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

[Loki]

Just now, Bobthebuilder said:

I first noticed this trend with the hipsters in east London from about 2008. Too poor to buy a razor? Grow a beard, too poor to buy a car? Ride a push-bike, too poor to eat a decent meal? Serial killer etc, etc. They had sunk every penny into a £450,000 ex council flat in E8 and couldn't afford anything else.

They were LARPing.  It's easy to glamorise poverty when Mummy and Daddy can bail you out...a popular beat combo called Blur did a song about it...  Not sure about the latest, they are just following the herd (But in a unique and individualistic way)

 

[Bobthebuilder]

Thought you meant this one. "What have you got? Massed produced in somewhere hot."

 

[Loki]

@Bobthebuilder I like it.  The vid reminds me of this

 

[Harley]

14 hours ago, Democorruptcy said:

I thought a technicals chap like you might be 61.8% next time?

Interesting.  But I'm more of a dabbling rough tart in such things who likes just a bit of everything!

[Democorruptcy]

2 minutes ago, Harley said:

Interesting.  But I'm more of a dabbling rough tart who likes just a bit of everything!

The FTSE is starting from a much lower level than the US markets. The Hussman downdates seem to expect something in the range of a Fibonacci retrace for the S&P. Would be nice to know the starting top figure if it was going to happen!

[Harley]

2 hours ago, Democorruptcy said:

The FTSE is starting from a much lower level than the US markets. The Hussman downdates seem to expect something in the range of a Fibonacci retrace for the S&P. Would be nice to know the starting top figure if it was going to happen!

Cheers.  A lot to like there as a piece of analysis.  I'll need to read it a few times!

The basis of his initial analysis, inter alia, seems to be his projection for future S&P returns (workings?), the S&P (a badly weighted cap index and only one, albeit the largest market), and a focus on just some asset classes (bonds v equities) which I question the validity of doing in such an analysis.

Not to rubbish his points or conclusion but would be interesting if he went broader and explained his workings.  The option value of money is accepted, and something I stick to - although I really need to get back into equity hedging (his preferred choice).  Derivatives and cash are however not risk free.

I like a lot of his stock valuation and macro stuff.  As far as US equity value is concerned - my international screens rarely identify a US company (and not much else atm either).  US companies stand out for poor tangible book to equity valuations, high debt levels and low current ratios.  But debt (debt to equity ratio) is the most common issue.  The November equity bull seems to have killed off further international value purchases for me. 

What he says about valuations echoes as I heard someone say elsewhere that the run up in equity valuations is more about low bond yields than much else and we are now (given the current situation) at extremes.  XOM apparently having to effectively borrow to pay its div may be a canary and a sign of a yield trap (another reason for my move away to a more subtle value focus).  

I was going to post this about the 60:40 portfolio as it's well written but fear it may, on the basis of the above, end up directing people towards the guns!

https://www.ftadviser.com/investments/2020/12/08/portfolio-construction-after-the-pandemic/

PS:  Thinking some more, the article may have flowed better starting with the macro valuation stuff, then the cash option, then the policy stuff.

[Democorruptcy]

56 minutes ago, Harley said:

Cheers.  A lot to like there as a piece of analysis.  I'll need to read it a few times!

I've posted that link before and some of his other stuff. If interested you could search 'this topic' for "Hussman Downdate"

[sancho panza]

23 hours ago, dnb24 said:

https://www.telegraph.co.uk/property/house-prices/looming-threat-forced-sellers-could-hit-house-prices-despite/

 

anecdotal- family member works in Liverpool for council advising on benefits- in last 6 weeks she reports significant increase in forced sellers of property due to  savings been rinsed trying to keep afloat. 
 

#debtdeflationcometh

https://www.thetimes.co.uk/article/we-are-millionaire-mortgage-prisoners-znd3t0ttg

We are millionaire mortgage prisoners

 

[Noallegiance]

12 minutes ago, sancho panza said:

#debtdeflationcometh

https://www.thetimes.co.uk/article/we-are-millionaire-mortgage-prisoners-znd3t0ttg

We are millionaire mortgage prisoners

 

Shame

[sancho panza]

On 11/12/2020 at 10:36, Wheeler said:

Interview on Crux Investor with David Hunter:

 

 

 

I love his phrase that there are two types of investors,

'those who learn from their msitakes and those who don't.'

