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

[Bobthebuilder]

23 minutes ago, DurhamBorn said:

Javid "a decade of renewal"

"record low cost of borrowing means we can invest more"

"rebuild our national infrastructure no1 priority"

There you go,now official,reflation.Every area we mentioned at the start of this thread two years ago mentioned as the priority.

I think it might be a good time to increase my monthly drips.

[sancho panza]

21 hours ago, kibuc said:

In the same time span:

Impact Silver - flat

Great Panther - down 4%

My two larges silver holdings. Luckily Alexco and Endeavour more than make up for it. Endeavour acts exactly as I'd expect from a speculative play on silver.

It's fascinating that we got here with DXY at 99.

I'm still struggling to come to terms with that,as it wasn't in my plan.If USD weakens from here,they could go even higher.

Fres looking cheap but then I would say that as we bought some recently.

Been looking at charts and silver has (on the few data points we have over last 45 year) run a lot later than gold and much harder.Collapses more quickly too.

 

[Barnsey]

9 minutes ago, sancho panza said:

I'm still struggling to come to terms with that,as it wasn't in my plan.If USD weakens from here,they could go even higher.

I can only think it must be related to collapsing global bond yields across the curve, folks sniffing out trouble ahead?

[kibuc]

Just now, Barnsey said:

I can only think it must be related to collapsing global bond yields across the curve?

Or maybe just the cleanest dirty shirt. Euro is 57% of DXY and it's going down in flames at the moment.

[Barnsey]

1 minute ago, kibuc said:

Or maybe just the cleanest dirty shirt. Euro is 57% of DXY and it's going down in flames at the moment.

Yep, dollar milkshake theory

[sancho panza]

14 hours ago, Barnsey said:

Mainly West Mids Sancho, areas surrounding Birmingham. More affluent bits like Sutton Coldfield down even more, 7-9% for Semis and detached.

Had a look at RM and Sutton and the reductions start on page 2 of 10.Sadly,no property bee any more to see the size of them.

3 hours ago, DurhamBorn said:

Remainers probably stretching the process so they can blame Brexit,when of course it has very little to do with it.In fact Brexit worries have made the macro situation in the UK better thanks to sterling ,but very little re-balancing went on.The housing market is ground zero in the UK.Its amazing the amount of people who think their house is their pension.The twin affects of falls in equity,and rising rates in the next cycle will kill that idea stone dead.BTL is tricky.Fully paid for houses might still be ok investments for income in cheaper areas,though we could see a big deflation in rents that would lower housing benefits.I work with several Polish and they say many of their friends in lower paid jobs are thinking of going home,not because of Brexit,but because sterling has fallen so far its not worth their while being here.The only ones staying are the ones who are on tax credits.

The markets will now focus on the CBs going loose and forget the damage is already done underneath.Massive deflationary pressures just below the surface.Fed have made biggest policy error since the 30s,too tight for too long.The blow up might be in the east,or Europe,but the cause, a lack of dollar liquidity probably.

 

If you're right and there's an exodus of EE's then things might develop more quickly than previously.There are generational highs in levels of renting,so people jsut aren't tied like they used to be.

Any drop in tenant demand will see the debt deflation pick up speed.

21 minutes ago, Barnsey said:

I can only think it must be related to collapsing global bond yields across the curve, folks sniffing out trouble ahead?

That makes a lot of sense.Saw a great chart I posted previously pitting amount negative yielding bonds with gold price.

[janch]

1 hour ago, DurhamBorn said:

Javid "a decade of renewal"

"record low cost of borrowing means we can invest more"

"rebuild our national infrastructure no1 priority"

There you go,now official,reflation.Every area we mentioned at the start of this thread two years ago mentioned as the priority.

Perhaps he's a secret reader here..............he seems to have an idea of what's coming

[Barnsey]

43 minutes ago, sancho panza said:

That makes a lot of sense.Saw a great chart I posted previously pitting amount negative yielding bonds with gold price.

 

[Talking Monkey]

14 hours ago, DurhamBorn said:

Not bad eh.My rubber band stocks have delivered amazing results.They have massive energy when the complex turns.However you need to really focus on when that turn will be or they keep handing out pain.The miners have now made me a really big return and very very happy.Iv still got most of my silver miners,though most gold miners have gone now.

