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

[DurhamBorn]

9 hours ago, Hunty said:

Link MS

If central banks buy $1.3B assets every 60 minutes, how long until they own all the assets?  The idea behind QE is to buy the assets at high prices no-one else will pay using their fiat dollars to keep 'liquidity' in the market.  Is that right?  So if you're a central bank and you can print an infinite amount of fiat, doesn't this eventually end with the FED (or ECB, et. al) owning everything?  

It seems like this program allows people get to the exits and cash out of what would otherwise be a painful re-pricing of assets, but it seems extremely short sighted to me, because the FRN's are debased with all the printing and all the real-world assets are going to end up on the FED's ledger.  Doesn't this end with everyone holding bags of worthless toilet paper and you paying rent to the FED because they own your house, your car, the company you work for?

No,because they dont own any assets really,they own debt.Most of the recent CB action has been to help governments with fiscal injections.I would agree lots of bonds etc will be re-priced down by a lot.I think inflation adjusted people buying 10 or 15 year government debt will lose between 50% and 80% inflation.Asset allocation prices will simply adjust up and down on the amount of liquidity and the moves from consumtion to investment in assets.

The next cycle will see inflation rocket,that is what will eat savings etc,unless people have allocation to some inflation loving areas.Most dont have any,or very little.The woke funds selling out of big oil is a prime exampls.Tesla wont protect anyone from inflation.

I should add,there is still a year window for bonds to have one last run up in a big kahuna.

[DurhamBorn]

32 minutes ago, Green Devil said:

😂

80% crash in the stock market next year? 

Inflation 20%, interest rates 15%.

Come on... I could see inflation at 20%, but the rest is pure fantasy. 

David will be putting out the things he sees in the structure of the macro position.It could be a lot of the market goes down 80% but some holds its own or even goes up.

David worked for the best equity team who ever lived.He was trained by the best macro strategists of the last 50 years.As with Steve Kaplan its best for everyone to enjoy their work and form their own thoughts,but take a lot from those guys.I rate them both as two of the best contrarian investors out there,and among the very few who have seen cycles like the one likely ahead.Nobody under 40 has any memory of whats likely ahead.I can just remember.

[Harley]

44 minutes ago, Green Devil said:

😂

80% crash in the stock market next year? 

Inflation 20%, interest rates 15%.

Come on... I could see inflation at 20%, but the rest is pure fantasy. 

So no BK (TBF, he did say between 80% and say 65%) in your roadmap then, just straight to inflation?  Fair enough.  It's very helpful to map out a number of scenarios and look for any alignment in potential actions.  Nothing is certain, everything has a probability, outcome, and expected outcome.

[Harley]

One thing I'm not clear on (maybe once explained but the brain has shrunk too much to retain) - what actually causes a BK (trigger and then ensuing process)?  And by BK I am assuming we mean a worldwide equity market fall in prices of say 65-80% of 3 to 4 months duration.  I can posit from some classic economics, including Austrian School, but I think the rationale is different.  Is it a solvency/liquidity crisis where the first grain of sand (a company) can no longer fund its debt and we have a cascade effect (an unwinding)?

[Green Devil]

4 minutes ago, Harley said:

So no BK (TBF, he did say between 80% and say 65%) in your roadmap then, just straight to inflation?  Fair enough.  It's very helpful to map out a number of scenarios and look for any alignment in potential actions.  Nothing is certain, everything has a probability, outcome, and expected outcome.

We're already in asset inflation. Its just not showing in wages or food etc. There's always a crash due to some external events so a dip is certainly possible, but a year long bust? We had corona crash and that only lasted 2 months FFS! Can it get much worse? Anyone who talks about rates rising still thinks we're in the old monetary system. IMO we're not.

 

[Harley]

Assuming a BK event (as defined above), has anyone mapped out the likely price consequences of each asset type before and after said event (after being the period until the next major event)?

Specifically:

US, EU and UK long term government bonds

US, EU and UK corporate bonds

Silver and gold

Regional equity markets (US, EU, APD, EM)

Sectors (Materials, energy, etc)

Currencies (GBPUSD. GBPEUR, GBP.....)

Commodities

UK bank deposits

Etc

I assume everything goes down initially as people liquidate positions to pay margin calls, etc so I'm thinking a bit further post BK, to after the initial dust has settled, say a month(?) - say like a building collapse - the initial effects all of that dust versus the longer term effects of the pollution of the toxic dust .

