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

[JMD]

6 hours ago, UnconventionalWisdom said:

 

 

But is anyone here still buying commode since their run up? Of course uranium does still look cheap and also its a fantastic contrarian play, so what's not to love? (Metallurgical/steel making coal was also cheap last time I looked)

[Castlevania]

4 hours ago, DurhamBorn said:

Remember everyone,its not just hard assets,its companies that gain from the inflation as well.Those who can push the inflation and run ahead of it.That OFCOM and BT is a prime example.

End of a long disinflation,telcos invest billions but get very little return for it.The profits stand still while debt increase.Shares get sold and sold.

Regulators go to said companies saying we need this/that.Company exec says oh we might build a bit but for now we need to protect from being bought out and asset stripped our shares are so low.Shareholders are leaving,we need to hand them the cash not invest.

OFCOM goes back to cushy office,and think crap,government on our case and we have stuffed the telcos too hard.

So just before a reflation begins they say to the telco,oh built it and we wont regulate prices for at least a decade.Government who need the investment nod it through,after all inflation is dead right,who cares.

BT then build a network with debt coupons of 3% max while putting prices up on it by inflation +3%.A service everyone nearly will use.Free cash exlodes.

Other telcos then have a much higher floor for their pricing and all the boats float higher.

100% classic macro contrarian cross market work.Everyone looking the wrong way at a key inflection point.

De-complex hard assets for the base of the portfolio,then sectors who can push the inflation around them,not have it land on their heads.

 

I was thinking about this earlier today after your initial post on Ofcom and BT. The government are desperate for investment and thus the creation of jobs, that they’ll allow above inflation pricing. I think it ties in with what I think you or @sancho panza mentioned about where we were in the cycle. They’re scared of high levels of unemployment far more than inflation.

[Castlevania]

3 hours ago, Harley said:

Good point - thinking hat on - alas BT and co (e.g. VOD) are doing my head in regarding (previously reliable) buy signals (i.e. pretty much none these last few years!) - up c.30% on the monthly (over the last two months) but not the usual strong buy signal underpinnings things - maybe we are at extremes and normal things don't behave or maybe a fake (undergoing a bottoming process - maybe that Sept20 low needs retesting?).

As stupid as it sounds, if you plan on holding long term does it matter if you paid ~£1.30 now for either Vodafone or BT as opposed to a ~£1.00 six weeks ago?

[Harley]

25 minutes ago, Castlevania said:

As stupid as it sounds, if you plan on holding long term does it matter if you paid ~£1.30 now for either Vodafone or BT as opposed to a ~£1.00 six weeks ago?

Absolutely not (apart from a remote tail risk or broad trend) - I'm just being myopic with my "pay to play" approach (initial positions (the pay) and then wait for buy signals to add to them (the play)), plus well worried about a 1929 style fall (relatively small fall, bounce, then the real biggie).

[Harley]

21 minutes ago, JMD said:

so what's not to love

I'll probably regret saying this - no "carrying" div!

[Harley]

1 hour ago, DurhamBorn said:

I think if we get a credit event/BK those lows might be re-tested.Market will want to shake out weak hands and remove as many new buyers as it can before the long grind up.This cycle will see most people getting off at points only for inflation areas to keep going up i think.

Agreed, value investing is a well discussed thing atm (at least in our circles) and the money flows seem to be showing it so I could envisage a retest come shakeout of those with no conviction, with the herd getting in later after a solvency crisis has shown the importance of fundamentals such as cash, real assets, resilience to inflation, etc.

 

[Harley]

46 minutes ago, JMD said:

DB, so telcos, ciggies, energy, steel and chemical industries. Have you had any thoughts recently on other (non pm/commodity) inflation front-running sectors? For example cigarette investment was a bit of a revelation to me when you first introduced them, and I note that your other favourite of gambling companies is being further deregulated in the US. Not strictly decomplex sectors, but both are 'addictive pastimes'... so perhaps alcohol/video games also fit same criteria, however I think these ones have many competitors so not easy to pick winners.

I've wrestled with this and changed my approach having built initial positions in a number of our beloved industries - I now just run my screens and see what pops up, looking at each one on its merits, regardless of industry, etc but nothing wow so far.

[DurhamBorn]

39 minutes ago, Castlevania said:

I was thinking about this earlier today after your initial post on Ofcom and BT. The government are desperate for investment and thus the creation of jobs, that they’ll allow above inflation pricing. I think it ties in with what I think you or @sancho panza mentioned about where we were in the cycle. They’re scared of high levels of unemployment far more than inflation.

Exactly.It was me,governments and CBs fear unemployment more than inflation and thats one of the critical cross market things to look for.Telecom infrastructure thats robust etc for £5 extra a month on bills.Ofcom have done exactly what i would expect,and actually the right thing,macro forced their hand.Thats the thing with the crowd with no understanding of cycles.They project forward the past,and even then only mostly the past they can easily remember.