It was quite strange today sitting in the company brief seeing what they expect for the next year,knowing they were in for a huge shock.Its almost like living in a secret world you cant talk about.

The miners were actually easy,it gets harder going forward,everything points to a reflation cycle alongside a distribution cycle.That will hammer most portfolios.

Its true DB it is like living in a secret world and you cannot really talk about it else folks think you are a loon, glad we have this thread

[Talking Monkey]

2 hours ago, DurhamBorn said:

If you take highs over last 5 years its even worse in many areas.Royal Mail was £6 at one point.BT over £5 etc.Remember as well,priced in $ some of these are down over 80% from lows.

They were right to come down of course as we are at the end of a long dis-inflation.The question is,where will they be at the end of a reflation?.My road maps say the likes of BT go up 300%+,but time will tell.

 I noted  what the likes of starbucks did over the last 10 years, went up 20 fold it just doesn't make sense, I would have thought whilst throwing off huge cash flow the likes of VOD and BT would go up more than 300% from here by 2027

[Barnsey]

6 minutes ago, Talking Monkey said:

 I noted  what the likes of starbucks did over the last 10 years, went up 20 fold it just doesn't make sense, I would have thought whilst throwing off huge cash flow the likes of VOD and BT would go up more than 300% from here by 2027

Exactly! On that note:

Starbucks shares fall after weaker-than-expected 2020 forecast

Quote

After the company crushed third quarter earnings estimates and raised its 2019 outlook in July, some investors might be taken aback by the weaker outlook for 2020. Starbucks had previously said at its investor day in December that it expected earnings per share growth of at least 13% in 2020. 

Starbucks also reiterated its guidance for fiscal 2019, expecting earnings per share in a range of $2.80 to $2.82.

Despite market concerns about a recession in the near future, CEO Kevin Johnson said on CNBC’s “Mad Money” in August that Starbucks has not seen any signs of an economic slowdown in the U.S.

https://www.cnbc.com/2019/09/04/starbucks-shares-fall-after-weaker-than-expected-2020-forecast.html

Peak buybacks and peak consumer coming to an end.

 

[Barnsey]

My last copy and paste tweet for the day (promise), but quite a staggering one to mull over...

And last news article for today:

Home Bidding Wars Hit Eight-Year Low as Buyers Lose Confidence

Quote

Recession fears in the U.S. are killing homebuyers’ fighting spirit, sending the rate of bidding wars to an eight-year low.

About 10% of buyers faced competitors in August, down from more than 42% a year earlier, according to an analysis by brokerage Redfin Corp. of offers written by its agents. The share fell from 11.4% in July, which was the lowest since at least 2011. It reached 59% in March 2018, and has been declining since then.

Mortgage rates near three-year lows “have failed to bring enough buyers to the market to rev up competition for homes this summer,” Daryl Fairweather, chief economist for Redfin, said in a statement. “Recession fears have been enough to spook some would-be buyers from making the big financial commitment of a home purchase.”

https://www.bloomberg.com/news/articles/2019-09-04/home-bidding-wars-hit-eight-year-low-as-buyers-lose-confidence

[Durabo]

Everything feels so wild at the moment. I can't wait to read a history book about this time in 20+ years!

[Lavalas]

3 hours ago, sancho panza said:

Had a look at RM and Sutton and the reductions start on page 2 of 10.Sadly,no property bee any more to see the size of them.

There’s Property Log which works on Google Chrome. Made by a chap on ToS and does the same job.

https://chrome.google.com/webstore/detail/property-log/jccihedpilhidcbkconacnalppdeecno?hl=en-G

 

[Errol]

I'm not selling any gold or gold shares - simply because what is going to happen hasn't happened yet. When gold goes past $5000 an ounce I would consider selling (some) shares but ideally it would be closer to $10,000 an ounce. I'm prepared to wait and have been waiting many, many years.

When prices drop I just buy more.

I should add that I see gold's story as only really at the beginning. $5000 an ounce will be near the middle and $10,000+ (possibly a lot more) near the end.

[M.C. UK]

3 hours ago, Errol said:

I should add that I see gold's story as only really at the beginning. $5000 an ounce will be near the middle and $10,000+ (possibly a lot more) near the end.

