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

[sancho panza]

11 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 remember some time back you saying this in much simpler terms as a way of explaining why BT and to  a leser extent the Socttish Play were cutting divis to bring the regulators on board.I also remember you predicting that BT were goign to get a good deal from the regulator on ths basis outlined above.A tick on both counts DB,fair play.

A few years back-2017 or so- I designed a rough portfolio for my family to aim for if anything unfortunate happened to me.It was centred on telecoms20-25% and oil was only 10%.Funny how price changes everything for the time being.But also that the thesis has changed.

I've said before,I'm roughly in line with DHunter seeing a BK next year,so I'm hoping for a second bite at the broader telco sector after that especially given how much debt there is in the sector(thouhg much of it cheap).We're nowhere near our full telco holidng,as I've been investing us in oil&gold(but the opportunity of the past 6 months were too much) but I'm really impressed by what's been posted re BT over the last few days.

7 hours 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)

Must say,I have picked up some more commodities but only before recent spike.Got a choice Monday on buying a last few oilies or another chunk of BT/Vod.

I'm still drawn to oil here.

The telco's are long term decade long plays here,whereas oil offers the prospect of a sale and repurchase pre/post BK.

7 hours 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.

It was DB and I remember that too .he's put some pearls on here over time.The irony is that there complete fear of unemployment virtually guarantees higher inflation which guranatees higher unemployment.

7 hours 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?

We got some BT at £1-10 and £1.Toying with adding some more jsut to get the weighting up to a level where I can jsut leave them for a decade if they run.CHance of some more after a BK possibly but Vod went up through 08.

At these levels BT could well do a BAT's/BLT from 2000 and be paying out nearly as much in divi in a decade as we've paid for the stock now.

[sancho panza]

6 hours ago, DurhamBorn said:

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.

That's the thing.People need their broadband like they need their oil and gas.Consumers don't really need foreign holidays,new cars,new phones etc etc.There are a lot of places people can cut back to increase their spending on life's essentials.

I think there's a real logic to reamining invested narrowly here in the decomplex areas for a time yet.

Ref the bit in bold,people need to be looking at 200 years of economic history not jsut the last 20.But then it's a disease that afflicted many including the CBers.

6 hours ago, UnconventionalWisdom said:

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.

There are some major losses coming for the broad indices.There was an excellent discussion on the pros and cons of passive investing by @Harley some time back iirc.Most of the moeny is being pushed into overpriced big tech stocks,not much else.

[Castlevania]

1 hour ago, DurhamBorn said:

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.

The derivatives will mostly now (older contracts entered pre financial crisis when the derivatives market was still something of the Wild West probably won’t) be collateralised by either cash or government bonds up to the present value of the derivative, which mitigates a lot of the risk.

The big issue for the banks (and for their derivative counterparties) are their lending books.

[sancho panza]

4 hours ago, Cattle Prod said:

Physical oil market being tight all over the wires, the futures traders have caught up with quicker than I thought they would, and the curve is backwardating. We spotted it weeks/months ago though, and got in at much cheaper prices. I hope some of you are enjoying profits, but in the grand scheme of the cycle, it won't make too much difference. But for me, the real power is that we will be much more comfortable in future pullbacks, while Mondays buyers will be screaming. By getting ahead of the crowd, we are much less likely to get shaken out.

I must say if I'd been offered our current postions in the oilies three years back I'd have taken it for sure.The more you've explained the way the oil markets/drilling/exploration etc work,the more convinced I've become that we're looking at a major bull due to lack of US shale and demand recovering.

If you'd offered me the sort of holding we've got in say Shell 3 years ago,I'd have bitten your arm off.It's the basis for a god retirement portfolio.

Below is a Wolf St post(who else???),hinting that things are building.

https://wolfstreet.com/2020/12/02/here-comes-the-trucking-boom-in-the-weirdest-economy-ever/

[sancho panza]

4 hours 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?!

