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

[Errol]

This thread just keeps getting better and better.

I don't think anyone should be leaving it, or logging off for arbitrary reasons. Just post when you like and don't feel obliged to post. Take a relaxed approach.

Over Christmas it can be a great time for thinking and reading about various topics, so this thread can provide a place for new ideas and discussion of the ideas that have been here for a while.

[DurhamBorn]

Iv been going over a lot of data from the early 1970s charts to try to get a feel for where our inflation might come from this time.What might be the trigger.

Its pretty obvious back in the 70s inflation was mostly a local issue,not worldwide,and it tended to ebb and flow with the odd periodic pressure from worldwide commodity prices.

Since the start of dis-inflation in 1982 there is a graph that times perfectly in the opposite direction.The growth of global supply chains,starting first with Japan and its just in time manufacturing.

That process is now in reverse,because they are forgetting the comparative advantage and are concentrating on security of supply instead and home political problems.This will make things more secure but only by using higher cost local supplies.Already these supply chains are fractured causing huge problems and thats with demand down with lockdowns etc.Indeed my own company has to keep paying people double time to work sundays when parts arrive that werent there when they should of been friday,never heard of before.I keep getting asked "is there anyone local?" 

These fragmented supply chains will give an inflation pulse very soon,and then it will be compounded as demand moves higher out of lockdowns.

There is massive liquidity building,and that means it can be done,but with much higher prices being paid.

I think that will be the story of the start of this reflation cycle.Fractured supply chains needing on shoring that means expanded energy use worldwide that then feeds into already rising costs.

I think looking at investments its clear that all companies that use complex supply chains are going to see lower profits as although they will get higher prices for their products,their supply chain changes and input costs will be higher.

So if we think in simple terms its how many links to the consumer.A car has around 15,000 links,each part etc.A fag from BAT probably has around 15 .

An integrated oil company hardly any.

Potash probably less than 10

A telco,its it around 3? is it direct sale of product once cables are in the ground?

If my thesis on this is correct,then the winners in the cycle ahead will be the companies with the lowest numbers.They will be able to price up with the inflation everyone else is suffering,but will only be suffering a small amount of that inflation themselves.However they need to be companies where demand wont fall much and they are needed/wanted.

Some complex areas will be expanding ,yet might make no money out of the cycle.

It could be no EV car maker makes any money during the cycle for instance.

 

 

 

 

[DurhamBorn]

In some countries the wind simply doesnt blow enough,but it took a lot of oil and gas to put them there (and take them down)

https://www.japantimes.co.jp/news/2020/12/17/business/¥60-billion-wind-power-project-dismantle/

 

[Bricormortis]

Re the ONS mortality graph. Thanks for posting that Sancho.

I have forwarded a copy to the Daily Mail with some comments re excess non covid deaths, suggesting they should put it out there.

I also sent a copy to the BBC . Should have put "you can fool some of the people some of the time" in the subject header.

I wont send it to my MP as I am bending his ear over other matters.

I would encourage others to spread it around.    

Can be found on page 825.

[Popuplights]

17 hours ago, Harley said:

I was chatting to someone about the chart and was dismissing this year being in the upper boundary given Covid is real (if overstated), and then thought how many of this year's deaths were actually due to the reaction to covid (cancers, etc) rather than covid itself?  There are going to be two shocks to those seeing this chart - a long fuse and much anger unless the spin and general malleability continues.

Well 12 days to go, and the unarguable truth will be revealed. I shall be printing out the graph and giving copies to all and any covid maniacs meet. I'm quite looking forward to it.

[Dogtania]

21 minutes ago, Bricormortis said:

Re the ONS mortality graph. Thanks for posting that Sancho.

I have forwarded a copy to the Daily Mail with some comments re excess non covid deaths, suggesting they should put it out there.

I also sent a copy to the BBC . Should have put "you can fool some of the people some of the time" in the subject header.

I wont send it to my MP as I am bending his ear over other matters.

I would encourage others to spread it around.    

Can be found on page 825.

Sorry, definitely know there are other places to discuss so don't want to clutter here but just this morning chatting to someone at work who has a family friend who works or owns a crematorium.  Apparantly cause of death is nearly always covid or there about.  Guy at work thinks a bit ridiculous and obviously just pushing a few close to death over (terminal, immune suppressed etc).

Don't want to say much more other than its quite common to hear the same guy (or type of guy ie normal people) to see this but equally don't understand concern with vaccine or question wider picture...ie disjointed thinking. (Depressing or illuminating how many think?) Briefly mentioned I didn't want to take vaccine but agreed older people should if does protect.... With I hadn't.  Nothing else was said but going to back pedal later and say something slightly positive re vaccine to muddy my tracks.  I know I'm not fighting the good fight, there are other battles personally in the future and someone like this work guy, lad  about town, big mouth,I just don't want hassle of anything remotely contactrian.