@Errol  I am quite sure I saw you (and perhaps even DB) showing this $5000+ possible value/figure - I wonder if would be possible to share how you got to this figures - and apologies for my complete ignorance on the matter.

Cheers

M.C

[sancho panza]

7 hours ago, Talking Monkey said:

 I noted  what the likes of starbucks did over the last 10 years, went up 20 fold it just doesn't make sense, I would have thought whilst throwing off huge cash flow the likes of VOD and BT would go up more than 300% from here by 2027

I shorted SBUX a couple of times last year.Looks like I got away with it.I'll never understand what they're doing on a P?E of 34 at $90 odd bucks on a balance sheet like this

https://uk.investing.com/equities/starbucks-corp-financial-summary

 

 

6 hours ago, Barnsey said:

My last copy and paste tweet for the day (promise), but quite a staggering one to mull over...

And last news article for today:

Home Bidding Wars Hit Eight-Year Low as Buyers Lose Confidence

https://www.bloomberg.com/news/articles/2019-09-04/home-bidding-wars-hit-eight-year-low-as-buyers-lose-confidence

Keep em coming Barnsey.

17 minutes ago, M.C. UK said:

@Errol  I am quite sure I saw you (and perhaps even DB) showing this $5000+ possible value/figure - I wonder if would be possible to share how you got to this figures - and apologies for my complete ignorance on the matter.

Cheers

M.C

DIrection of travel for the dollar over the last thirty years

[sancho panza]

Paul Hodges discusses China bubble popping.Highlights are mine

https://www.icis.com/chemicals-and-the-economy/2019/09/chinas-renminbi-and-the-global-ring-of-fire/

By Paul Hodges on 1st September 2019 in Financial Events

SHARE THIS STORY

 

China’s property bubble puts it at the epicentre of the ring of fire © Reuters 

China’s devaluation could be the trigger for an international debt crisis, as I describe in my latest post for the Financial Times, published on the BeyondBrics blog

August has often seen the start of major debt crises. The Latin American crisis began on August 12, 1982. The Asian crisis began with Thailand’s IMF rescue on August 11, 1997. The Russian crisis began on August 17, 1998.

We fear that the renminbi’s fall below Rmb7 per dollar on August 5 will act as just such a catalyst — this time, for the onset of a global debt crisis that has long been in the category of an accident waiting to happen.

The risk is summarised in the chart below from the Institute of International Finance, showing the seemingly inexorable rise in global debt over the past 20 years

Central banks came to believe that business cycles could be abolished by the use of stimulus, first through subprime and then through quantitative easing. This would encourage the return of the legendary “animal spirits” and allow the debt created to be wiped out by a combination of growth and inflation.

© Institute of International Finance

Unfortunately, as we have argued here before, this belief took no account of demographics or the impact of today’s ageing populations in slowing demand growth.

The baby boomers, who created the growth supercycle when they moved into the wealth creator 25-54 generation, have now joined the cohort of perennials aged 55 and above. They already own most of what they need. The focus on stimulus means that policymakers have failed to develop the new social/economic policies needed to maintain soundly-based growth in a world of increasing life expectancy and falling fertility. Instead, stimulus policies have created overcapacity and today’s record levels of debt.

As William White, a former chief economist of the Bank for International Settlements, warned at Davos in 2016: “It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something.” Presciently, he suggested that the trigger for the crisis could be a Chinese devaluation.

Central banks have created a debt-fuelled ‘ring of fire’ with multiple fault-lines

The risk, outlined in our second chart, is that central banks have created a debt-fuelled global “ring of fire”. China has undertaken around half of all global stimulus since 2008, in effect creating subprime on steroids. As we noted here last year, its tier 1 cities boast some of the highest house-price-to-earnings ratios in the world, while profits from property speculation allowed car sales to rise fourfold from 500,000 a month in 2008 to 2m a month in 2017.

