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

[Animal Spirits]

8 minutes ago, Cattle Prod said:

I followed his 'limits to growth' I think it was called back in the mid 2000s, it's one of the reasons I went into the energy business. I think it came out on a CD back then, how quaint.

One thing has always stuck in my head is, to paraphrase "One of humanitys greatest failings is the inability to understand the exponential function". 

For example, did you know that 2% eventually goes exponential? Remember that when they say 2% is a desirable rate of inflation. It might take a while, but it eventually goes parabolic and wipes out all your wealth. And well they know it. 

Here's a simple example I just ran off in Excel:

The dollar clearly much went quicker than 2%...

The only desirable rate of inflation is zero. And if it isn't, you need your wealth to keep up with it.

 

And the rule of 72 👍

[NogintheNog]

8 minutes ago, Animal Spirits said:

And the rule of 72 👍

Rule of 72 = time for an asset to double in value. These calculations are fine, provided the asset you are basing them on stays static in terms of value. If you had used the 'rule of 72' on the 'Scottish Play' (can we just call it Centrica now?) It clearly would not work!

Meanwhile if you'd bought say LON: RDSB at sub 900p last year you've done the rule of 72 in one year!

[Animal Spirits]

3 minutes ago, NogintheNog said:

Rule of 72 = time for an asset to double in value. These calculations are fine, provided the asset you are basing them on stays static in terms of value. If you had used the 'rule of 72' on the 'Scottish Play' (can we just call it Centrica now?) It clearly would not work!

Meanwhile if you'd bought say LON: RDSB at sub 900p last year you've done the rule of 72 in one year!

True, I actually first came across it from population increases.

[Hancock]

1 hour ago, NogintheNog said:

I'll take a £0 bet that they don't raise in November. The BoE want this inflation, they are not going to do anything yet to stop it. Even when they do they'll be so far behind the inflation that rates will still be deeply negative!

If they were gonna raise rates they'd have already done it by now

They're 2 decades behind the curve, but raising rates isn't going to stop inflation as that cats out the bag after the helicopter drop, the predicted 0.15% rise won't do a thing other than show they're not totally ignorant to whats going on.

[Castlevania]

11 hours ago, nirvana said:

BT went from 99p to £2.05 .......where's the bogged emoji? 

There are a few exceptions. With dividends I’m up ~150% in Airtel Africa and BT doubled before sliding, but as a whole they’ve largely gone nowhere.

[nirvana]

1 hour ago, Hancock said:

the predicted 0.15% rise

says who? I'll short that prediction 

[DurhamBorn]

2 hours ago, Cattle Prod said:

I followed his 'limits to growth' I think it was called back in the mid 2000s, it's one of the reasons I went into the energy business. I think it came out on a CD back then, how quaint.

One thing has always stuck in my head is, to paraphrase "One of humanitys greatest failings is the inability to understand the exponential function". 

For example, did you know that 2% eventually goes exponential? Remember that when they say 2% is a desirable rate of inflation. It might take a while, but it eventually goes parabolic and wipes out all your wealth. And well they know it. 

Here's a simple example I just ran off in Excel:

The dollar clearly much went quicker than 2%...

The only desirable rate of inflation is zero. And if it isn't, you need your wealth to keep up with it.

 

I think people feel comfort in small numbers and it costs them dear.Prime example are IFA fees.Add in fund fees and platform fees and it can be 2.2% a year,even cheap ones 1.7%.Of course someone sticks a £200k inheritance with them and sees it going up 11k a year during the good times they think what a great job the IFA is doing when really a third of their gains before inflation are going out the door.Im convinced this cycle from here onwards will see those type of investments go down nominal around 3% a year,but even a break even with inflation averaging 6% (63% for the cycle i still see) and 2% fees is a disaster for anyone close to retiring,and even worse for someone just entering drawdown at say 60.

A lot of the work before the cycle got under way was to try to find the areas that could leverage those 2%s a year.

On the economy though iv just been for my sunday stroll around Durham and it was lifting with people.Having to line up outside to get a table in the cafes.However my re-fillable coffee from Wetherspoons has gone up to £1.20 so i made sure i had three re-fills.Hundreds of lovely Asians walking past so the uni is still sucking in the money from abroad.

[Heart's Ease]

2 hours ago, Cattle Prod said:

I followed his 'limits to growth' I think it was called back in the mid 2000s, it's one of the reasons I went into the energy business. I think it came out on a CD back then, how quaint.

One thing has always stuck in my head is, to paraphrase "One of humanitys greatest failings is the inability to understand the exponential function". 

For example, did you know that 2% eventually goes exponential? Remember that when they say 2% is a desirable rate of inflation. It might take a while, but it eventually goes parabolic and wipes out all your wealth. And well they know it. 

Here's a simple example I just ran off in Excel:

The dollar clearly much went quicker than 2%...

The only desirable rate of inflation is zero. And if it isn't, you need your wealth to keep up with it.

 

Remember his example of a drop of water in a baseball stadium which doubles every minute. How long til the water fills it to the brim? I think in ?2009 he thought it had reached 'the bleachers'.?

Same analogy as a grain of rice doubling for each square on a chessboard.

Yes, listened to that series and thought it excellent back then.

https://www.principledynamics.com/exponentials

picked up a link see episode 4

 

 

[DurhamBorn]

2 hours ago, NogintheNog said:

I'll take a £0 bet that they don't raise in November. The BoE want this inflation, they are not going to do anything yet to stop it. Even when they do they'll be so far behind the inflation that rates will still be deeply negative!