 

 

Jsut to add to @DurhamBorn answer above which is pretty thorough,M2 has seen no such uptick which means it is someone harbouring cash in demadn accounts.

DB's is one explanation although I do wonder if there may be a technical explantion because that does seem one hell of a jump for a week eg it's the unwind of some sa alend repo CB activites.The sums are mind blowing and possibly coincide with another Wolf St post.But then again,that would account for a slow build up in M1 not $500bn in a week.

 

2 hours ago, DurhamBorn said:

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.

but but but ....derivatives all net off,there is no risk.......etc etc etc.

Saw a Dimartion twitter psot earleir talking of absurd levels of options activity.......

LIke you say,it only takes one decent size counterparty and all of a sudden the netting off stops.

[jamtomorrow]

11 hours 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?!

 

 

The series without seasonal adjustment is fascinating, shows a monthly pattern approx $300bn (5%) in amplitude.

In that context, the recent jump is both bigger ($800bn or so, bottom to top) and smaller ("only" 2x to 3x the monthly).

Maybe Fed decided it's time to count All the Crypto as US M1? 

[CVG]

10 hours ago, DurhamBorn said:

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.

 

 

Thanks Db. I want to capture that one.

[Green Devil]

https://www.bloomberg.com/news/articles/2020-12-05/u-k-power-prices-jump-after-grid-warns-of-narrowing-reserves

I see uranium stocks had a 10% pump on friday 

[MrXxxx]

14 hours ago, Harley said:

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.

Great analogy and one I can understand.

[MrXxxx]

10 hours ago, DurhamBorn said:

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.

So basically VOD bought a guarantee that is renaged on...and so guarantees nothing but costs a lot!

[Harley]

11 hours ago, DurhamBorn said:

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.

I heard you the first time, and really heard you the second to realise I need to do more, so time for a preservation of capital moment - clearly banks are risky to invest in and hold money with, but you also think companies (excluding collectives like ETFs, somewhere I would have thought as a fair harbour) - presumably more of an impairment in value for the likes of VOD, but more severe for those businesses mired in derivatives beyond say currency hedging - such as insurance companies, commodity traders, others(?) but maybe also contagion into general counterparty risks like say one of hundreds I could think of - derivative based ETFs, etc, hell spreading to ETFs, etc generally?

[Harley]

OK, so think I'll go quite a bit further on the caution front (maybe too many "End Game" thinking) - always thought it was odd the government haven't made their move financially under the cover of CV (given they have in many other areas), indeed pulled their punches at the latest "Budget" and the "Budget" prior to that - assumed they were giving time for some people to run to the hills, but that should be done by now, but the time it takes to unwind derivative positions, well...........

PS:  Apologies for b'tarding DBs original point by incorrectly conflating it with a different (tin foil?) subject - just a case of "only the paranoiac survive"!

[geordie_lurch]

More good news for those here counting on a hydrogen powered future with the Germans also getting on board converting their trains

https://m.dw.com/en/deutsche-bahn-siemens-launch-hydrogen-trains-trial/a-55716107

[DurhamBorn]

1 hour ago, Green Devil said:

https://www.bloomberg.com/news/articles/2020-12-05/u-k-power-prices-jump-after-grid-warns-of-narrowing-reserves

I see uranium stocks had a 10% pump on friday 

Another example of idiot regulators forcing ROCE so low nobody invests.Save Susan £5 a week she can hand to the council in council tax instead.Nuts.Drax will be rubbing their hands though because Cruachan pumped storage really comes into its own when this happens.They pump the water up the mountain when prices are low and then release it on a spike.Whats amazing as a macro strategist is when you see people shocked.They simply have no idea of leads and lags etc.Maybe someone on here should set up a consultancy and pimp our work to big companies.Id be in.Point them to this thread in the blurb.They employ economists,but not macro.

[DurhamBorn]

https://www.bloomberg.com/news/articles/2020-12-04/mystery-surrounds-7-billion-outflow-from-vanguard-s-p-500-fund

Obvious a big player wanted to remove their holdings from the ETF and no doubt sell off the parts they think overvalued.Harley has always mentioned the very real risk on these passive ETFs.