The rest is of the qulaity we're used to.Need to relisten to this without the kids screaming at me.

On 11/12/2020 at 22:47, Inigo said:

Speaking to someone this week who regularly ships container loads of stuff from the far east.  Apparently there are no containers left, they are all in the UK.  Cost has risen from around £1,000 to around £6,000.  Stuff cannot be unloaded at Felixstowe as it is full, with a backlog, ships waiting outside to unload and instead unloading in Zeebrugge.

Heard the same from a close firend who ships containers from CHina a lot.Exactly the same tbh.even the bit about there being no empty containers in CHina-she literally used those words

They're an online seller so had a good march/arpil but now have loads of stock lines lsited as unavailable.She also said HOnda had closed a factory because they couldn't get parts which I think @durhamborn alludes to downthread iirc

Covid/Brexit/Shipping crisis all coming at the worng time.

On 12/12/2020 at 10:06, 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)?

I think top to bottom in the indices will be the normal 1-3 year range.I'm not sure we'll see a 3-4 motnh bottom,that would be unprecedneted but not impossible.LAst credit deflation took 3 years to bottom in 1932.I think they'll be much dip buying intially as punters have been rewarded for BTFD the last few years.It'll take some time to shake out that optimism imho

On 12/12/2020 at 10:14, Harley said:

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 .

 

For me H,it's going to be like March when the quality stuff got sold off to pay margin calls and to rasie cash.Only place I'll be hiding is UST's and cash as well as bottom rungs in oilies/goldies/telecoms/UST's.

Looking at corporate credit markets,soemthing Danielle Dimartino ahs been warning about for some time,the unwind could be very disorderly and only the big balance sheets will be safe harbours.

[sancho panza]

On 12/12/2020 at 11:07, Harley said:

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?

Question for you H and @DurhamBorn, in terms of duration which flavours of UST are you going for ahead of BK if you get the chance,long dated or short dated?

ZROZ reinvests divi so goes up more than TLT I've heard.

[sancho panza]

On 11/12/2020 at 08:52, Cattle Prod said:

China vehicle sales up ~ 10% yoy, so much for the China hoarding oil to sell products narrative. They need all the extra oil they bought this year, CCP wouldn't want the people queueing at petrol stations. EVs growing strongly in fairness, shame they'll mostly be running on coal:

Interestingn CP,I remember someone on here think it was @DoINeedOne psoting a chart showing energy usage since 2000 and coal dipped a bit post 2008 but was back at previous demand a fe wyears later.

Ref China,I plucked a few figures from Fred but I have my doubts about how good they are,so will need an alternate soruce if you know one.M2 gets published here in USD and GDP in yuan so I've indexed them.

A few things leap out like the apparent death of CPI in China when you consider flats in big cities can retail for $250k ++.Also M2 crossing over GDP.Plus growth of Chinese reserves.

Ref

 

[sancho panza]

This chart sums up where are and where we've come from.

World went mad during the crossover between 200-2005.

We're now ina world where Federal debt has climbing above US pension fund assets leaving you wondering who the future buyers of 1.5% 30 year bonds will be?Especially given foreign buyers have been reducing holdings over last year or two-Wolf St ?

[reformed nice guy]

1 hour ago, sancho panza said:

#debtdeflationcometh

https://www.thetimes.co.uk/article/we-are-millionaire-mortgage-prisoners-znd3t0ttg

We are millionaire mortgage prisoners

So the bank, which has seen their income, outgoings and presumably their business accounts, will not lend to them and they are "millionaires"? It fails the sniff test. 

[DurhamBorn]

1 hour ago, sancho panza said:

Question for you H and @DurhamBorn, in terms of duration which flavours of UST are you going for ahead of BK if you get the chance,long dated or short dated?

ZROZ reinvests divi so goes up more than TLT I've heard.

10 year,its the most liquid, TLT,it would be 6 months probably so coupon wouldnt interest me really.

[Loki]

On 11/12/2020 at 16:23, geordie_lurch said:

If we get a hard Brexit confirmed over the weekend AND maybe if more develops on the Texas lawsuit over the election 'result' AND maybe we hear of the first few deaths from the vaccine in the UK or similar then I think we could get another Black Monday soon

So in the spirit of ToS where I seem to remember people making a call on them I'm going to stick my neck out and call it for this Monday 14h December 2020
 

Have a good weekend all

 

Seen a post elsewhere on the site, buggered if I can find it again as the search function is useless

But they said USA vaccine approval could mean markets soar at the open.  I am inclined to agree.  Vaccine and stimulus deal are the magic incantations for now. 

