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

[Chewing Grass]

4 minutes ago, sancho panza said:

People in the UK and the West in general have been used to much higher standard of living than their counterparts in many other countries around the worldover many decades.

A chunk of that has been down to the 'exhorbitant privilege' afforded them by the strength of their currency.

and this since 2008.

That privilege resulted in Mercedes being a mass market lease car, driven by young girls who just passed their tests and sitting outside social houses (rented/private/social) as 2K miles per year 'status symbols'.

Strong currency and low-interest rates to keep the plebs solvent and spending whilst having their pensions i.e. retirement trashed.

[DurhamBorn]

Just now, Chewing Grass said:

and this since 2008.

That privilege resulted in Mercedes being a mass market lease car, driven by young girls who just passed their tests and sitting outside social houses (rented/private/social) as 2K miles per year 'status symbols'.

Strong currency and low-interest rates to keep the plebs solvent and spending whilst having their pensions i.e. retirement trashed.

BOE has been printing the welfare budget for a decade mostly and the amounts have caught up with wages for half the population.Like you say its incredible.

[reformed nice guy]

Imagine being a Chinese student coming to the UK, looking into the window of a council house and seeing a 80in TV for a family that hasnt worked in multiple generations. You think back to the relatives back in China working 12 hour days to make the parts for it.

They must find us mad

[Barnsey]

 

[jamtomorrow]

Been trying to round up some ideas on the timing of when BTC properly "breaks cover", specifically in terms of when its impact on wider macroeconomics becomes impossible to ignore.

I came across this from June and thought worth sharing:

https://coinmetrics.substack.com/p/coin-metrics-state-of-the-network-9b9

Here's the standout passage:

With daily trading volume of only $4.1 billion, Bitcoin’s spot markets are still minuscule in comparison to U.S. equity markets, U.S. bond markets, and global foreign exchange markets. The interpretation is that Bitcoin, in its current state, is most comparable in size to a large capitalization stock rather than a distinct asset class. A large institutional investor such as an endowment, pension fund, or sovereign wealth fund might reasonably conclude that Bitcoin is only suitable for a portion of the already small allocation to alternative assets rather than carving out a separate allocation towards it. 

If historical growth rates can be maintained, however, Bitcoin’s current daily volume from spot markets of $4.3 billion would need fewer than 4 years of growth to exceed daily volume of all U.S. equities. Fewer than 5 years of growth are needed to exceed daily volume of all U.S. bonds. 

Bearing in mind those are extrapolations to full parity with existing markets, I'm expecting the effects outside cryptoworld to reach "impossible to ignore" long before parity.

@DurhamBorn, have you tried incorporating crypto in your incarnation of the Fidelity model?

[Majorpain]

9 hours ago, spygirl said:

The fed will turn when prices get higher - they will as China is no longer exporting deflation and in the shithouse for the foreseeable future.

China is to the US what Germany is to the UK - supressing their currency to make their goods artificially cheap.

The orange one put at stop to that, and i imagine he has quite a few things cooking for his second term that will make life for the commies quite unpleasant.  If China had been able to wait another 10-15 years the US would have been dancing to their tune, as it is the US president has control of things ATM.

[spygirl]

1 minute ago, Majorpain said:

China is to the US what Germany is to the UK - supressing their currency to make their goods artificially cheap.

The orange one put at stop to that, and i imagine he has quite a few things cooking for his second term that will make life for the commies quite unpleasant.  If China had been able to wait another 10-15 years the US would have been dancing to their tune, as it is the US president has control of things ATM.

Bar a few years after the war, the Germans have never had a cheap DM policy.

Germany out designed and quality the UK.

 

 

[Majorpain]

4 minutes ago, spygirl said:

Bar a few years after the war, the Germans have never had a cheap DM policy.

Germany out designed and quality the UK.

DM isn't the problem, Euro is!