The 40/60 type funds are more private investors through advisors and it would be interesting to see if their holdings just keep creeping up.I really worry for people close to or into  pension drawdown using these 40/60 ,60/40 funds.They have a long record of 5% returns after 2% financial advisor fees so they have been an easy sell from IFAs etc.Drawdown 5% pension stands still or slightly grows is a powerful sell and a nice income stream for IFA.However im convinced everyone is missing we dont just have equity/bonds to counter,we have commods etc.The cycle should see bond money flow to inflation assets and equity markets re-allocate but not enough to compensate .A few years of 5% falls in these funds+2% fees+5% drawdown will prove a disaster for people.Thats before inflation.5 years like that and the pensions are down to peanuts after 10 years.

[Errol]

When the blue line starts to shoot up, the fire starts:

 

 

US M1 money supply has increased by 55% since February. 35% of all US dollars in existence have been printed in 10 months:

 

[feed]

 

US House votes to decriminalize marijuana, little chance in current Senate | News | DW | 04.12.2020

If the dems take the senate in Jan with Georgia runoff.  

On a side note, with the telecoms.  Facebook/twitter/google and to a certain extent Apple, don't exist without them. 

Something I noticed back in 2016 with the release of the mobile pokemon game, value for the game designer and the IP holder went to the moon, but it was the Telecom companies I saw people buying more download capacity from.  For some reason people don't see the pipes.  Anyway, if new media/social media companies are leading our new era of politics, I doubt they'll let regulars slow those pipes. 

 

[Chewing Grass]

2 hours ago, DurhamBorn said:

Another example of idiot regulators forcing ROCE so low nobody invests.Save Susan £5 a week she can hand to the council in council tax instead.Nuts.Drax will be rubbing their hands though because Cruachan pumped storage really co

I was watching the grid on Friday & Saturday as it was the start of this colder spell and the only thing that stopped them having to do extra-ordinary things was the 11-12GW that was coming in from wind. On Thursday wind was struggling to push 2GW and solar was non-existent so they got lucky.

[DurhamBorn]

2 minutes ago, feed said:

 

US House votes to decriminalize marijuana, little chance in current Senate | News | DW | 04.12.2020

If the dems take the senate in Jan with Georgia runoff.  

On a side note, with the telecoms.  Facebook/twitter/google and to a certain extent Apple, don't exist without them. 

Something I noticed back in 2016 with the release of the mobile pokemon game, value for the game designer and the IP holder went to the moon, but it was the Telecom companies I saw people buying more download capacity from.  For some reason people don't see the pipes.  Anyway, if new media/social media companies are leading our new era of politics, I doubt they'll let regulars slow those pipes. 

 

Exactly and the companies havent had their fair share of the cake.As  @sancho panza  says they could do a BAT.BT would be asset stripped unless the shares treble.Ofcom would have some explaining to do to government.

Pot is interesting as it opens up a massive market for big tobacco.Imperial have invested in Auxly Cannabis,whose shares are on their backsides but perked up lately.Imperial might fancy taking them out by slowly getting the equity through cash injections.

Next year or the year after ,after they cut the debt the new CEO will have £600 mill a year to play with of free cash.Buybacks or growth in new areas.They could buy Auxly of course with 30% cash,the rest stock,or even all stock.

Big tobacco are masters at their game,cannabis is a simple move for them,and they are probably the only companies with the cash who wont give a monkeys about ethics,all the woke funds dumped the shares over the last 5 years.

 

 

 

[DurhamBorn]

26 minutes ago, Errol said:

When the blue line starts to shoot up, the fire starts:

 

 

US M1 money supply has increased by 55% since February. 35% of all US dollars in existence have been printed in 10 months:

 

35% in 10 months.Incredible,but expected.Lots of M1 about to buy real assets/build real assets etc.Bond holders need to sniff their poppers and bend over soon.They might get one last day in the sun though on a BK.

