Credit deflation and the reflation cycle to come (part 3)

[Animal Spirits]

2 hours ago, CannonFodder said:

I think you are smarter than me and approach things from a logical manner so needed time to reflect.

I think we agree that banks profits increase due to leverage; the degree of leverage is what is undecided. 17 times according those figures is still significant.

I don.t approach from a logical point of view, I work with ex bankers and well... would be cautious of opaqueness and misdirection in all of their figures. cooking the books is too strong, everything will be according to rule but loopholes are highly valued. Placing things in a subsidary or joint venture a matter of course. 

BASEL 1 didnt work well imho, then 2 then 3. how will 4 and 5 turn out or maybe Basel 57 lol. Basel i feel is more about regulators and gov looking tough than being tough.

Doubts i have with Basel include

Transfering mortgages to another entity after creation

If a bank grants a motgage to Mr A and he buys a house from Mr B then B has a massive deposit in his account so the bank can create more mortgages on this new 'deposit' leverage of leverage

Likewise I sit in the camp of not knowing what their balance sheets are like in terms of repair as well, I am skeptical of the face value of figures reported. 

this however is my prejudices rather than logic

 

@CannonFodder@sancho panza Check out some of these posts on Basel regs, apparently by a former exec director of the World Bank who suggests Basel doesn't adequately assess risk. I've also pasted some other parts relevant to the thread:

http://teawithft.blogspot.com/2021/10/the-history-ill-tell-my-grandchildren.html

Thirty-three years ago, the world belonged to liberalism and Soviet communism was collapsing. Historians will record how in 1988, one year before the Berlin Wall fell, the western world’s bank regulators introduced risk weighted bank capital requirements that distorted the allocation of credit. That put an end to any laissez-faire economics. With risk weights of 0% the government and 100% citizens, as if bureaucrats know better what to do with credit than e.g., entrepreneurs, communism took over. 

http://teawithft.blogspot.com/2021/06/spurn-bank-regulators-false-promises.html

But anyone who reads “Keeping at it” 2018 in which Paul Volcker’s 2018 valiantly confessed: “The assets assigned the lowest risk, for which bank capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages”, should be able to understand that rent-extraction also occurs by means of cheaper and more abundant access to credit.

And boy did regulators throw away unencumbered access to credit in “the wrong way”

Here follows four examples: 

To establish their risk weights, they used the perceived credit risks, what’s seen “under the street light” while, of course, they should have used the risks for banks conditioned on how credit risks were perceived. 

By allowing banks, when the outlook was rosy, to hold little capital, meaning paying high dividends, lots of share buy backs, and huge bonuses, they placed business cycles on steroids.

Very little of their capital requirements cover misperceived credit risks or unexpected events. Therefore, just as in 2008 with the collapse of AAA rated mortgage back securities, and now with a pandemic, banks were doomed to stand there with their pants down.

With risk weights of 0% the sovereign and 100% the citizens, which de facto imply bureaucrats know better what to do with credit they’re not personally responsible for than e.g., entrepreneurs, they smuggled communism/statism/fascism into our banking system.

http://teawithft.blogspot.com/2021/06/the-main-ingredient-of-any-safe-pension.html

But the current risk weighted bank capital requirements, with lower risk weights for financing the “safer” present, e.g., loans to governments and residential mortgages, than when financing the riskier future, e.g., small businesses and entrepreneurs, is a clear example of how that intergenerational holy bond Edmund Burke wrote about has been violated.

In order to have a jolly good time, boomers placed a reverse mortgage on the economy, and all, young and old, will pay dearly for it.

And way back, when observing how many Social Security System Reforms were based on the underlying assumption that they will be growing 5 to 7 percent in real terms, I also warned, time and time again, that it was not possible for the value of investment funds to grow, forever, at a higher rate than the underlying economy, unless they are just inflating it with air, or unless they are taking a chunk of the growth from someone else. In this respect the 'chickens are only coming home to roost'.

[sancho panza]

Below I've added some DXY to the oil/recession/S&P timeline.DXY is in red.All price points are monthly closes to reduce noise.

Obviously this comes with a data point warning on recession starts due the way GDP figures are altered sometimes many months after first print.Also some caution needed as the GDP deflator has differences to CPI.

