20% by 2030.

China is also dependent on energy imports. There's going to be conflict between Japan and China. Hopefully it'll be a proxy war and not direct conflict.

But I think Germany was different. Without its high unemployment, disillusioned people and constantly fighting political parties, there'd be no Hitler. If there's no Hitler wanting a Greater Germany there'd be no  generals who needed huge amounts of oil for their blitzkriegs.

 

Even Biden's media supporters like reuters are talking about the oil price needing to be higher.

"Any U.S. president needs affordable fuel for consumers. And for Biden, the price would need to be high enough to make clean energy alternatives to fossil fuels competitive in support of his ambitious climate plan."

So, he has to get the oil price high enough to make renewables attractive but not too high for consumers.

That's going to be an interesting balancing act.

 

https://uk.investing.com/news/commodities-news/factbox-how-a-biden-presidency-would-transform-the-us-energy-landscape-2247233

[DurhamBorn]

Contrarian in my says Biden will be hugely bullish for oil and gas,starting with telling Germany to stop building gas pipelines from Russia.US doesnt want Europe in Russia's pocket.That will be interesting how it plays out.

He will also double down on China like Trump to everyones shock.

 

[Loki]

1 minute ago, DurhamBorn said:

He will also double down on China like Trump to everyones shock.

 

In words or actions though?

I was going back through these threads earlier, are your indicators all still "flashing red" or are we in the calm before the storm?

[Causeway]

On 07/11/2020 at 14:47, DurhamBorn said:

No,companies like BAT earn a large part of their profits in $s,Oil companies obvious.Telcos like Vod and TEF both earn most earnings outside of sterling.

Im not 100% sold on sterling going down a lot though to be honest as i havent done much work on it,but still exect inflation assets to far outperform sterling.

This got me thinking about why my small nibble into Equinor early March recovered more initially than my other oilies:

https://www.xe.com/currencycharts/?from=GBP&to=NOK&view=1Y

If the current WTI/Brent dip keeps GBP-NOK down, might look again at Equinor or even Telenor. dyor all obv (newbie)

[Castlevania]

3 hours ago, MrXxxx said:

What about AAF?...from memory it seemed reasonable in SPs coma scores.

There’s a clue in the name as to which continent they operate in  

However, yes I like them and hold a broadly similar amount to my holdings in Vodafone and Telefonica.

[Castlevania]

50 minutes ago, DurhamBorn said:

Contrarian in my says Biden will be hugely bullish for oil and gas,starting with telling Germany to stop building gas pipelines from Russia.US doesnt want Europe in Russia's pocket.That will be interesting how it plays out.

He will also double down on China like Trump to everyones shock.

 

Yeah. Ambrose Evans Pritchard in the Torygraph wrote a couple months ago how he expected a Biden presidency to use the Paris Agreement on emissions to bully China.

[MrXxxx]

30 minutes ago, Castlevania said:

There’s a clue in the name as to which continent they operate in  

However, yes I like them and hold a broadly similar amount to my holdings in Vodafone and Telefonica.

Money is money whoever it is coming from (https://www.gsma.com/mobileeconomy/sub-saharan-africa/) :-)

[Castlevania]

4 minutes ago, Cattle Prod said:

And he won't be able to do either. A US president might be able to tinker around the edges on a well supplied market, like calling in favours with Saudi, but will be able to do nothing in a structurally undersupplied market, except scapegoat OPEC for high gas prices, and shout about cartels. This is what happened '05 - '08.

Will it be like Jimmy Carter telling the American people to put on an extra sweater as opposed to turning on the heating?

[MrXxxx]

23 hours ago, DurhamBorn said:

https://www.telegraph.co.uk/business/2020/11/07/rely-qe-lockdown-will-never-end/?li_source=LI&li_medium=liftigniter-rhr

Refresh and hit esc to read 

Where this is wrong is it wont end in a currency collapse until they cant print anymore and inflation is running out of control.Its loss of buying power that forces a currency dump as people rush to buy anything of value with it.

Sterling is likely to rise against the dollar until the dollar gets down to 88 or lower because liquidity is lagging in the UK.The BOE is around £100 billion behind on QE.

I expect another £100billion in spring,maybe £120 billion,then another £200 billion over the next 24 months.Then maybe a last £50 billion twice.

If we get a big kahuna then another £300 billion in the months after then £200 billion and two £50 billions.

So £420 billion more QE or £600 with a big kahuna.

When did we tell everyone this was going to happen at the end of the cycle?

 

The Bank of England is, to all intents and purposes, buying gilts directly from the government – albeit using the secondary market to claim it’s avoiding outright “banana republic” style money-printing.

 

 

Slightly off-theme but what are people opinion on the impact of this on state pensions i.e. traditionally if you had enough years for a SP but were still short it was wise to buy the additional years, given this super QE (with resultant inflation) will it still be such a good deal?