I ramble enough elsewhere about this anyway... But it does hold that this all cause mortality figures is pretty important so just added the crematorium thing in as anecdote.

[Sasquatch]

My only real area of expertise is within the construction industry. I am at the 'coal face' as it were when reviewing tender prices. The last two tenders have come in under budget despite the clear evidence of higher prices for plasterboard, insulation etc. However some of this high pricing is probably related to supply problems due to covid rather than inflation kicking in just yet.

I tend to ring round the long list of builders before each tender to see if they are interested. Sometimes they are not because their order book is full or the project is not the right fit. I rang round last week for a project (circa £1M) and had an immediate yes from all of the builders I contacted. They are all worried about the future.

As I have have mentioned in posts previously, a builder can squeeze their margin a little in order to secure work but this only allows for perhaps 5 to 7.5% of adjustment. Beyond this, they work for turnover only or even worse at a loss. Obviously an unsustainable situation but if a builder has cash reserves they can do this for a while hoping that they will kill off the opposition. 

Then prices will go up, especially if the materials prices continue to rise.

An often used phrase in the industry:

"Turnover is vanity, profit is sanity, cash is reality"

Most construction contracts have fluctuation clauses that are often struck out. I see these being activated again at some point, akin to the marketplace in the 70's. There is barely anyone working in the industry now who will remember the inflation of the mid 70's to the early 80's. This lack of generational knowledge will chime across all sectors. There are going to be lots of confused people by the mid 2020's. 

[Harley]

1 hour ago, DurhamBorn said:

If my thesis on this is correct,then the winners in the cycle ahead will be the companies with the lowest numbers.They will be able to price up with the inflation everyone else is suffering,but will only be suffering a small amount of that inflation themselves.However they need to be companies where demand wont fall much and they are needed/wanted.

"Love it, love it, love it"!  My operating thesis to a tee.  I would also add brittleness in addition to the ability to pass on (and maybe profit from) inflation.  Chains of every type may come under increasing pressure at such a turning so play safe?  Regarding your links narrative, I call them "degrees of freedom", drawn from my econ/polo/philo/theory/stats days: "Degrees of Freedom refers to the maximum number of logically independent values, which are values that have the freedom to vary, in the data sample".  They exist all over life and are worth the search and to be surrounded by.

[Harley]

10 minutes ago, Sasquatch said:

"Turnover is vanity, profit is sanity, cash is reality"

Hence my focus on cash flow above P&L and it's associated metrics, followed by the balance sheet and its cash, real assets, and debts!

[DurhamBorn]

4 minutes ago, Harley said:

"Love it, love it, love it"!  My operating thesis to a tee.  I would also add brittleness in addition to the ability to pass on (and maybe profit from) inflation.  Chains of every type may come under increasing pressure at such a turning so play safe?  Regarding your links narrative, I call them "degrees of freedom", drawn from my econ/polo/philo/theory/stats days: "Degrees of Freedom refers to the maximum number of logically independent values, which are values that have the freedom to vary, in the data sample".  They exist all over life.

My work/data was showing this,and it lead me to the answers,but its only now im understanding why those answers keep coming up.I think its going to be critical.Complex as you say means brittleness,it cant not in a cycle with rising problems.

Im starting to think a few other areas might fit in.Maybe the likes of my old employer GSK?.They have very small supply chains,and actually very simple.The technical part is all done in house themselves.10 ingredients plus the active they make.Foil packs/vials packaging.They can easily swap out to more expensive local supply without it touching margins.

So they wont suffer from input inflation,but can they put up prices in the market?.Im not sure,but im going to start buying them as well now.

 

 

[Dogtania]

1 minute ago, Harley said:

"Love it, love it, love it"!  My operating thesis to a tee.  I would also add brittleness in addition to the ability to pass on (and maybe profit from) inflation.  Chains of every type may come under increasing pressure at such a turning so play safe?  Regarding your links narrative, I call them "degrees of freedom", drawn from my econ/polo/philo/theory/stats days: "Degrees of Freedom refers to the maximum number of logically independent values, which are values that have the freedom to vary, in the data sample".  They exist all over life.

Yeah this was super informative.  Really simple boils things down but equally something profound to think about.

I'm worried if there is a big bust coming whether I should be thinking about selling.  Selling half.  Or just holding through.  I'm inclined to hold but keep building a small amount of dry powder.  