The two recession recessions eitehr side of the tech bubble featured a decent dollar weakening phase.There might be reasons such as capital getting drawn into US markets that kept Dollar strengthening into

Interesting as well from an observational point of view that the DXY has moved inversely to oil during key inflection points eg nov 07 (US recession started in Dec 07) through to Oct 2011 when gold peaked,then again through the commodity bear Sep 14 and Jan 16 bottom.You wouldnt time off it but hey.

I've divided the oil figure by 3 jsut to give a better picture.

Jsut obs DYOR natch

 

 

'This a repost from Thread 2 Aprill 22 21.Discussion of oil price rises preceding recessions and stock market drops.It really feels like we're in the oil run up phase before the crash

1990

You can see that in Q4 1989,there was already a likely negative GDP print in real terms or at least sever weakness economically.

Oct 1988 Oil bottoms monthly close $13.58,intraday $12.28

May 1989 DXY tops out on monthlies at 102.98 begins weakening phase

Jan 1990 WTI at $24.20 intraday peak a 78% rise from Oct 1988

Jan 90 S&P 500 first attempt at 360 intraday

May 90 S&P 500 peaks around 360

July 1990  US recession starts with oil at $20.69

Sept 1990 oil peaks at monthly close $39.51 a 190% rise from bottom

Oct 1990 oil intraday peak $41.15

Oct 1990 S&P 500 bottoms

January 1991 DXY bottoms at 82

March 1991 US recession ends with oil at $19.63

https://www.macrotrends.net/countries/USA/united-states/gdp-gross-domestic-product

 

2000

July 1995 major bottom in DXY at 81.57

Dec 1998  Oil bottoms at $10.35,turns up DXY forms intermediate bottom at 94.17-short weakening phase

Mar 2000 S&P 500 Intraday peak

Aug 2000 S&P500 monthly peak

Sep 2000 Intraday oil peak at $37.80

Jul-Sept 2000 Real GDP 0.53%-possible start of US recession not using real world view of economy.

Nov 2000 Oil peaks on monthlies at $33.82 a 226% rise from bottom

Mar 2001 US recession begins

Nov 2001 US recession ends.

Jan 2002 DXY tops out at 120.24

Aug 2002 S&P bottoms on the monthlies

 

2008

Jan 2007 Oil bottoms on the monthlies at $58.14

Oct 2007 S&P peaks on monthlies at 1550

Dec 2007 US enters recession with Oil at $95.98

Mar 2008 DXY bottoms at 71.80

June 2008 Oil peaks at $140-monthlies a 140% rise from bottom

Feb 2009 S&P bottoms around 730 on the monthlies DXY tops at 88.17

June 2009 US recession ends with oil at $69.89

 

 

'

[JMD]

14 hours ago, reformed nice guy said:

I was lucky with a gas producer  called ovintiv. Got my ladders at 12, 9, 7.5 but never got 5. Currently 33 but has been at 40 this year. All down to you DB, you gave me the confidence in the sector and the ladder system to keep the emotions out.

Yes Ovintive has the 3rd largest global gas reserves, it lies behind the giants Exxon(1st) and BP(2nd)... Really wish I had bought more of it when it was at those low low prices!!

[Ash4781b]

I am in a market for a new mobile phone. Looking at monthly contracts they have built in margins over RPI for increases (eg. +3.5%). Ouch. These must be great for the company on the other side. However, although the absolute cost of the contract is low in the scheme of things I do think the media champions will pickup these contracts and demand something is done! And as there’s an entitlement to the latest phone some are going to getting shocks at these rises. I don’t totally follow why they are priced at large margins over RPI . 
 

edit: these are the hotukdeals list

Three: a Fixed Annual Price Change, 4.5% this year. 
O2: RPI plus 3.9%.
EE, Vodafone: Consumer Price Index plus 3.9%.

The date of the adjustment also varies by provider:

Three: April 
O2: Announced in Feb, effective from April
EE: Announced in Jan, effective from March
Vodafone: Announced in Jan, effective from April

[DoINeedOne]

Incase anyone wondering about Mag silver drop today

Fresnillo plc ("Fresnillo") and MAG Silver Corp. ("MAG Silver") today provide a commissioning update on the Juanicipio Project (56% / 44% Fresnillo and MAG Silver, respectively).