(More of a trading post than an investment post, sorry)

[DurhamBorn]

3 hours ago, sancho panza said:

#debtdeflationcometh

https://www.thetimes.co.uk/article/we-are-millionaire-mortgage-prisoners-znd3t0ttg

We are millionaire mortgage prisoners

 

So they had an interest rate of around 1.2% yet didnt bother making any capital repayments.Instead lived it up execting to always borrow at interest only and never repay.As my old mate used to say to the lasses in the taxi ranks,you just have to suck it and see.

[Paulie]

30 minutes ago, DurhamBorn said:

10 year,its the most liquid, TLT,it would be 6 months probably so coupon wouldnt interest me really.

If I'm not wrong TLT isn't saleable under EU rules without a KIID. Perhaps come Jan.....

I think IBTL is similar (don't worry, nothing to do with rentals...)

[DurhamBorn]

1 minute ago, Paulie said:

If I'm not wrong TLT isn't saleable under EU rules without a KIID. Perhaps come Jan.....

I think IBTL is similar (don't worry, nothing to do with rentals...)

Yes IBTL is exactly the same and used unless we get shot of the KIID rubbish once we are out of the Reich.

[Harley]

3 hours ago, sancho panza said:

For me H,it's going to be like March when the quality stuff got sold off to pay margin calls and to rasie cash.Only place I'll be hiding is UST's and cash as well as bottom rungs in oilies/goldies/telecoms/UST's.

Cheers, me too.  Bottom rungs mostly in and I've started to add to my small amount of USTs. That still leaves counterparty risk for cash and collectives (e.g. ETFs) for USTs.  PM's as well as they may bounce back after that initial dash for liquidity sell off.  GBP versus USD looks potentially range bound with strong resistance at the 1.4+ range on the monthly, although the talking heads negative on the DXY (but DXY<>GBP).  Indeed DXY could be bottoming!

[Harley]

3 hours ago, sancho panza said:

Question for you H and @DurhamBorn, in terms of duration which flavours of UST are you going for ahead of BK if you get the chance,long dated or short dated?

ZROZ reinvests divi so goes up more than TLT I've heard.

I go long and short duration.  Short (1 to 5 year) for cash (e.g. TSY3) and long (20+ year) for bonds allocation (e.g. IBTL).  Both are iShares who lend out the holdings so I'm not happy.  Any recs (these aren't, DYOR) gratefully received.  I also hold UK and Euro government bonds. 

[Democorruptcy]

4 hours ago, sancho panza said:

Shows that Interest Only was still available after the financial crash. On ToS some wouldn't have it when I suggested that.

[Harley]

B*gger, looks like I had old data - Reading the KIDs for the Vanguard UST funds/ETFs, they say "The Fund may engage in short term secured lending of its investments to certain eligible third parties".

 

 

[Harley]

2 hours ago, Harley said:

I go long and short duration.  Short (1 to 5 year) for cash (e.g. TSY3) and long (20+ year) for bonds allocation (e.g. IBTL).  Both are iShares who lend out the holdings so I'm not happy.  Any recs (these aren't, DYOR) gratefully received.  I also hold UK and Euro government bonds. 

Wrong, TSY3 is SSGA not iShares.

A good source for UST, etc ETFs:

http://justetf.com/uk/find-etf.html?assetClass=class-bonds&groupField=index&country=US&bondType=Government

[Yadda yadda yadda]

5 hours ago, DurhamBorn said:

So they had an interest rate of around 1.2% yet didnt bother making any capital repayments.Instead lived it up execting to always borrow at interest only and never repay.As my old mate used to say to the lasses in the taxi ranks,you just have to suck it and see.

Worse than that. Base rate is currently 0.1%. So they're paying 0.83%. I make that a £1.22m loan. £844×12/0.0083. 30% of £1.75m is £525k deposit so it adds up, roughly.

They're idiots for spending all their income. They could go for a ten year repayment loan but they'd be looking at £10k per month plus interest. If they can't afford that or the bank doesn't think they can then they'll have to sell.

Sell up and move to Durham. Obvious answer. Nice big house paid for out of the original deposit. Retirement sorted too if they're in a high HPI area.