As the FT reported in April, investors have already been spooked by rising levels of dollar debt in China’s property sector. This debt is set to open the global ring of fire, as US president Donald Trump raises the stakes in his trade war. The president and his advisers seem to have chosen to ignore the very real risk of currency devaluation, as markets respond to the impact of tariffs on the economy:

• China’s property bubble puts it at the epicentre of the ring of fire
• This is now spreading out across Asia, impacting other Asian currencies and economies
• The Bank of Japan is about to become the largest owner of Japanese stocks
• The end of the property bubble is causing the end of the commodity bubble
• In turn, this is impacting Australia, South Africa, Brazil, Russia and the Middle East
• ECB stimulus means eurozone government bonds have negative interest rates
• Banks cannot make a profit and savers have no income
• President Trump’s China trade war risks connecting all the dots
• The UK’s potential no-deal Brexit in October further threatens global supply chains

The issue is the risk of contagion from one market to another. Risks in individual silos can be bad enough, but if they spread across boundaries it quickly becomes hard to know who is holding the risk. As US Federal Reserve chairman Jay Powell warned in May while discussing potential problems in the market for collateralised loan obligations (CLO):

“Regulators, investors, and market participants around the world would benefit greatly from more information on who is bearing the ultimate risk associated with CLOs. We know that the US CLO market spans the globe . . . But right now, we mainly know where the CLOs are not — only $90bn of the $700bn in total CLOs are held by the largest US banks . . . In a downturn institutions anywhere could find themselves under pressure, especially those with inadequate loss-absorbing capacity or runnable short-term financing.”

The CLO market is just one part of the problem. As S&P Global reported recently, more than $3tn of US corporate debt is rated triple B, with $1tn rated triple B minus, the lowest level of investment grade. US companies account for 54 per cent of the world’s $7tn total triple B debt. The risk of contagion in any sell-off is clear, as many institutions would have to sell if recession forced rating agencies into downgrades, taking debt below investment grade.

In turn, this would add to the risks in US equity markets, which are already at extreme valuations. Pension funds would be most at risk as they have been major investors in corporate debt and in recent years have entered markets such as the Asian offshore US dollar market in their search for higher yields. A downturn in their returns would risk creating a vicious circle, forcing companies to increase their pension contributions just at the moment when their earnings are already under pressure as the trade war slows the global economy.

Mr Trump may come to regret his comment that “trade wars are good and easy to win”. We envisage a testing time ahead, particularly as only those over 60 have personal experience of even the “normal” business cycles seen before the boomer supercycle began.

[dgul]

7 minutes ago, sancho panza said:

Paul Hodges discusses China bubble popping.Highlights are mine

https://www.icis.com/chemicals-and-the-economy/2019/09/chinas-renminbi-and-the-global-ring-of-fire/

By Paul Hodges on 1st September 2019 in Financial Events

SHARE THIS STORY

 

China’s property bubble puts it at the epicentre of the ring of fire © Reuters 

China’s devaluation could be the trigger for an international debt crisis, as I describe in my latest post for the Financial Times, published on the BeyondBrics blog

August has often seen the start of major debt crises. The Latin American crisis began on August 12, 1982. The Asian crisis began with Thailand’s IMF rescue on August 11, 1997. The Russian crisis began on August 17, 1998.

We fear that the renminbi’s fall below Rmb7 per dollar on August 5 will act as just such a catalyst — this time, for the onset of a global debt crisis that has long been in the category of an accident waiting to happen.

The risk is summarised in the chart below from the Institute of International Finance, showing the seemingly inexorable rise in global debt over the past 20 years

Central banks came to believe that business cycles could be abolished by the use of stimulus, first through subprime and then through quantitative easing. This would encourage the return of the legendary “animal spirits” and allow the debt created to be wiped out by a combination of growth and inflation.

© Institute of International Finance

Unfortunately, as we have argued here before, this belief took no account of demographics or the impact of today’s ageing populations in slowing demand growth.

The baby boomers, who created the growth supercycle when they moved into the wealth creator 25-54 generation, have now joined the cohort of perennials aged 55 and above. They already own most of what they need. The focus on stimulus means that policymakers have failed to develop the new social/economic policies needed to maintain soundly-based growth in a world of increasing life expectancy and falling fertility. Instead, stimulus policies have created overcapacity and today’s record levels of debt.

As William White, a former chief economist of the Bank for International Settlements, warned at Davos in 2016: “It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something.” Presciently, he suggested that the trigger for the crisis could be a Chinese devaluation.