 

The Juanicipio Project team delivered the Project for plant commissioning on schedule despite the recent changes to labour contracting legislation and having successfully mitigated most COVID-19 related issues over the past two years, a testament to the dedication of the operational and development teams on the ground.

However, the 'Comisión Federal de Electricidad' ("CFE"), the state-owned electrical company, has just notified Fresnillo, the Juanicipio Project operator, that approval to complete the tie-in to the national power grid cannot yet be granted and the mill commissioning timeline will therefore be extended by approximately six months. This is directly related to knock-on effects of the pandemic on the CFE's operations, predominantly related to a lack of CFE staff which limits its ability to oversee three key tasks to: review the existing installation; supervise physical connection to the active power grid; and approve required blackout prevention devices.

As operator, Fresnillo will continue to engage closely with the CFE and 'El Centro Nacional de Control de Energía' ("CENACE") to do all that it can to expedite these necessary approvals. Although there remains uncertainty regarding the timing for connecting the Juanicipio Project to the power grid, the current estimate, which continues to be subject to potential COVID-19 related realities, is that full load commissioning activities will be approved sometime after the first week of May 2022.

Stoping and mineralized mine development at Juanicipio will continue. In order to minimize any potential adverse effect, Fresnillo will make available any unused plant capacity at its Minera Fresnillo and Minera Saucito operations to process mineralized material produced at Juanicipio during this period, and if possible matching commissioning and ramp up tonnages that were previously expected. The effect on cashflow generation from Juanicipio therefore will also be mitigated while CFE approvals are pending.

"As an industry, we continue to manage the ongoing impact of the pandemic and while frustrating for all concerned, we recognize this situation is beyond the control of all parties," said Octavio Alvidrez, Chief Executive of Fresnillo plc. "The health and safety of our people and all our partners remains our priority. We thank the CFE for their engagement and will continue to work closely with them to accelerate grid connection as quickly as we can. Meanwhile, we will continue to process mineralized development material by using any excess capacity available at the Minera Fresnillo and Minera Saucito plants, minimizing any impact on future cashflow generation."

"We are very fortunate to be able to process mineralized material from Juanicipio through the excess capacity available at the Minera Fresnillo and Minera Saucito plants, which should minimize the economic impact of the electrical connection timing," said George Paspalas, President and CEO of MAG Silver. "The Juanicipio Project team has managed through stringent COVID-19 protocols to make the process plant effectively ready for start-up.  However, approvals for the electrical connection for the Project have been affected by governmental COVID-19 restrictions that have severely limited the CFE in carrying out their reviews and final sign-off. We look forward to the CFE resuming normal activities, so we can flip the switch on our plant!"

 

[stoobs]

2 hours ago, spygirl said:

They pretty much do esp.for mortgages.

Unsecured lending/credit card - no

I also thought it was nightly clearing where any outstanding imbalances had to be addressed.

If Barclays inexplicably grant me an interest free loan of £100tn for a 'loft conversion', that results in a deposit of £100tn in my Barclays account.

That evening the £100tn is on both sides of Barclays balance sheet so has no effect on clearing.

The next day I travel to London and using my debit card spend the £100tn in a pub offering "seasonal meats, butchered onsite, casually presented at untreated wood tables".

The pub has its account with HSBC so the £100tn now sits in a different bank.

That evening during clearing, HSBC ask Barclays for the ~£100tn balancing payment and my local Barclays loan manager has a large object inserted in his bottom sideways.

[DurhamBorn]

15 hours ago, reformed nice guy said:

I was lucky with a gas producer  called ovintiv. Got my ladders at 12, 9, 7.5 but never got 5. Currently 33 but has been at 40 this year. All down to you DB, you gave me the confidence in the sector and the ladder system to keep the emotions out.

I got decent amounts in Northwestern etc,but should of really made much more given the call.I actually put more in the telcos then that are flatlining.Of course given the pace and the markets at the time my allocation was still very good.Potash was my biggest area and at the bottom Mosaic and Drax were my two biggest holdings and Royal Mail close behind and Mosaic was swapped out into oilies etc .Harsh truth is the work was superb on the call,but i wasnt prepared on how to leverage it enough.Maybe the MSM narrative etc crept into the depths of my mind.