 

[Harley]

36 minutes ago, Green Devil said:

We're already in asset inflation. Its just not showing in wages or food etc. There's always a crash due to some external events so a dip is certainly possible, but a year long bust? We had corona crash and that only lasted 2 months FFS! Can it get much worse? Anyone who talks about rates rising still thinks we're in the old monetary system. IMO we're not.

TBF, DH said a 3 to 4 month BK - as opposed to the old normal in that regard.  His point is a big fall is hard to crawl out of despite the rebound (just like many of my positions post the CV crash which are still under despite some recent major upswings).  I agree with that in the sense of things are speeding up (and more volatile) - like a ship being overweight (money/debt) and prone to capsize quickly once it gets going).  A basis for that profile in systems theory. 

Totally agree with the point about asset inflation (but TBF plus some leakage into food, etc via shrinkflation).  I see that as very much a velocity of money thing tied to the unequal distribution of this recent "wealth" and the marginal propensity to consume/spend (rich people can only buy so much bog roll whereas most of us don't buy fine art).  That makes behavioural aspects a key driver of this show as it's velocity which is the champion for behaviour in the otherwise mechanistic price of money formulae.

I'm also uncertain about rates  - as you say, that is defo the old normal and we seem to be off somewhere else now, with MMT, etc so maybe it will be different this time, least for quite a while. 

More importantly I agree with the underlying sentiment (something I have also banged on about) - a real danger is we stay in the burning building (or box) sticking to the old normal reference points and way of doing things when that is falling away all around us - Mr Market likes to hurt the most people but even Mr Market has his devil/master - my Russian doll analogy!

A key (often forgotten) thing is economics and life generally - take time to identify the function you wish to optimise as that function has many attributes beyond just the variables, like time (temporal) and the base unit of measure (value).  A poor function optimised is sub-optimal!

[Talking Monkey]

14 hours ago, Heart's Ease said:

Just checked to see if XOM dividend has arrived in HL and can't see anything yet.  Arrived to Freetrade account this afternoon.  Anyone else got XOM in HL?

Ive checked an hour or so ago and cannot see the Dividends for Exxon or Chevron in HL, is this normal do they have a delay.  Has anybody ever experienced a Divi not turning up and having to chase HL admin.

[Green Devil]

11 minutes ago, Harley said:

TBF, DH said a 3 to 4 month BK - as opposed to the old normal in that regard.  His point is a big fall is hard to crawl out of despite the rebound (just like many of my positions post the CV crash which are still under despite some recent major upswings).  I agree with that in the sense of things are speeding up (and more volatile) - like a ship being overweight (money/debt) and prone to capsize quickly once it gets going).  A basis for that profile in systems theory. 

Totally agree with the point about asset inflation (but TBF plus some leakage into food, etc via shrinkflation).  I see that as very much a velcoty of money thing tied to the unequal distribution of this recent "wealth" and the marginal propensity to consume/spend (rich people can only buy so much bog roll whereas most of us don't buy fine art).  That makes behavioural aspects a key driver of this show as it's velocity which is the champion for behaviour in the otherwise mechanistic price of money formulae.

I'm also uncertain about rates  - as you say, that is defo the old normal and we seem to be off somewhere else now, with MMT, etc so maybe it will be different this time, least for quite a while. 

More importantly I agree with the underlying sentiment (something I have also banged on about) - a real danger is we stay in the burning building (or box) sticking to the old normal reference points and way of doing things when that is falling away all around us - Mr Market likes to hurt the most people but even Mr Market has his devil/master - my Russian doll analogy!

They have already mapped out what happens. They will switch from dollar to CBDC and when they do they will wipe out government and company debt. The only mugs left swimming out when the tide recedes will be those with big fat mortgages as we know pricing of housing is the one thing they will keep constant. They might give all those endebted a sweetner, ie holiday for a few years. But their debts will stand to ensure their compliance in the future. Happy days. Buy bitcoin now while its under 100k.

[Harley]

11 minutes ago, Talking Monkey said:

Ive checked an hour or so ago and cannot see the Dividends for Exxon or Chevron in HL, is this normal do they have a delay.  Has anybody ever experienced a Divi not turning up and having to chase HL admin.

I heard in some podcast XOM had to effectively borrow to pay its div - maybe held up at the bank!