[Harley]

34 minutes ago, MrXxxx said:

Slightly off-theme but what are people opinion on the impact of this on state pensions i.e. traditionally if you had enough years for a SP but were still short it was wise to buy the additional years, given this super QE (with resultant inflation) will it still be such a good deal?

I want to buy extra years but it looks like they've tried to make it very difficult.  I still don't know how to do it.  It was far easier in the past.  

[arrow]

46 minutes ago, Cattle Prod said:

And he won't be able to do either. A US president might be able to tinker around the edges on a well supplied market, like calling in favours with Saudi, but will be able to do nothing in a structurally undersupplied market, except scapegoat OPEC for high gas prices, and shout about cartels. This is what happened '05 - '08.

Yes, I don't think he'll be able to do much. It's not in his control.

[MrXxxx]

23 minutes ago, Harley said:

I want to buy extra years but it looks like they've tried to make it very difficult.  I still don't know how to do it.  It was far easier in the past.  

I think you can only buy previous year that were missed or partly paid (and so do not count), but this understanding is on PAYE stamp and not self=employed stamp.

[leonardratso]

RE:SP, mine says i cant buy old missed ones when i was a contractor because they are too old, too long ago.

But... maybe someone can correct me, when i looked a coupla years back im sure the max for full SP was 30years, im on 33, but kept reading its 35years, is that correct did they add another 5 years on, or am i going biden with my memory.

[sancho panza]

7 hours ago, DurhamBorn said:

I agree on the banks,i simply dont consider them really because they are all last cycle.As you say they dont drive economies in a reflation,governments do.Market has forgot all about that.They still think credit creation is a banking situation forgetting that the bank the banks use (CB) is the ultimate credit creator and unlike the banks can direct into the economy through willing governments.Its actually fantastic to see that now happening because it was really the entire basis of this thread that that route would be taken.If it hadnt been the entire reflation cycle roadmap might/would of fallen apart.Luckily however the macro numbers etc showed that however much hardly anybody expected it,it would end up the only show in town.

I agree there is massive dislocation ahead in the credit markets and the stock markets.Incredible amounts of liquidity is going to swap asset classes and we cant be sure how it plays out,at least in the short term.

What will be interesting is to see if the CBs try to force down mortgage rates.Everyone is crying for it,and execting it,but im not sure they will.Its not a priority because the consumer isnt driving the economy now.

I think CB's will resort to any sticking plaster they can think of.Driving mortgage rates down is a sticking plaster imho.

When I was a kid,banks were financial intermedieaires who performed a utility function in the economy,moving payments between companies and lending money within the limits of cash reserve lending.The real cut and thrust of economic life was conducted by entrpreneurs across all sectors.

That changed in the 80's as banking became more and more central to wealth creation.

Basel banking regs came in ,Glass Steagall got repealed and banks gots their own prop desks.The bonus driven expansion of reckless lending was only going to end in tears..............but noone ever though it would end in redundancy for the banking classes.

As your thesis stated from the start-fair play to you,I wasn't thinking that far ahead-the govts were destined to step in when the banks no longer could.

 

I think the days are loomingwhen the banks go back to processing payments again.

[sancho panza]

7 hours ago, Barnsey said:

I'd suggest LTVs and product availability have already been restricted to GFC levels Sancho, job losses are mounting but only now moving up to middle incomes and therefore home owners.

The banks aren't daft,they can see the writing on the wall.My Brother in law used to be high in a UK bank.We were talking student debt and I asked about the oft quoted quasi fact that student debts don't count when you apply for a mortgage.He laughed.Told me they couldn't not take them into account.

They can see the furlough ending.They can see the leverage to property prices in the under 50's who are heavily mortgaged.They might get some free moeny,but what if they don't.

I'd be incredibly surprised if UK banks weren't preparing for a serious downturn.

 

[sancho panza]

6 hours ago, Cattle Prod said:

Think this is it (for Brent):

 

12 mth spreads (if I got the code right). Went above the zero line in early '17 as stocks were drawing down after the '16 low. Same thing will happen again imho.

Thanks for posting that CP.

Brent chart below.

I've highlighted two lines JUne 2017 to Sept 2018.Picture paints etc

[Talking Monkey]

1 hour ago, Harley said:

I want to buy extra years but it looks like they've tried to make it very difficult.  I still don't know how to do it.  It was far easier in the past.  

Is that missed years in the past or extra years, didn't know you could pay for extra years

[Harley]

1 hour ago, MrXxxx said:

I think you can only buy previous year that were missed or partly paid (and so do not count), but this understanding is on PAYE stamp and not self=employed stamp.

I know whst I can do but the mechanics are a problem.  You need a specific reference to make an electronic payment for a specific year and good luck getting that.  You have to contact them for that.  They have no function on line, even when logged in, to generate the reference.  Never used to be like that.

[Harley]

11 minutes ago, Talking Monkey said:

Is that missed years in the past or extra years, didn't know you could pay for extra years

Only for missed years.  That's what I meant by extra years - years extra to what you have paid - like for when you were working overseas. And time limits apply in which you can make such payments.  I did some a while back and want to do more.