I think the sector will do 150% to 300% including dividends over the cycle unless some early takeovers.Violent pullbacks along the way.Hopefully return on capital employed will move higher each year of the cycle,thats the key number for telcos given their huge assets and big fixed debt loads.

[Chewing Grass]

Just seen an advert about something called 'go henry' the debit card for kids.

Apparently 'go henry' is designed to teach children about money (not get potential bank accounts and sell services) and parents can pay pocket money into it for children to spend rather than letting them use cash.

Can't actually see it doing their maths skills any good but hey-ho somebody thinks they can make enough money out of it to advertise it on TV.

[UnconventionalWisdom]

1 hour ago, JMD said:

But is anyone here still buying commode since their run up? Of course uranium does still look cheap and also its a fantastic contrarian play, so what's not to love? (Metallurgical/steel making coal was also cheap last time I looked)

I was more implying that we are likely to be on the right track. Most pension schemes and MSM still pushing equities but this could evidence we are hitting the top for the likes of FAANGS and Tesla.

I did actually add to my physical gold and silver but that was more because I recently received an inheritance. I believe there will be a big pull back in physical but an even greater one in equities. Just covering myself if the BK doesn't happen. If it does, opportunity to get more along with reflation stocks.

[UnconventionalWisdom]

1 hour ago, Castlevania said:

As stupid as it sounds, if you plan on holding long term does it matter if you paid ~£1.30 now for either Vodafone or BT as opposed to a ~£1.00 six weeks ago?

I will add to my BT and VOD. I am up by a few % as I started buying about a year ago. It's human nature to value losses more than gains. I wouldn't focus on the past, just focus on things going forward. I will continue to buy as there's a chance the BK won't happen. If it does, we can pick up even more. Telecos will do well going forward and as DB says they can cover their debt and wipe out the competition going forward. 

[Harley]

18 minutes ago, UnconventionalWisdom said:

I believe there will be a big pull back in physical but an even greater one in equities.

Oh dear (thoughts on why?) - but fortunately I really have a hard time not underpinning myself with a balanced asset portfolio, with the cleverness (or not) reserved for the detail of what comprises each of those asset classes (e.g. in equities, growth versus value versus income, which regional split, etc) - like the balanced portfolio has my back.

[Harley]

8 minutes ago, UnconventionalWisdom said:

I will add to my BT and VOD. I am up by a few % as I started buying about a year ago. It's human nature to value losses more than gains. I wouldn't focus on the past, just focus on things going forward. I will continue to buy as there's a chance the BK won't happen. If it does, we can pick up even more. Telecos will do well going forward and as DB says they can cover their debt and wipe out the competition going forward. 

I'm well stuffed on VOD allocation wise atm (unless I reduce the number of target holdings) so am more interested in looking for others, so for example recently nibbled at a Japanese communications company (same with Tobacco, etc).

[UnconventionalWisdom]

Just now, Harley said:

Oh dear (thoughts on why?) - but fortunately I really have a hard time not underpinning myself with a balanced asset portfolio, with the cleverness (or not) reserved for the detail of what comprises each of those asset classes (e.g. in equities, growth versus value versus income, which regional split, etc) - like the balanced portfolio has my back.

Race for liquidity if equities get hit. There's a lot of dump investment going on- people going into FANNGS because they use the stuff, buying TESLA because it's gone up and they believe the biggest bullshitter Musk that he can conquer the auto industry. I don't have the same knowledge as you in analysing these companies but it all feels very 2001!

With physical, I always get a little nervous when anything increases for a long time- gold price has been steadily increasing for more than 2 years. Some people will want gains even if there isn't a pullback. 

I still have faith that gold will do well depite the pullback so happy to add to my position. 

[UnconventionalWisdom]

7 minutes ago, Harley said:

I'm well stuffed on VOD allocation wise atm (unless I reduce the number of target holdings) so am more interested in looking for others, so for example recently nibbled at a Japanese communications company (same with Tobacco, etc).

I would like to look at more too. I lived in South Korea for just over a year in 2009. Was amazed to see how much faith they had in their products- everything techwise was Korean. LG or Samsung, they really got to understand exactly what the customer wanted by understanding what the locals were telling them. They had great infrastructure- solid state street lighting everywhere. Came back to England and my hometown saved energy costs by turning the lights of one side of the street off. I was amazed that we weren't up to speed. Korea and Japan have the opportunity to do well in a reflation/inflationary environment as tech development will be needed due to staff costs and money flowing into the economy. I personally don't know too much about particular companies but something worth looking into. Taiwan could also be in a good position as they also have good worldwide distribution. 

[Harley]

4 minutes ago, UnconventionalWisdom said:

Race for liquidity if equities get hit. There's a lot of dump investment going on- people going into FANNGS because they use the stuff, buying TESLA because it's gone up and they believe the biggest bullshitter Musk that he can conquer the auto industry. I don't have the same knowledge as you in analysing these companies but it all feels very 2001!