[Green Devil]

5 minutes ago, Talking Monkey said:

Ive checked an hour or so ago and cannot see the Dividends for Exxon or Chevron in HL, is this normal do they have a delay.  Has anybody ever experienced a Divi not turning up and having to chase HL admin.

Dividend date was 10Nov so i would of thought youd have it in hand by now.

[Harley]

2 minutes ago, Green Devil said:

They have already mapped out what happens. They will switch from dollar to CBDC and when they do they will wipe out government and company debt. The only mugs left swimming out when the tide recedes will be those with big fat mortgages as we know pricing of housing is the one thing they will keep constant. They might give all those endebted a sweetner, ie holiday for a few years. But their debts will stand to ensure their compliance in the future. Happy days. Buy bitcoin now while its under 100k.

Well put, I think I might just do that.....!

[Talking Monkey]

33 minutes ago, Harley said:

One thing I'm not clear on (maybe once explained but the brain has shrunk too much to retain) - what actually causes a BK (trigger and then ensuing process)?  And by BK I am assuming we mean a worldwide equity market fall in prices of say 65-80% of 3 to 4 months duration.  I can posit from some classic economics, including Austrian School, but I think the rationale is different.  Is it a solvency/liquidity crisis where the first grain of sand (a company) can no longer fund its debt and we have a cascade effect (an unwinding)?

Vague memories from the early 2000s was how everything was totally nuts the valuations on some of the internet stocks were insane, daft metrics like burn rate and the higher the cash burn the better. The equivalent today are the insane PEs we see. From 2007/8  the first wobble akin to that grain of sand that I became aware of was a couple of funds at Bear Stearns running into trouble.

 

Hunter talks of Fed mistakes leading to a BK, by that I assume the mistake is they at some point over the next few months stop growing their balance sheet in the face of a very very overheated stock market and rising inflation. Alongside this the insolvencies must appear at some point along with  some fund of significant size going pop. Whatever it is that precipitates a very significant correction in hindsight we will interpret it as the straw that broke the camel's back, but in reality it was simply the inevitable consequence of extreme valuations

 

[Talking Monkey]

8 minutes ago, Green Devil said:

Dividend date was 10Nov so i would of thought youd have it in hand by now.

The Ex Dividend date was 10th Nov, the actual pay date was 10 Dec for XOM and Chevron both haven't turned up

[Harley]

9 minutes ago, Talking Monkey said:

Vague memories from the early 2000s was how everything was totally nuts the valuations on some of the internet stocks were insane, daft metrics like burn rate and the higher the cash burn the better. The equivalent today are the insane PEs we see. From 2007/8  the first wobble akin to that grain of sand that I became aware of was a couple of funds at Bear Stearns running into trouble.

Hunter talks of Fed mistakes leading to a BK, by that I assume the mistake is they at some point over the next few months stop growing their balance sheet in the face of a very very overheated stock market and rising inflation. Alongside this the insolvencies must appear at some point along with  some fund of significant size going pop. Whatever it is that precipitates a very significant correction in hindsight we will interpret it as the straw that broke the camel's back, but in reality it was simply the inevitable consequence of extreme valuations

Nice one thanks - so the answer is really in asking the right question.  It seems it is that we have an "overloaded", "top heavy", "inherently unstable", etc ship due to monetary flows in and out which only requires a minor trigger (could be anything) to set off a cascade of events - a great unwinding.  A car ferry with too many and badly positioned vehicles making it unstable and it overturns in a flash due to a minor freak wave or whatever.

All this reminds me of when I studied Advanced Economic Theory all those years ago - so terribly taught they had to give us all a 2:1 for it - but I do remember talk about bouncing balls in boxes and the like - really wish it had worked out back then - or maybe you need to live a bit first (clearly the academic involved hadn't (quelle suprise), hence being challenged to deliver the course!).  

[Talking Monkey]

1 hour ago, DurhamBorn said:

David will be putting out the things he sees in the structure of the macro position.It could be a lot of the market goes down 80% but some holds its own or even goes up.

David worked for the best equity team who ever lived.He was trained by the best macro strategists of the last 50 years.As with Steve Kaplan its best for everyone to enjoy their work and form their own thoughts,but take a lot from those guys.I rate them both as two of the best contrarian investors out there,and among the very few who have seen cycles like the one likely ahead.Nobody under 40 has any memory of whats likely ahead.I can just remember.