[sancho panza]

On 13/11/2020 at 08:54, Cattle Prod said:

The one area I differ with people here is on housing. In the last inflationary period, housing was perhaps the best thing to own (according to my old man, anwyay!). It's a classic inflation hedge, and I don't quite understand DB when he says it'll be one of the worst hit areas of the UK in the coming inflation. I agree that the SE is bloated to the rest of the country, but if you own a property at a reasonable price other parts of the country, I think it'll serve you very well as a hedge. (a) houses are going to be the first thing more well off people are going to want to 'grab', (b) the materials in the house are going to inflate, per the commodity themes here, and overall prices will have to keep up or else new houses will become too expensive relative to existing stock. A house was a very good thing to buy in the 70s, even if you didn't manage to own it outright or get a fixed rate, you still got it essentially for free as long as you could service the debt.

Agree on Council Tax, but we might see some good old fashioned tax riots on that one. It's an awful tax.

I think there are a couple of caveats/provisos.I incude some data below which I've had to finish at 2016 as I haven't time to find a 2020 source and my point remains the same anyway.The mrotgage repayment table is indicative.

Genererally,you're right hosue prices have beena good inflation hedge in the past.However the key feature of the 70's is that wages kept pace with infaltion.

 

However,there are two groups here imo.

1) People who own outright/have fixed rate mrotgages to see them to the end of their term/viable overpayment strategy

2) Everyone else with varying degrees of leverage

 

Group 1 will find housing a decent infaltion hedge depending when they bought and at what price.Plus or minus...

Group 2 is where the problems will most likely come and whether hosuing provides a decent inflation hedge depends on whether you can ride it through the trough.

Below are the data for hosue prices and wages from relaible sources.It's plain that wages kept pace with HPI during the 70's.Will the same happen in an environment where the average salary in Leicester is circa £25k and the average 3 bed semi £200k and the biggest employers here are the two Uni's,three hosptials and two councils(city and county)?I'm not so sure.It relies on a key number of things such as fiscal spending maintaining itself,unlikely imho-given the vast size of the state,the consistent fiscal deficits and the booming national debt.

Another key consideration is that the hosuing market prices are set at the margin where vendors need to sell.We also know the bankign system is more over leveraged than 2006.

So the prospect of a decent downdraft in hosue prices could be a significant feature of an economic dislocation.That may provide an opportunity for people to buy in at reasonable house price/salary multiples to then use as an inflation hedge.

Below the HP/Salary data is a screenshot of a 25 year repayment plan.The risks of non payment or rising IR's are patent.If IR's lift to 5%,then the inital interest payments are circa £9000 rather than £4000.Given hwo many people are highly leveraged at the start of their mortgage or via HTB,there are a lot that would be unable to take that uplift

So in essence a lot of hosuing potential as an inflation hedge relies on your abiblity to stay in the game.The belwo mortgage is 2.29% on £180k.Years 1-15 are the crucial ones where I would suspect default risk is highest.

Ave House price       Ave Wage Manual             House/Wage mulitple

1970 £3920k                   £1500                          2.61

1980 £19273k                 £6448                         2.98

2016  £205,555              £36,400                      5.64

UK inflation data 1970's-Macrotrends

Land Reg House price Data 1970+

ONS UK Wage data 1950 on

 

https://www.mortgagecalculator.uk/

[geordie_lurch]

Thanks for all the housing chat in this thread as I think it's vital to look beyond the other inflation assets we are all already on board with here and spread what little 'wealth' some of us have. The current environment does remind me a lot of the olden days on ToS wondering whether to sell to rent before the 2008 crash (I sold in 2006), I then bought again in 2009 when everyone was saying it was madness and then again in 2014 which worked out well thankfully but only because the powers that be did things none of us predicted.

However I now find myself in a different position as I'm now in my 40s and renting again. I thankfully have some cash coming my way and I'm realistically going to need a base in a certain area to be near my children so putting that cash into a fixed rate mortgage of minimum 5 years, possibly 10 even if house prices fall back from today's levels 20% I will still be better off than renting and probably having to pay increasing rent that landlords will try to pass on given what we all believe is coming.

Everyone's circumstances are different obviously but fixing in at the mortgage rates that are still currently available if you need to be in a certain area for that same time period, can overpay etc as DB mentions seems to have very little downside compared to there being no money available for mortgages when or if we FINALLY get the house price crash

[AWW]

11 hours ago, spygirl said:

Simply put - medium to long term houses are a hedge on wage inflation.