Central banks have created a debt-fuelled ‘ring of fire’ with multiple fault-lines

The risk, outlined in our second chart, is that central banks have created a debt-fuelled global “ring of fire”. China has undertaken around half of all global stimulus since 2008, in effect creating subprime on steroids. As we noted here last year, its tier 1 cities boast some of the highest house-price-to-earnings ratios in the world, while profits from property speculation allowed car sales to rise fourfold from 500,000 a month in 2008 to 2m a month in 2017.

As the FT reported in April, investors have already been spooked by rising levels of dollar debt in China’s property sector. This debt is set to open the global ring of fire, as US president Donald Trump raises the stakes in his trade war. The president and his advisers seem to have chosen to ignore the very real risk of currency devaluation, as markets respond to the impact of tariffs on the economy:

• China’s property bubble puts it at the epicentre of the ring of fire
• This is now spreading out across Asia, impacting other Asian currencies and economies
• The Bank of Japan is about to become the largest owner of Japanese stocks
• The end of the property bubble is causing the end of the commodity bubble
• In turn, this is impacting Australia, South Africa, Brazil, Russia and the Middle East
• ECB stimulus means eurozone government bonds have negative interest rates
• Banks cannot make a profit and savers have no income
• President Trump’s China trade war risks connecting all the dots
• The UK’s potential no-deal Brexit in October further threatens global supply chains

The issue is the risk of contagion from one market to another. Risks in individual silos can be bad enough, but if they spread across boundaries it quickly becomes hard to know who is holding the risk. As US Federal Reserve chairman Jay Powell warned in May while discussing potential problems in the market for collateralised loan obligations (CLO):

“Regulators, investors, and market participants around the world would benefit greatly from more information on who is bearing the ultimate risk associated with CLOs. We know that the US CLO market spans the globe . . . But right now, we mainly know where the CLOs are not — only $90bn of the $700bn in total CLOs are held by the largest US banks . . . In a downturn institutions anywhere could find themselves under pressure, especially those with inadequate loss-absorbing capacity or runnable short-term financing.”

The CLO market is just one part of the problem. As S&P Global reported recently, more than $3tn of US corporate debt is rated triple B, with $1tn rated triple B minus, the lowest level of investment grade. US companies account for 54 per cent of the world’s $7tn total triple B debt. The risk of contagion in any sell-off is clear, as many institutions would have to sell if recession forced rating agencies into downgrades, taking debt below investment grade.

In turn, this would add to the risks in US equity markets, which are already at extreme valuations. Pension funds would be most at risk as they have been major investors in corporate debt and in recent years have entered markets such as the Asian offshore US dollar market in their search for higher yields. A downturn in their returns would risk creating a vicious circle, forcing companies to increase their pension contributions just at the moment when their earnings are already under pressure as the trade war slows the global economy.

Mr Trump may come to regret his comment that “trade wars are good and easy to win”. We envisage a testing time ahead, particularly as only those over 60 have personal experience of even the “normal” business cycles seen before the boomer supercycle began.

Thanks -- that's interesting.

A small point:  

Quote

We fear that the renminbi’s fall below Rmb7 per dollar on August 5 will act as just such a catalyst — this time, for the onset of a global debt crisis that has long been in the category of an accident waiting to happen.

Accident implies there's no-one to blame...

[DurhamBorn]

8 hours ago, Talking Monkey said:

 I noted  what the likes of starbucks did over the last 10 years, went up 20 fold it just doesn't make sense, I would have thought whilst throwing off huge cash flow the likes of VOD and BT would go up more than 300% from here by 2027

They probably will,thats my price targets based on lowest case inflation numbers (inflation high of 8%,where im expecting 12%+) and doesnt include dividends that should add another 70%.Telcos will have a headwind with interest rates going up mid cycle,but hopefully they cash flow running should outpace.

[DurhamBorn]

1 hour ago, M.C. UK said:

@Errol  I am quite sure I saw you (and perhaps even DB) showing this $5000+ possible value/figure - I wonder if would be possible to share how you got to this figures - and apologies for my complete ignorance on the matter.