With physical, I always get a little nervous when anything increases for a long time- gold price has been steadily increasing for more than 2 years. Some people will want gains even if there isn't a pullback. 

I still have faith that gold will do well depite the pullback so happy to add to my position. 

Well pointed out, agreed, it does - it feels like an ambush where you guide people towards the guns, having sealed off their obvious (because they panic) bug out route.

[Loki]

10 minutes ago, Cattle Prod said:

Huge spike in M1 in recent weeks. Looks like 500bn in a week! The steepest increase all year. Where the bloody hell did that come from?? I didn't see any stimulus cheques go out. Half a trillion...is this physical cash?!

 

 

 

Where would minted bullion fall on the 'M' series of charts?  And would it be recorded at face value or spot value?

[Loki]

10 minutes ago, Cattle Prod said:

The definition says "currency" and in the US, coin bullion is currency, so yes I guess. What are you thinking? They have 261m oz gold in treasury stocks, but only 2.7m of that is coin. But lets say they nominate the lot as coin in an accounting trick. And then (finally) mark it to market. At $1850, thats $483 bn!

Let's start a conspiracy theory, they all seem to be coming true this year 

Not a bad effort, but where are the lizards and the Planet X's?! Come on man 

 

(Yes, you've actually fleshed out my half-baked idea better than I could ever have hoped to )

[DurhamBorn]

When M1 exceeds M2 growth its a big signal that corporates and other entities are building cash to invest in capital goods and investment in the real economy.They have raised debt (FED flooding the pipes) and its sitting waiting to invest in readily available money/currency.

It signals something very important.Companies and entities are about to seek higher returns out of the dollar be moving dollars borrowed into real good and assets.

Dollar down commods and assets priced in dollars up.Watch for M2 growth to fall away from M1 growth.Thats because entities are pulling cash into accounts M1,but then spending it on assets so M2 growth falls away.If M2 growth remains the same as M1 we remain in dis-inflation.Its the difference in the growth rates that matter.M1 much higher than M2 inflation in assets imbound.

[Loki]

I love how @DurhamBorn can explain in one post (In a way I can understand) what a financial website would spend 5 pages filling with words words words words words words words words words words words words 

[DurhamBorn]

Remember when i said for inflation they needed to print back all the dis-inflation in the economy?

Well here is the graph to show the affect.Adjust to 50 years on the graph to see things best.

https://www.longtermtrends.net/m2-money-supply-vs-inflation/

See how cumulative M2 has blown through cumulative GDP at last.?

Notice from 1990 how money supply/stock fell away from GDP.Dis-inflation from the east and borrowed debt over present money.

The only time it got close was after the financial crisis but couldnt quite pull away.That was due to most of the QE rebuilding bank balance sheets instead of building demand .The 1990 to 2008 on the gragh can be seen why the damage was done to the banks.M2 way below GDP.

 

 

[Noallegiance]

1 hour ago, Cattle Prod said:

Huge spike in M1 in recent weeks. Looks like 500bn in a week! The steepest increase all year. Where the bloody hell did that come from?? I didn't see any stimulus cheques go out. Half a trillion...is this physical cash?!

 

 

Bond buying?

[DurhamBorn]

5 hours ago, JMD said:

DB, so telcos, ciggies, energy, steel and chemical industries. Have you had any thoughts recently on other (non pm/commodity) inflation front-running sectors? For example cigarette investment was a bit of a revelation to me when you first introduced them, and I note that your other favourite of gambling companies is being further deregulated in the US. Not strictly decomplex sectors, but both are 'addictive pastimes'... so perhaps alcohol/video games also fit same criteria, however I think these ones have many competitors so not easy to pick winners.

Ciggies have pricing power.Wages go up 20% ciggie smokers pay 20% more.Industrial companies like Caterillar etc have pricing power in a reflation,but the stocks are already high.We might see other areas open up once we know we are into the cycle.Still a big risk of a huge derivative event yet so still need to tread carefully.

[Noallegiance]

46 minutes ago, DurhamBorn said:

Still a big risk of a huge derivative event yet so still need to tread carefully.

I've heard this from many commentators but don't understand it.

Can you elaborate?

[DurhamBorn]

10 minutes ago, Noallegiance said:

I've heard this from many commentators but don't understand it.

Can you elaborate?

Trillions in derivatives out there with counterparty after counterparty risk.Nobody knows what happens if some roll over what will happen.Vod have billions of debt and derivatives for instance.Derivatives are to cover currency risk mostly but what happens if they claim and then the counterparty claims from their counterparty but that counterparty cant pay?.They go under,Vodafones counterparty goes under,Vodafone have to swallow the currency loses.

Now likely they could swallow it ok.However what about insurance companies,banks,etc etc.Its a minefield and a bomb under the financial system.