The most fascinating part for me is that although both see an almost 80% correction occurring David sees a melt-up first to some very lofty levels

There are tons of awesome insights to be had from both of their work 

[Lightscribe]

1 hour ago, Green Devil said:

😂

80% crash in the stock market next year? 

Inflation 20%, interest rates 15%.

Come on... I could see inflation at 20%, but the rest is pure fantasy. 

It’s not fantasy dear fellow.

Just because the media says one thing, doesn’t change the fact the damage is already done.

The first wave in a Tsunami isn’t the one that causes the devastation.

https://www.cityam.com/almost-a-fifth-of-all-us-dollars-were-created-this-year/

[Green Devil]

2 minutes ago, Lightscribe said:

It’s not fantasy dear fellow.

Just because the media says one thing, doesn’t change the fact the damage is already done.

The first wave in a Tsunami isn’t the one that causes the devastation.

https://www.cityam.com/almost-a-fifth-of-all-us-dollars-were-created-this-year/

So where does it say 20% inflation means 15% interest rates?

Old school money theory spread by dinosaur gold bugs in the media.

[Underwhelmed]

Have previously posted excerpts from this guy's newsletter again this part is pertinent to this thread and resonates with the main thesis:

https://www.cmgwealth.com/ri/on-my-radar-minus-43-8-to-fair-value/

 

Quote

 

On My Radar: Minus 43.8% to Fair Value

• December 11, 2020

By Steve Blumenthal

“Rule #3: There are no new eras – excesses are never permanent.”

– Bob Farrell,
Former Chief Stock Market Analyst and Sr. Investment Advisor, Merrill Lynch
Bob Farrell’s 10 Rules for Investing

Today, I share my favorite stock market valuation chart with you. It bluntly suggests that a 43.8% correction is required to get us back to what is considered “fair value.” Will it happen? Don’t know.

A 26.3% correction gets us back to what is considered “overvalued.” The S&P 500 Index was at 3,621.63 on November 30, 2020. Minus 26.3% puts the market at 2,669.14. Consider that a higher probability. A shock that would send the Fed to the rescue.

What is clear is that we sit at one of the most overvalued levels in history. I find valuation data useful in terms of asset allocation (targets for opportunity) and by process, I like to review various valuation metrics each month. Before we take a look at what they’re telling us, recall that debt is a drag on growth and thus a drag on future earnings. “There are no new eras.” I wrote last week about William White (check it out here). Bill was the chief economist at the Bank for International Settlements. Think of the BIS as the central banks’ central banker. “The elephant in the room is debt,” he said. Bill sees four possible scenarios:

1. Households, corporations, and governments try to save more to repay their debt. But we know that this gets you into the Keynesian Paradox of Thrift, where the economy collapses. This way leads to disaster.
2. You can try to grow your way out of a debt overhang through stronger real economic growth. But we know that a debt overhang impedes real economic growth. Of course, we should try to increase potential growth through structural reforms, but this is unlikely to be the silver bullet that saves us.
3. This leaves the two remaining ways: Higher nominal growth – i.e., higher inflation – or
4. Get rid of the bad debt by restructuring and writing it off.

Bill advises a combination of three and four, adding, “Approach the problem, try to identify the bad debts, and restructure them in as orderly a fashion that you can.”

On the surface, that “restructure” and “orderly” sound easy to do. But restructuring the mortgage debt mess in 2009 was not so orderly. We now call it “The Great Financial Crisis.” Expect the same sort of impact to hit the corporations who have binged on debt and the investors who own that debt. “Excesses are never permanent.”

You’re not going to be happy if your bond fund drops 40%—an all-too-real risk.

Creditable academic research suggests debt affects growth when it crosses 90% debt-to-GDP. Note the right-hand column in the following chart and factor the information into your deflationary calculator. This is the elephant in the room! (Data through June 30, 2020.):

Source: Ned Davis Research

Getting rid of the bad debt by restructuring and writing it off means that in our immediate future, deflation persists. Excess global production capacity and aging demographics also mean deflationary pressures persist. But do keep one eye on future policy response. If we get what I think is coming, in the U.S. and globally, inflation will become front-page news. That will create an entirely different investment regime. My best guess is that it will happen two years from now.