[Axeman123]

This has to be deliberate sabotage:

 

[Loki]

15 minutes ago, Axeman123 said:

This has to be deliberate sabotage:

 

 

Looks like @DurhamBorn won't have to worry about nuke vs oil any more

[Majorpain]

3 hours ago, Axeman123 said:

This has to be deliberate sabotage:

 

Loonies are in charge in Germany ATM, the big question is are they going to keep the maintenance up for the next few months so they can switch them back on with a bit of warning if things get dire?

Probably not.

[Axeman123]

8 minutes ago, Majorpain said:

Loonies are in charge in Germany ATM, the big question is are they going to keep the maintenance up for the next few months so they can switch them back on with a bit of warning if things get dire?

Probably not.

More likely they will start demolition/sabotage ASAP, to permanently keep them offline.

[Democorruptcy]

4 hours ago, Axeman123 said:

This has to be deliberate sabotage:

 

I watched a Simon Reeve in The Lakes (iplayer maybe 3rd of 3 episodes) and a good portion was at Sellafield. He said how nuclear could be the future because it was low carbon. Also that some of the nuclear waste might need a huge underground cavern building to store it, that would be a great engineering feat but didn't mention that it would need lots of energy to do it.

[Yellow_Reduced_Sticker]

"Gas price falls as cargo ships divert to UK"

Huge cargo ships carrying liquid gas that were destined for China have changed course and are now heading towards the UK, as Europe remains trapped in a major supply crunch.

Paging @ThoughtCriminal Hope ya mates closed out there LONG gas postions?!

https://www.telegraph.co.uk/business/2021/12/28/cargo-ships-divert-gas-china-britain/

 

Meanwhile back at the ranch, our macbeth is at an ALL TIME YEAR HIGH!

 

[sancho panza]

This trend really does bode ill for social cohesion,historicallyalso portends the rise of extremist politicians

https://wolfstreet.com/2021/12/27/my-wealth-effect-monitor-wealth-disparity-monitor-for-the-feds-money-printer-economy-december-update/

The Fed makes the rich richer, the bottom 50% pay for it via inflation.

The Fed’s policies are designed to create asset price inflation. Asset holders get richer. That’s the purpose. The more they have, the more they get from this asset price inflation.

The bottom 50% have nearly nothing in terms of assets – for example, they held on average only $4,077 in stocks per household in Q3 – and they get shafted. This has been the case for decades, but during the pandemic, the Fed embarked on a historic money printing binge, and the results in terms of this ridiculous wealth disparity are now everywhere.

But for the bottom 50%, this historic money-printing binge has now created the worst inflation in 40 years. Inflation means the dollar loses purchasing power. But for the bottom 50%, their labor, which is denominated in dollars, loses purchasing power in terms of housing, food, cars, etc. And so the bottom 50% get to tighten their belt to pay for the Wealth Effect.

[Hancock]

Is that the BK the World Bank sees on the horizon.

https://www.telegraph.co.uk/business/2021/12/29/risk-double-dip-recessions-inflation-covid-restrictions-bite/

Risk of double dip recessions as inflation and Covid restrictions bite, World Bank warns

Countries are imposing new restrictions on economic activity amid fears omicron could force lockdowns even if less severe

By Tom Rees 29 December 2021 • 12:10pm

Soaring inflation and tough Covid restrictions risk triggering double dip recessions, the World Bank has warned, as countries run out of economic ammunition after two years fighting the pandemic. 

Carmen Reinhart, chief economist at the international financial institution, sounded the alarm on the ability of countries to tackle the twin threats of omicron and a cost of living crisis as tougher Covid rules are put in place.

Forecasters had predicted another strong year of recovery for the global economy in 2022. However, the economic outlook has darkened considerably in recent weeks as fresh lockdown restrictions imposed to curb the spread of omicron also threaten to stoke already high inflation.

Ms Reinhart told the Telegraph the variant is a “setback” for the global recovery as she warned “the longer this goes on the more the ammunition supplies go down”, limiting the firepower of economic aid.

She said: “There’s a lot of downside risks: I think for Europe, they are already more manifest, but they’re there for everyone.