That doesn't pass the sniff test when you look at the last 20 years. Big HPI with depressed wages.

[spygirl]

12 minutes ago, sancho panza said:

I think there are a couple of caveats/provisos.I incude some data below which I've had to finish at 2016 as I haven't time to find a 2020 source and my point remains the same anyway.The mrotgage repayment table is indicative.

Genererally,you're right house prices have beena good inflation hedge in the past.However the key feature of the 70's is that wages kept pace with infaltion.

 

However,there are two groups here imo.

1) People who own outright/have fixed rate mrotgages to see them to the end of their term/viable overpayment strategy

2) Everyone else with varying degrees of leverage

 

Group 1 will find housing a decent infaltion hedge depending when they bought and at what price.Plus or minus...

Group 2 is where the problems will most likely come and whether hosuing provides a decent inflation hedge depends on whether you can ride it through the trough.

Below are the data for hosue prices and wages from relaible sources.It's plain that wages kept pace with HPI during the 70's.Will the same happen in an environment where the average salary in Leicester is circa £25k and the average 3 bed semi £200k and the biggest employers here are the two Uni's,three hosptials and two councils(city and county)?I'm not so sure.It relies on a key number of things such as fiscal spending maintaining itself,unlikely imho-given the vast size of the state,the consistent fiscal deficits and the booming national debt.

Another key consideration is that the hosuing market prices are set at the margin where vendors need to sell.We also know the bankign system is more over leveraged than 2006.

So the prospect of a decent downdraft in hosue prices could be a significant feature of an economic dislocation.That may provide an opportunity for people to buy in at reasonable house price/salary multiples to then use as an inflation hedge.

Below the HP/Salary data is a screenshot of a 25 year repayment plan.The risks of non payment or rising IR's are patent.If IR's lift to 5%,then the inital interest payments are circa £9000 rather than £4000.Given hwo many people are highly leveraged at the start of their mortgage or via HTB,there are a lot that would be unable to take that uplift

So in essence a lot of hosuing potential as an inflation hedge relies on your abiblity to stay in the game.The belwo mortgage is 2.29% on £180k.Years 1-15 are the crucial ones where I would suspect default risk is highest.

Ave House price       Ave Wage Manual             House/Wage mulitple

1970 £3920k                   £1500                          2.61

1980 £19273k                 £6448                         2.98

2016  £205,555              £36,400                      5.64

UK inflation data 1970's-Macrotrends

Land Reg House price Data 1970+

ONS UK Wage data 1950 on

 

https://www.mortgagecalculator.uk/

If you are lucky enough to live in an area where HPE is 'normalish' i.e. under 5

The ability to fix long and low and overpay is a no brainer.- best investment evah!

Your example with a 200/m overpayment. If theres two thats 100/m month - about ~23/w, . Well into should not be missed.

Even without much HPI - which I doubt we'll see in the UK, at least real terms, the mortgage is derisked by year 10.

Its that compounding interest again.

 

Overpaying would save you £15,194 in interest alone, and mean you pay the debt off in full 6 years & 4 months earlier.

---

Normally you repay £788 per month. If you regularly overpay £200, you'd be mortgage free 6 years and 4 months earlier. Your total payment over this period would be £221,277.

 

 

Year	Without Overpayment	With Overpayment
0	£180,000	£180,000
1	£174,599	£172,174
2	£169,074	£164,167
3	£163,421	£155,976
4	£157,637	£147,595
5	£151,720	£139,020
6	£145,666	£130,248
7	£139,473	£121,273
8	£133,136	£112,090
9	£126,653	£102,695
10	£120,020	£93,084
11	£113,234	£83,250
12	£106,291	£73,189
13	£99,187	£62,896
14	£91,920	£52,365
15	£84,485	£41,591
16	£76,878	£30,568
17	£69,095	£19,290
18	£61,132	£7,751
19	£52,986	£0
20	£44,651	£0
21	£36,124	£0
22	£27,400	£0
23	£18,474	£0
24	£9,342	£0
25	£0	£0

 

[DurhamBorn]

@jamtomorrow no,iv never invested in crypto,dont understand it and wont be for a while yet.Id never say never of course and i have thought about putting a small investment of a couple of k into that Swedish fund just in case.