[sancho panza]

13 hours ago, Castlevania said:

The derivatives will mostly now (older contracts entered pre financial crisis when the derivatives market was still something of the Wild West probably won’t) be collateralised by either cash or government bonds up to the present value of the derivative, which mitigates a lot of the risk.

The big issue for the banks (and for their derivative counterparties) are their lending books.

CV,have you much knowledge of rehypothecation ie the same piece of collateral being used a few times.I read sometime back that one of the reasons London had always beena  financial hub was they allowed it and US authorities didn't.

In terms of derivatives,it's maybe better to delineate the different types eg forex,MBS,swaps markets etc.

In terms of the stock options markets,I'm not sure they're completely collateralized for the big books or market makers.But happy to be explained.

Technically,swaps markets are derivatives and inherently,if two parties are swapping interest flows on two assets and one asset suffers a default eg MBS then the collateral is dog poo.I'm not sure how regulation has improved but you'd know more than I would.
What I do know is that moral hazard has increased post 2008 not decreased.We've seen from that excellent paper from the Durham Econ professor that the UK banks are more leveraged than 2006 so there's little faith on my part that the derivtaives markets are in better shape than 08.

Just my view though.

[sancho panza]

4 hours ago, MrXxxx said:

So basically VOD bought a guarantee that is renaged on...and so guarantees nothing but costs a lot!

No Vod have taken guarantee that they can sell X amount of dollars at a certain price,if their counterarty goes bust,Vod still have the dollars.May actually work in their favour depending on the $.May not.

The party that writes the forex call carries the bulk of the risk unless Vod is runnign a strategy that unevenly exposes them to risk in a currency eg their Swiss taking out a dollar loan in Switzerland.But there's no reason for vodafone to do that.

[Harley]

2 hours ago, DurhamBorn said:

https://www.bloomberg.com/news/articles/2020-12-04/mystery-surrounds-7-billion-outflow-from-vanguard-s-p-500-fund

Obvious a big player wanted to remove their holdings from the ETF and no doubt sell off the parts they think overvalued.Harley has always mentioned the very real risk on these passive ETFs.

The 40/60 type funds are more private investors through advisors and it would be interesting to see if their holdings just keep creeping up.I really worry for people close to or into  pension drawdown using these 40/60 ,60/40 funds.They have a long record of 5% returns after 2% financial advisor fees so they have been an easy sell from IFAs etc.Drawdown 5% pension stands still or slightly grows is a powerful sell and a nice income stream for IFA.However im convinced everyone is missing we dont just have equity/bonds to counter,we have commods etc.The cycle should see bond money flow to inflation assets and equity markets re-allocate but not enough to compensate .A few years of 5% falls in these funds+2% fees+5% drawdown will prove a disaster for people.Thats before inflation.5 years like that and the pensions are down to peanuts after 10 years.

Just to say in regards to one risk of ETFs, I believe (DYOR) Vanguard at least does not lend out your underlying shares - although plenty else I'm concerned about though but that's just me, and I do hold some - IMO a question of where you want to be on the various risk scales life presents us with.

[Harley]

2 minutes ago, sancho panza said:

No Vod have taken guarantee that they can sell X amount of dollars at a certain price,if their counterarty goes bust,Vod still have the dollars.May actually work in their favour depending on the $.May not.

The party that writes the forex call carries the bulk of the risk unless Vod is runnign a strategy that unevenly exposes them to risk in a currency eg their Swiss taking out a dollar loan in Switzerland.But there's no reason for vodafone to do that.

Some companies in one previous crash were exposed when it was found their only profits were coming from what effectively was currency trading (via derivatives) - company treasurers turning into traders for a necessary bit of coin.

[Harley]

13 hours ago, sancho panza said:

LIke you say,it only takes one decent size counterparty and all of a sudden the netting off stops.

Is that the big red button for the "Great Reset", once "they" have covered?