It's hard though when you see mega printing and think surely better in an oil company, piece of silver.... Or just tins of food.  Sainsbury's had t-shirt for £2 yesterday FFS.  Made in bangladsh looked reasonable quality.  I don't want a t-shirt though but the point is it sometimes feels I'd be better owning than cash.

Yes if I had land etc I would be buying equipment etc no question.  I don't so what is second best... Equities I guess based on resources or fundamental services people need, as close to the source as possible ie oil extreme example like mentioned.

I guess a balance is best.  I saw David Hunter iirc reqoute himself a few days ago regarding a 60/70% bust across the board next year.  He's been quite accurate so far....

But I think folly for me personally to try to play the markets.

Other than bitcoin which I think I would like to try to punt in and out of.  Only one guy I know is interested, he's got a few more people involved in crypto but very much hodl, I said in a chat I wanted to just risk a small bit as was so volatile, he said just hold or you get 'rekt' I retorted doesn't matter if it goes down I'll rebuy, if it goes up and doesn't return with gravity so be it I'll be left with more toilet paper...I said in a few years could well be worth nothing anyway...silence😅

[Noallegiance]

I now see the bitter sweetness of the time we're entering. 

My work had been largely unaffected in a negative way and even seen growth because of 2020 events.

Due to the nature of the work and area of it I can't comment on detail, but things are now suddenly impacting us negatively to such an extent that a reduction in take-home and hours for everyone involved is about to begin.

The atmosphere has changed immediately. I'm surrounded by rabbit-in-the-headlights eyes. People complaining that they suddenly can't get by. The tide has gone out.

From what I can gather from body language, most people are relying on debt for their lifestyle (whether ostentatious or otherwise) and what's coming now and in the years to come is going to be ugly for these people.

I have a multi-faceted emotional reaction to this. I'm not sorry for them enough to remove my thoughts about living off debt. One makes one's choices. But to be in the presence of people who are now realising that they will genuinely struggle is a first for my lifetime and it smells awful. It also produces within me a validation for at least two-decades-worth of choices, even down to the woman I married and how lucky I am that she is like me on the things that truly matter.

It's a curious and potent mix of satisfaction, fear, pity, happiness and sorrow within me right now. For individuals, nation's and he wider world. So much to digest. So much to cope with. So much witnessed and yet to witness. And how to steer a course? A difficult challenge.

I hope everyone here has a decent end to the year and can ride the ugliness ahead with poise and determination. 

Shit's coming for a lot of people and even those not directly affected will see it and feel it.

[Loki]

50 minutes ago, Dogtania said:

But I think folly for me personally to try to play the markets.

I'm thinking of it as this is our "Tesla" moment (Even if you just open a few shorts at the targets we've spoken about on this thread).  Or some calls on silver.  Edit: I made £100 last week just by opening some - well 35,000 - EUR/USD swaps for a few days.

I love contrarian macro for the long haul of 10 years but I don't want to sit and watch potential mad gainz  pass me buy.  Anyone kicking themselves over Tesla or Bitcoin has an opportunity here, depending on your risk appetite of course.

[Popuplights]

49 minutes ago, Noallegiance said:

I now see the bitter sweetness of the time we're entering. 

My work had been largely unaffected in a negative way and even seen growth because of 2020 events.

Due to the nature of the work and area of it I can't comment on detail, but things are now suddenly impacting us negatively to such an extent that a reduction in take-home and hours for everyone involved is about to begin.

The atmosphere has changed immediately. I'm surrounded by rabbit-in-the-headlights eyes. People complaining that they suddenly can't get by. The tide has gone out.

From what I can gather from body language, most people are relying on debt for their lifestyle (whether ostentatious or otherwise) and what's coming now and in the years to come is going to be ugly for these people.

I have a multi-faceted emotional reaction to this. I'm not sorry for them enough to remove my thoughts about living off debt. One makes one's choices. But to be in the presence of people who are now realising that they will genuinely struggle is a first for my lifetime and it smells awful. It also produces within me a validation for at least two-decades-worth of choices, even down to the woman I married and how lucky I am that she is like me on the things that truly matter.

It's a curious and potent mix of satisfaction, fear, pity, happiness and sorrow within me right now. For individuals, nation's and he wider world. So much to digest. So much to cope with. So much witnessed and yet to witness. And how to steer a course? A difficult challenge.

I hope everyone here has a decent end to the year and can ride the ugliness ahead with poise and determination. 

Shit's coming for a lot of people and even those not directly affected will see it and feel it.

Totally agree. People living on debt are in for a world of hurt. Spend wisely, buy quality, avoid keeping up with the Joneses ( not that anyone on here is like that!) We will weather the coming storm. 