 

 

 

 

[Harley]

1 hour ago, DurhamBorn said:

I should add,there is still a year window for bonds to have one last run up in a big kahuna.

This is what I'm going for as one of only a few pre BK safe harbours unless anyone says different.  The issue is in its implementation as it would be via a collective instrument like an ETF and most lend out their holdings to (and you just can't make this up) banks, etc!  Vanguard say they don't lend but I have to look harder to find a UST ETF (or maybe a fund) as VGOV is a bit of everything.  Then there's the issue with any such collective instruments in a BK - access to sell - everything could get locked down, even then opening later at a discount.  UK gilts are easier to get in a collective or even outright, but Sterling?

[Harley]

12 hours ago, DurhamBorn said:

No deal would probably see quick 5% to 8% down,especially in the 250 but then go higher as market wakes up to the fact it will mean more liquidity.

Sooner or later this will lead to massive bank failures of course,and maybe some insurance ones.That would be interesting insurers of annuities etc going under.

Germany will be thinking France is trying to hit German industry hard for a few fisherman because they will be the big loser from no deal not the UK.

I have a feeling supply chains are breaking down a bit already before Brexit.

Bit in bold.  Thanks, bang goes one of my ideas for when a wealth tax or other repression comes - buy an annuity to switch capital to income!  I feel like that mouse I'm trying to catch - I'll get him in the end, we all know that!

[geordie_lurch]

7 minutes ago, Underwhelmed said:

Getting rid of the bad debt by restructuring and writing it off means that in our immediate future, deflation persists. Excess global production capacity and aging demographics also mean deflationary pressures persist. But do keep one eye on future policy response. If we get what I think is coming, in the U.S. and globally, inflation will become front-page news. That will create an entirely different investment regime. My best guess is that it will happen two years from now.

The other alternative, which only a few on here seem to be taking seriously is they write the old money system off in it's entirety either as a result of the BK or a coordinated debt jubilee. We are then all moved over to their Central Bank Digital Currencies (CBDCs) which is 100% trackable and 100% controllable by them in terms of supply, length of time you have to spend it and where

[Underwhelmed]

2 minutes ago, geordie_lurch said:

The other alternative, which only a few on here seem to be taking seriously is they write the old money system off either as a result of the BK or a coordinated debt jubilee. We are then all moved over to their Central Bank Digital Currencies (CBDCs) which is 100% trackable and 100% controllable by them in terms of supply, length of time you have to spend it and where

Agree they are coming, only question is implementation date, will it be next year or year after or are we still a decade or so away from them?

[Harley]

11 minutes ago, geordie_lurch said:

The other alternative, which only a few on here seem to be taking seriously is they write the old money system off in it's entirety either as a result of the BK or a coordinated debt jubilee. We are then all moved over to their Central Bank Digital Currencies (CBDCs) which is 100% trackable and 100% controllable by them in terms of supply, length of time you have to spend it and where

Count me in.  Buy what you need now to make life cheaper then.  And anything else to get out of the financial system, but be proportionate in case you're wrong.  In modelling, we look at all reasonable/material scenarios and build a series of responses according to their expected outcomes.  Others go to church instead!

[geordie_lurch]

15 minutes ago, Underwhelmed said:

Agree they are coming, only question is implementation date, will it be next year or year after or are we still a decade or so away from them?

Well if we are going to be following or maybe implementing what China tells us (if we are already in their pocket ) then next year seems most likely to me. See this article about jd.com now taking them and their sub headline...

Quote

If expanded nationwide, China could turn into the most powerful economy yet to offer a national digital currency, beating a forthcoming digital version of the euro from the European Central Bank

and which I corrected at the end

Quote

Central banks around the world are within reach of launching sovereign digital currencies, with the Bahamas — whose central bank launched its Sand Dollar beyond a pilot program in October this year — topping the chart. Perhaps most significant, however, is that of The People’s Bank of China, which has been researching a digital yuan since 2014. Today, China stands a chance of being the first major economy to introduce a sovereign digital currency.

As a matter of fact, China has left the rest of the world in the dust when it comes to digital currencies. It is not surprising considering the way the government and domestic companies such as e-commerce giant Alibaba Group Holding and its fintech affiliate Ant Group have used digital technology to transform China’s traditional banking and financial architecture into a cutting-edge, online-focused, and user-friendly system for the internet era another means of totalitarian control.