Cheers

M.C

I think $10,000 gold is likely at the end of the next cycle and $200 to $300 silver.The reason is because we will be right on the edge of a hyper inflation.I dont think we will tip over but the high on my road map says 21% inflation.That sounds crazy,but thats exactly what it says based on the amount of printing i expect to turn around this debt deflation.We will probably undershoot and 12%+ more likely,but a couple of years of inflation in double digits will be enough.What sets the next cycle apart for me is the fact everyone will be printing and everyone reflating.That will cause a 70s style period.

Remember how much money is parked in bonds.The first sniff or reflation and that will flood into real assets.Velocity on steroids.The bond market wont blow up the real economy when it pops,it will instead cause some real old style inflation.

[DurhamBorn]

53 minutes ago, Cattle Prod said:

Do you not think inflation will run up before the crash this time too? Or is this time really different ;-)

I dont think it will,but i have to consider it nearly always has before.Iv dipped into a few steel companies just in case.

[JMD]

1 hour ago, sancho panza said:

I shorted SBUX a couple of times last year.Looks like I got away with it.I'll never understand what they're doing on a P?E of 34 at $90 odd bucks on a balance sheet like this

https://uk.investing.com/equities/starbucks-corp-financial-summary

 

SP, any idea how the huge increase in liabilities in 2018 came about? 

[JMD]

Any thoughts on Schiff's prediction, between 25-27 mins - he says the overriding political desire to prevent a US market crash will be the active driver for massive money printing - his point being during the build-up to next presidential elections the US government is prepared to sacrifice and devalue the dollar in order to make it appear to voters economy is doing fine - i.e. despite a fall in the real value of US stocks their nominal value will remain same.

Conspiratorial in terms of the political mischief maybe, but I suppose if dollar falls, investors in UK will effectively still be able to buy US stocks at cheap price (in pounds). I guess my question is do the specifics of any political maneuverings or market mechanics matter that much in terms of how the debt deflation and the coming reflation cycle plays out? 

 

 

[Democorruptcy]

3 hours ago, sancho panza said:

I shorted SBUX a couple of times last year.Looks like I got away with it.I'll never understand what they're doing on a P?E of 34 at $90 odd bucks on a balance sheet like this

https://uk.investing.com/equities/starbucks-corp-financial-summary

Share buybacks?

It seems incredible to me that 'returning billions to investors' is enabled by "the company incurred a lot of debt to fuel all these buybacks".

How can they have surplus money to return if they have to borrow to do it? It seems complete Ponzi. If ever companies had to have zero debt before they could do buybacks, the stock market would suffer a very loud hissing sound as the air came out.

Quote

Starbucks bottomed near $50 around the same time an expanded share repurchase plan was announced. Management had already committed to return $15 billion to shareholders via buybacks and dividends through fiscal year 2020. Newly appointed CEO Kevin Johnson pledged to increase the target by an extra $10 billion.

$25 billion was an extraordinary sum to return to shareholders, considering Starbucks' overall market cap was under $80 billion. There's no such thing as a "Can't Lose Investment," but this setup was darn close. Here you had one of the premier business franchises in the world, offering a double-digit shareholder yield (dividends + buybacks), in an environment where bonds yield next to nothing.

 

 

 

When the buyback program accelerated in late-2018, shares outstanding fell sharply. The stock price broke above a multi-year trading range, and it's been off to the races ever since.

 

 

Starbucks' Share Repurchase Program Comes With IOUs

There are a couple "IOUs" linked to Starbucks' buyback program that investors should be mindful of going forward.

First, the company incurred a lot of debt to fuel all these buybacks.

 

• Three years ago, Starbucks had about $3 billion in debt and a debt/equity ratio of 59%.
• The company now carries $9.2 billion in debt and the debt/equity ratio exceeds 800%.

 

Second, Starbucks' valuation profile has changed.

Enterprise value (EV) considers the value of an entire company—debt and equity. That's an important metric now since Starbucks just incurred a bunch of debt.

Below is Starbuck's valuation range over the last five years, measuring the ratio of EV to estimated earnings before interest and taxes. Starbucks presently trades at 24.8x, which is a 36% premium to the historical average of 18.3.

 

Valuations in the broad equity market have drifted down over the last year, which makes Starbucks recent valuation surge an even more interesting anomaly.

https://www.forbes.com/sites/michaelcannivet/2019/08/29/starbucks-big-stock-buyback-limits-future-upside/#74245d417047