[Loki]

@Noallegiance great post.  I'm not seeing it so much just yet, no-one I know is struggling for work and the trades are rammed.

I do wonder though if this Christmas will be looked back at fondly despite the year of maddening crowds. 

[Barnsey]

Just want to chime in and also thank everyone for all the hugely helpful and insightful info and thoughts over the months and years. Whilst I've had to cash out of my reflation investments for the house deposit it's been a huge education and at least I didn't lose money throughout this chaos.

It's been a great education so far and hope this very unique thread continues as things pick up pace next year. Something tells me our path may not be as linear as hoped but ultimately our instincts will prove right overall. Be careful out there as we enter the "portfolio optimisation" phase of this crisis in 2021.

Mutant strain emergency lockdown announcement at 4pm today.

[wherebee]

I'd say one thing to consider re inflation proofing your life are clothes.

 

I remember when a pair of jeans was a major purchase.  Noone under 40 will think of clothes as something to budget for.  If you are unlikely to change your size much, buying 3-4 pairs of good quality jeans or trousers, and a bunch of tshirts and shirts, could be very sensible.

We filled up on socks and underwear at the start of the pandemic due to supply chain fears for australia.  I think we will double dip, stick them in a suitcase, in sealed packets, and leave them until needed.  

I could see the days of cheap clothing for the west being over.

[Loki]

13 minutes ago, Barnsey said:

Something tells me our path may not be as linear as hoped

Agreed, we're not immune from the market hurting the most people it can.  One of durhamborn's sayings that stuck with me.

Hopefully it buys us flowers afterwards though, unlike the others! 

[Harley]

1 hour ago, wherebee said:

I'd say one thing to consider re inflation proofing your life are clothes.

 

I remember when a pair of jeans was a major purchase.  Noone under 40 will think of clothes as something to budget for.  If you are unlikely to change your size much, buying 3-4 pairs of good quality jeans or trousers, and a bunch of tshirts and shirts, could be very sensible.

We filled up on socks and underwear at the start of the pandemic due to supply chain fears for australia.  I think we will double dip, stick them in a suitcase, in sealed packets, and leave them until needed.  

I could see the days of cheap clothing for the west being over.

I have a car full of clothes and stuff for the charity shops after a clear out way back this year before the first lockdown.  Decided I need another look to check!  I've also been buying iron on knee patches and that iron on Wonderweb stuff!  Also been re-purposing stuff like old wood which looks really good once cleaned up (made a nice large outdoor cupboard).  About to fix my dehumidifier in my new workshop (another summer project completed).  Pig in sh*te me!

[Harley]

2 hours ago, Noallegiance said:

I now see the bitter sweetness of the time we're entering. 

My work had been largely unaffected in a negative way and even seen growth because of 2020 events.

Due to the nature of the work and area of it I can't comment on detail, but things are now suddenly impacting us negatively to such an extent that a reduction in take-home and hours for everyone involved is about to begin.

The atmosphere has changed immediately. I'm surrounded by rabbit-in-the-headlights eyes. People complaining that they suddenly can't get by. The tide has gone out.

From what I can gather from body language, most people are relying on debt for their lifestyle (whether ostentatious or otherwise) and what's coming now and in the years to come is going to be ugly for these people.

I have a multi-faceted emotional reaction to this. I'm not sorry for them enough to remove my thoughts about living off debt. One makes one's choices. But to be in the presence of people who are now realising that they will genuinely struggle is a first for my lifetime and it smells awful. It also produces within me a validation for at least two-decades-worth of choices, even down to the woman I married and how lucky I am that she is like me on the things that truly matter.

It's a curious and potent mix of satisfaction, fear, pity, happiness and sorrow within me right now. For individuals, nation's and he wider world. So much to digest. So much to cope with. So much witnessed and yet to witness. And how to steer a course? A difficult challenge.

I hope everyone here has a decent end to the year and can ride the ugliness ahead with poise and determination. 

Shit's coming for a lot of people and even those not directly affected will see it and feel it.

Inflation is similar - great to start with.  Be careful, people will turn on others come the time.  Time to be "grey".

[Loki]

17 minutes ago, Harley said:

Inflation is similar - great to start with.  Be careful, people will turn on others come the time.  Time to be "grey".

A mate of mine keeps insisting I should buy (Edit: well, lease.  Same thing innit as far as most are concerned) a flash car.

The affordability or desire is here nor there - with what we think is coming why the hell would I want a big arrow pointing at me?

My car is 11 years old...and (Gun metal) grey. I own every square cm of it.