“The combination of omicron and rising inflation and a lot of uncertainty about inflation is also a global concern, and it’s important in having any confidence about recovery. In other words… we’re in for more disappointments.”

Countries are imposing new restrictions on economic activity amid fears the rapid spread could force lockdowns even if omicron is less severe. England has held off on imposing fresh restrictions over Christmas and New Year’s Eve, but fresh curbs are still being considered for the new year.

Ms Reinhart said: “We’ve had less draconian measures taken than of course when Covid erupted, but certainly in that direction… it makes for a more halting double dip-like process. I think the concerns of double dips are very real.”

A double dip recession is when output falls for two consecutive quarters for a second time. Before omicron, the global economy was expected to continue a brisk recovery from the initial Covid slump with the UK and Europe previously set to claw back to pre-Covid GDP levels in early 2022.

Ms Reinhart also warned that worries over heavily indebted companies and stock markets risk tying the hands of central banks in their bid to fight rising inflation, another building pressure on economies.

Central banks are concerned the new variant could also increase inflationary pressures battering households as supply chains face more disruption. After taking on huge amounts of debt to endure lockdown, a hike in interest rates by central banks to fight inflation could ramp up the pressure on indebted firms.

Ms Reinhart said corporate indebtedness means the hands of central banks are “a lot more tied than is perhaps widely appreciated”, while inflation will be “more persistent”.

She said: “[Central banks] are also afraid of financial fragility concerns. We have a very leveraged corporate sector that has taken on a lot of high risk debt. A lot of the debt is really junk bond variety with very poor covenants. And so you have a lot of outstanding debt that is corporate debt that’s very sensitive to rate hikes.

“Also tying their [central banks] hands are concerns about what may happen with the equity market.”

The Bank of England and US Federal Reserve have started to unwind Covid stimulus to rein in price pressures. Earlier this month, the Bank hiked interest rates from a record low of 0.1pc to 0.25pc, while Fed rate-setters expect to vote for six rises in borrowing costs over the next two years.

On fighting the economic effects of omicron, Ms Reinhart said many low and middle income countries that already “didn’t have a lot of gunpowder” for stimulus are facing even greater strains if economies are hit. A number of countries are “entering a phase where doing fiscal stimulus is going to be much more challenging”.

[Hancock]

3 minutes ago, sancho panza said:

This trend really does bode ill for social cohesion,historicallyalso portends the rise of extremist politicians

https://wolfstreet.com/2021/12/27/my-wealth-effect-monitor-wealth-disparity-monitor-for-the-feds-money-printer-economy-december-update/

 

I thought it was great watching our billionaire overlords fly off into space whilst us plebs on earth were locked down! (only playing)

Only have to see my love of landlords to see where we currently are ... and i'm almost rich enough to be a global 1%er! 

 

[sancho panza]

A great piece by Shedlock discussing the glaring inaccuracy/fraud of using Owner's equivalent rent rather than hosue prices in CPI,amongst other things.

It really is a shame that you have to read relatively unread blogs like Shedlock/Shaun Richards/Wolf St to get this sort of level headed analysis.You won't read it anywhere in the MSM.

 

https://mishtalk.com/economics/every-measure-of-real-interest-rates-shows-the-fed-is-out-of-control

 

[Sugarlips]

Turkey should be fine then 🙄

 

[JMD]

3 hours ago, Cattle Prod said:

Hey JMD, where'd you get that number, I'd like to check it out! You have to be very careful with unconventional gas reserves, they can die on their arse so to speak.

Edit

It is a very hard sector to leverage as @DurhamBorn says, as pure play gas is expensive to do unless you're in shale. I mentioned Antero resources on here which has 22x, but I wouldn't worry too much about it as it'll all filter through the big companies as hedges roll off and they see the benefits of the new price regime. Many are hedged at ~50p a therm which was reasonable a year ago but could have got 10x that last week. 