[spygirl]

38 minutes ago, sancho panza said:

I

Ave House price       Ave Wage Manual             House/Wage mulitple

1970 £3920k                   £1500                          2.61

1980 £19273k                 £6448                         2.98

2016  £205,555              £36,400                      5.64

UK inflation data 1970's-Macrotrends

Land Reg House price Data 1970+

ONS UK Wage data 1950 on

 

https://www.mortgagecalculator.uk/

 

Theres a lot of price illusion going on. And the HPE cycle is a lot more volatile than most people understand.

In 1988 the London HPE was ~6.

In 1996ish it was under 3

Near me the ate 90s saw HPE around 2.

 

 

 

[jamtomorrow]

4 minutes ago, DurhamBorn said:

@jamtomorrow no,iv never invested in crypto,dont understand it and wont be for a while yet.Id never say never of course and i have thought about putting a small investment of a couple of k into that Swedish fund just in case.

Fair enough - but is there an obvious way it could be worked into the Fidelity model nonetheless? I expect you'd have to make some heroic assumptions, but in my view there are only two BTC futures that matter: BTC goes to zero "soon" (in which case, nothing worth modelling); BTC becomes further entrenched in a "digital gold" role.

That second possibility: is there any sense in which it could be modelled as a "gold 2"?

[AWW]

20 minutes ago, DurhamBorn said:

@jamtomorrow no,iv never invested in crypto,dont understand it and wont be for a while yet.Id never say never of course and i have thought about putting a small investment of a couple of k into that Swedish fund just in case.

I think it's worth having a small allocation, just in case BTC does ever become the much vaunted "digital gold". I've got a bit over a grand's worth and view it as cheap insurance.

This is the best explanation I've read of the nuts and bolts https://michaelnielsen.org/ddi/how-the-bitcoin-protocol-actually-works/

[jamtomorrow]

34 minutes ago, AWW said:

I think it's worth having a small allocation, just in case BTC does ever become the much vaunted "digital gold". I've got a bit over a grand's worth and view it as cheap insurance.

This is the best explanation I've read of the nuts and bolts https://michaelnielsen.org/ddi/how-the-bitcoin-protocol-actually-works/

Bear in mind you'll have to access BTC ETNs from outside the UK from Jan 1, after FCA effectively banned UK providers from offering them: https://www.standard.co.uk/business/bitcoin-crypto-ether-ripple-a4564786.html

Note that HL have already welched on what they said for the article: "Hargreaves Lansdown ... spokesman said investors will still be able to invest until the rule comes into effect in January". Not true: they pulled up the drawbridge a few weeks back, and you already can't buy XBT (I know for sure because I was looking into XBT for CGT planning).

Possible interpretation as a huge contrarian signal of course, but as ever DYOR etc

[Democorruptcy]

16 hours ago, UnconventionalWisdom said:

On the flip side housing should be a lot more affordable. The majority of young people are using ryanair as a means of escape. An industrial, inflationary cycle combined with falling house prices could mean a lot more owner occupiers at the expense of BTLers. 

I'd happily replace European trip for UK breaks if it meant I could afford a nice place.

I'm in a UK holiday destination and I don't see more UK breaks increasing my chances of affording a nice place here. Quite the opposite, even different planet. I think long term BTL is shifting to holiday lets. £10,000+ covid grants for having an AirBnb closed before the summer season then fully booked doesn't help.

[Thorn]

2 hours ago, DurhamBorn said:

@jamtomorrow no,iv never invested in crypto,dont understand it and wont be for a while yet.Id never say never of course and i have thought about putting a small investment of a couple of k into that Swedish fund just in case.

For leverage to Bitcoin there are companies like MARA, Argo blockchain, Hive which seem to go up when it rises.

Like my pizzas. Which by now are So Bloody Good, thanks again DB.

Wee Ferrari...Heat turned up to nearly full, heat the pizza with lid up for a minute first before you close it down to get a harder base so the slices do not flop when you lift them. 
Unbelievable.  Grazie once again. 