[Harley]

8 minutes ago, Loki said:

A mate of mine keeps insisting I should buy (Edit: well, lease.  Same thing innit as far as most are concerned) a flash car.

The affordability or desire is here nor there - with what we think is coming why the hell would I want a big arrow pointing at me?

My car is 11 years old...and (Gun metal) grey. I own every square cm of it.

https://www.youtube.com/watch?v=H3Wz7fC7tOY

A starter.  7:37 covers cars!  There are financial equivalents.

[Dogtania]

2 hours ago, Loki said:

I'm thinking of it as this is our "Tesla" moment (Even if you just open a few shorts at the targets we've spoken about on this thread).  Or some calls on silver.  Edit: I made £100 last week just by opening some - well 35,000 - EUR/USD swaps for a few days.

I love contrarian macro for the long haul of 10 years but I don't want to sit and watch potential mad gainz  pass me buy.  Anyone kicking themselves over Tesla or Bitcoin has an opportunity here, depending on your risk appetite of course.

Ah, maybe one day I'll learn 🤔 don't trust myself enough to the potential exposure etc right now.  Unfortunately.  As if I had learned or studied I agree could well be a good time...

My thinking being say for Tesla, surely it's seem as such a sure thing by so many that it should be relatively cheap to bet against (ie. Lots of upside).

Bitcoin, used to be a bugbear but maybe worked out for the best, not having bought when I intended back when I first discovered TOS and randomly coming across, seeing it as inherently deflationary (to my potential benefit), but didn't end up persevering as a bit of hassle buying (still is if you ask me, not to physically own, but the whole concept - but that's my failing).

Have small bit of that maidsafe that I've mentally put into being my 'bitcoin'.  Probably will crash and burn, or what I mean is if it does I don't mind.... The team behind aren't some money grabbing invisible entity but dreamers (potentially not good for me either).

Around to bitcoin though I'm quite interested in just trying to buy and sell.  Seems to easy... Probably for a reason.  But the volitity seems quite big.  We'll see.

Going back to betting against does seem like it's not just reality but luck you need.   Tesla and a belief in them can go on a lot longer than your position is able to remain solvent I think.  

But maybe with this coming possible big crash it's the ideal time like you say?!   Something so stretched and worth so much, maybe just has further to fall.  Wool suddenly pulled from people's eyes and en masse to the exit.  

I know your maybe not specifically meaning just Tesla as an option but with them right now seems maybe they are even propped up by the US government.  So many other factors in play.

The silver gains etc have been nice and maybe years to come bit of oil upside too.  Idk a compounded 10% return for a few years would be ok, I don't want to be greedy 😅

 

[Loki]

35 minutes ago, Harley said:

https://www.youtube.com/watch?v=H3Wz7fC7tOY

A starter.  7:37 covers cars!  There are financial equivalents.

Nice find!

[King Penda]

4 hours ago, Noallegiance said:

I now see the bitter sweetness of the time we're entering. 

My work had been largely unaffected in a negative way and even seen growth because of 2020 events.

Due to the nature of the work and area of it I can't comment on detail, but things are now suddenly impacting us negatively to such an extent that a reduction in take-home and hours for everyone involved is about to begin.

The atmosphere has changed immediately. I'm surrounded by rabbit-in-the-headlights eyes. People complaining that they suddenly can't get by. The tide has gone out.

From what I can gather from body language, most people are relying on debt for their lifestyle (whether ostentatious or otherwise) and what's coming now and in the years to come is going to be ugly for these people.

I have a multi-faceted emotional reaction to this. I'm not sorry for them enough to remove my thoughts about living off debt. One makes one's choices. But to be in the presence of people who are now realising that they will genuinely struggle is a first for my lifetime and it smells awful. It also produces within me a validation for at least two-decades-worth of choices, even down to the woman I married and how lucky I am that she is like me on the things that truly matter.

It's a curious and potent mix of satisfaction, fear, pity, happiness and sorrow within me right now. For individuals, nation's and he wider world. So much to digest. So much to cope with. So much witnessed and yet to witness. And how to steer a course? A difficult challenge.

I hope everyone here has a decent end to the year and can ride the ugliness ahead with poise and determination. 

Shit's coming for a lot of people and even those not directly affected will see it and feel it.

No it’s fun I am a horrible cunt but even I know every decade or so we get a recession it’s been obvious we are due a big one like the 1930s.4 years ago was the wake up call to get your house in order ie brexit which was predicted at the time to decimate the uk.Covid is a black swan no one could have predicted the time of .so if you’ve got a huge mortgage 2 loaned cars on your drive and maxed out credit cards tough fucking shit .you should have thought about brexit and positioned yourself accordingly