Unfortunately I only have the notes I made from 2/3 years back. Figures were taken from a reputable site, which I did also sanity check, but I can't recall which site it was. Exxon gas reserves were 85trillion cubic feet, BP 45trillion, Ovintiv 14trillion. Gazprom was in amongst the top ones also but at that time I wasn't interested in buying Russia, though since then I changed tack and Gazprom is now one of my biggest holdings. I accept what your saying and that 'gas reserves' can mean many different/misleading things. I think - but can't be certain - that the figures I've referenced were perhaps proven+'potential' reserves, I say this because recent report below (p24) lists the proven natural gas/natural gas liguids at approx 6trilliion...       (anyway happy to be corrected on any of this; plus for context I mainly buy the large integrated divi paying oilies but whatever the sector I also allocate 10% to small/speculative plays)                                                                                                                                                                                                                                                                          https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.ovintiv.com/wp-content/uploads/2021/03/ovintiv-2020-annual-report.pdf&ved=2ahUKEwjrxtaUnYr1AhUHYsAKHZCFB-oQFnoECBQQAQ&usg=AOvVaw2LOnLMrIo4JNc6DQT2cPlc

[Froggy2000]

9 hours ago, Axeman123 said:

More likely they will start demolition/sabotage ASAP, to permanently keep them offline.

Agree.  They'll cut all the critical cabling / rip out the electronics as soon as they can so the decision is irreversible.

[ThoughtCriminal]

10 hours ago, Yellow_Reduced_Sticker said:

"Gas price falls as cargo ships divert to UK"

Huge cargo ships carrying liquid gas that were destined for China have changed course and are now heading towards the UK, as Europe remains trapped in a major supply crunch.

Paging @ThoughtCriminal Hope ya mates closed out there LONG gas postions?!

https://www.telegraph.co.uk/business/2021/12/28/cargo-ships-divert-gas-china-britain/

 

Meanwhile back at the ranch, our macbeth is at an ALL TIME YEAR HIGH!

 

He seems to still make money even when it falls, just not "fuck you" money. 😂

[Noallegiance]

16 hours ago, Axeman123 said:

This has to be deliberate sabotage:

 

It feels like governments have gone to war with the populous.

First break them down.

Then take out their energy supply.

Next is food.

We're under seige.

[jamtomorrow]

8 hours ago, Cattle Prod said:

this is all wrapped up in Russia geopolitical tension imho

I've come to the same conclusion. Russia are starting to look/sound cornered/desperate on energy policy, which is how "accidents" happen.

Have a look over Lavrov's recent rant, dredging up years of pent-up grievances which - whilst they are on the whole true and justified - also represents a significant breakdown in the usual facade of insouciance. Something's up this time.

Hard to know what's going on inside the oligarchy, but don't assume Putin is as all-powerful as he seems - Putin has free reign only for as long as he delivers.

Maybe he was supposed to "deliver" those long term gas contracts with the EU that have been talked about here? There's a definite feel of "now or never" around all of it: the West is at its weakest but Putin is suddenly looking and sounding old, Ukraine has "last throw of the dice" written all over it, and if the EU get through a winter without caving ... 2022 could be very "interesting" indeed when it comes to internal politics in Russia - Abramovich doesn't usually hang around when his managers stop winning.

[spygirl]

38 minutes ago, jamtomorrow said:

I've come to the same conclusion. Russia are starting to look/sound cornered/desperate on energy policy, which is how "accidents" happen.

Have a look over Lavrov's recent rant, dredging up years of pent-up grievances which - whilst they are on the whole true and justified - also represents a significant breakdown in the usual facade of insouciance. Something's up this time.

Hard to know what's going on inside the oligarchy, but don't assume Putin is as all-powerful as he seems - Putin has free reign only for as long as he delivers.

Maybe he was supposed to "deliver" those long term gas contracts with the EU that have been talked about here? There's a definite feel of "now or never" around all of it: the West is at its weakest but Putin is suddenly looking and sounding old, Ukraine has "last throw of the dice" written all over it, and if the EU get through a winter without caving ... 2022 could be very "interesting" indeed when it comes to internal politics in Russia - Abramovich doesn't usually hang around when his managers stop winning.

Putin is 69.

Russian life exp is 73.

Since covid Putin has been kept in a virtual  plastic bubble.

[jamtomorrow]

24 minutes ago, spygirl said:

Putin is 69.

Russian life exp is 73.

Since covid Putin has been kept in a virtual  plastic bubble.

Now *that* would be one hell of a Black Swan. I wonder how the succession would play out. Is there any case to be made for "orderly"? Whoever comes through needs to have the backing of the oligarchs *and* the strength to keep them in line.