 

[UnconventionalWisdom]

34 minutes ago, Democorruptcy said:

I'm in a UK holiday destination and I don't see more UK breaks increasing my chances of affording a nice place here. Quite the opposite, even different planet. I think long term BTL is shifting to holiday lets. £10,000+ covid grants for having an AirBnb closed before the summer season then fully booked doesn't help.

IO BTL will get hammered when interest rates rise. Not sure how most holiday lets are funded- do banks lend in the same way as BTL?

[DurhamBorn]

https://www.telegraph.co.uk/business/2020/11/13/eu-hints-brexit-energy-blockade-power-blackouts-hollow-threat/

Just the start of this sort of thing.Of course the only reason the UK brings in the energy at peak is because it is a bit cheaper and we dont actually need it.That is as long as you fire up those lovely gas turbines and have DRAX running at full pelt on its wood chips.

The whole world will be like this soon.Blocks using energy supply as sticks to beat with and countries working out long term deals with countries and supplies they can trust.

If bozo Boris announces the end of combustion engines by 2030 it just moves the demand from oil to gas,but the gas price will go up much more than the oilies lose in oil sales.Those just go somewhere else,many countries still use two stroke engine  .

The other thing is the fact the EU will need UK wind power later in the cycle as the article mentions,though without more gas use it will be nowhere near enough.

Slowly slowly the energy sector is starting to see articles like this,moving back into centre stage.Lots of hyperbole of course,but underneath the road map is falling into place.Probably the story of the cycle.

[DurhamBorn]

22 minutes ago, Thorn said:

For leverage to Bitcoin there are companies like MARA, Argo blockchain, Hive which seem to go up when it rises.

Like my pizzas. Which by now are So Bloody Good, thanks again DB.

Wee Ferrari...Heat turned up to nearly full, heat the pizza with lid up for a minute first before you close it down to get a harder base so the slices do not flop when you lift them. 
Unbelievable.  Grazie once again. 

 

Best thing ever arent they.I buy Italian Caputo flour in bulk and fresh yeast and freeze that in 25g portions.I use the pizza express passata usually £1 from Tesco,enough for 5 pizzas.Il use that little trick myself for the base.I actually use trays now usually so i can have 3 or 4 pizzas ready to go in one after the other.When i have family nights they all say are you making pizzas,with a pasta bake chips etc i usually feed 10 for around £10.

I also really love my Morphy Richards 1l soup maker.20 mins press one button and fantastic soup.48p for Broccoli 1 potatoe,1 onion,1 kallo low salt stock cube,black pepper,pink salt,touch of cummin and touch of tumeric and touch of mixed herbs.

4 servings for 85p.Only tip is if anyone gets one is it says use cold water,iv found it doesnt cook enough if you do,so i use half boiled from the kettle.

Of topic i know,but fantastic healthy food dirt cheap means more for investing,or less needed to retire.Thats on topic 

 

[Democorruptcy]

34 minutes ago, UnconventionalWisdom said:

IO BTL will get hammered when interest rates rise. Not sure how most holiday lets are funded- do banks lend in the same way as BTL?

There seems to be a trend here of public sector workers in more secure jobs so presumably no problem getting finance if they need it, buying 2nd homes to retire to years ahead but letting them out for holidays now. 

Mortgages and tax breaks.

[MrXxxx]

20 hours ago, geordie_lurch said:

This seems like a decent new video for followers of this thread going by the title and quick skim of the description but not watched it yet myself...

 

30 mins on summary of first.

Key statements:

FIAT survival=confidence.

Portfolio=ignore short-term noise, aim yrs.

 Commods time has come but diversify just in case.

Next 10 yrs everyone will lose, just some more than others, make sure latter via portfolio choices.

[spygirl]

2 hours ago, UnconventionalWisdom said:

IO BTL will get hammered when interest rates rise. Not sure how most holiday lets are funded- do banks lend in the same way as BTL?

IO BTL are getting hammered now.

95% of the  idiots just dint know the tax changed 5 years ago.

Holiday let mortgages (FHL) are very rare. 

Only Leeds BS offer them.

Other small BS do, but tend to restrict the mortgage to housing in a a very small area.

I reckon the FHL laons will take down Leeds BS.