If they were gonna raise rates they'd have already done it by now

My roadmap is telling me they will raise rates but keep QE.I know its unlikely,and seems a ridiculous thought to do that,but my liquidity profiles are showing bankrupt governments,but more than enough liquidity in the system outside.Raising rates at the same time of providing more liquidity to governments would mean they could pop some bubbles and get capital to move.After all the best way to get money to move from say bubble tech,to commod producing areas and re-adjust investment is raise rates,but keep liquidity high.If i was in the BOE inner circle is raise rates,but try to keep QE going at £7 billion to £9 billion a month.The aim is to get tax increasing faster than spending.Lets see.

[JMD]

8 hours ago, Hancock said:

In the 8 months or so i spent in OZ around the years 2000 and 2003, i always got the impression their politicians were a  dopey versions of our fucken useless lot, who were always looking to out do the Brits.

Its as if they're trying to confirm my theory.

Though sadly it means destroying what seemed like a liveable country not so long ago.

 

Australia (and Canada and New Zealand) have become woke jokes in so many ways... for example, the report below, you couldn't really make up. But it describes how it should no longer be enough for investment funds to merely divest out of the hated carbon producing sectors, but that in future such funds should also actively short those evil companies. Apparently this will aid the fund in becoming a truly net-zero investment vehicle!!                                                                                                                  https://www.brisbanetimes.com.au/business/banking-and-finance/super-funds-could-short-heavy-emitters-to-meet-net-zero-targets-us-hedge-fund-titan-warns-20210822-p58kw8.html?utm_campaign=TraderFerg&utm_medium=email&utm_source=Revue newsletter

[DurhamBorn]

25 minutes ago, Cattle Prod said:

That's an interesting take. Do you see the Fed doing similar, or are other CBs raising rates to compete with the Fed, attract capital away from the US?

Im not sure on others,but it might happen.Im seeing two sides to the position now.Plenty of liquidity,but structural deficits for governments.They need longer for taxes to increase so the deficit becomes less than GDP growth.The world is desperate for industrial investment,but massive amounts of capital are stuck in bonds,tech and crypto.The CBs need that to move into cyclical areas.They wont say it,but im seeing signs they know it.Interest rate increases alongside funding government deficits would help with that.They wont say it of course,but if a few trillion came out of tech,tech would still operate as normal,but rising equity prices and rising prices on sales for the nuts and bolts companies would see their ROCE improve meaning they would invest,meaning wages go up,meaning inflation might top out at 7%-8% then come back to the 4% to 5% area.

IF we get a rate increase with QE still running then the above is the scenario they want,its the macro outcome anyway.Of course it would mean much higher prices in cyclicals down the line.

Should add,as you say,yes i think drawing capital is part of it,or at the least trying to stop capital leaving while they fund deficits.The main systemic risk in the UK alongside energy is sterling falling like a brick because it would ensure QE had to stop dead.That would mean a bankrupt government unable to issue gilts.I think the BOE would much rather inflict some pain on BTL landlords etc.

[Noallegiance]

54 minutes ago, DurhamBorn said:

Im not sure on others,but it might happen.Im seeing two sides to the position now.Plenty of liquidity,but structural deficits for governments.They need longer for taxes to increase so the deficit becomes less than GDP growth.The world is desperate for industrial investment,but massive amounts of capital are stuck in bonds,tech and crypto.The CBs need that to move into cyclical areas.They wont say it,but im seeing signs they know it.Interest rate increases alongside funding government deficits would help with that.They wont say it of course,but if a few trillion came out of tech,tech would still operate as normal,but rising equity prices and rising prices on sales for the nuts and bolts companies would see their ROCE improve meaning they would invest,meaning wages go up,meaning inflation might top out at 7%-8% then come back to the 4% to 5% area.

IF we get a rate increase with QE still running then the above is the scenario they want,its the macro outcome anyway.Of course it would mean much higher prices in cyclicals down the line.

Should add,as you say,yes i think drawing capital is part of it,or at the least trying to stop capital leaving while they fund deficits.The main systemic risk in the UK alongside energy is sterling falling like a brick because it would ensure QE had to stop dead.That would mean a bankrupt government unable to issue gilts.I think the BOE would much rather inflict some pain on BTL landlords etc.

7-8% seems pretty low compared to previously when you stated double figures (I think!). Is that adjusted particularly with interest rate rises + QE?

[DurhamBorn]

21 minutes ago, Noallegiance said:

7-8% seems pretty low compared to previously when you stated double figures (I think!). Is that adjusted particularly with interest rate rises + QE?

Its assuming they do as i predict they might,increase rates and QE still around £7billion to £9 billion.I expected double figures later in the cycle,but we might top out at this stage at 8%ish on the RPI and pull back to the 5% zone.A lot depends on the velocity once its into M3 and if they do the above.63% remains my cycle target for inflation though give or take.Thats the magic number from 18 months ago when the cycle started to end the cycle with wealth intact.Im aiming for that on top of divis,so wealth intact and no work for a cycle.Or little work,i might go and do a few months now and again at some point.

[Barnsey]

2 hours ago, DurhamBorn said:

The main systemic risk in the UK alongside energy is sterling falling like a brick because it would ensure QE had to stop dead.That would mean a bankrupt government unable to issue gilts.I think the BOE would much rather inflict some pain on BTL landlords etc.

That helps explain the seemingly premature reigning in of public finances by Sunak. Must protect the £ or at least foreign perceived confidence in it.

[UnconventionalWisdom]

Just want to thank the hive mind and @DurhamBorn in particular. 

Reading these articles with a smug look on my face thinking we've been chatting about this for years.

https://www.thisismoney.co.uk/money/investing/article-10073525/How-protect-portfolio-1970s-style-inflation-flare-up.html

https://www.marketwatch.com/story/here-are-the-etfs-to-buy-if-reflation-not-stagflation-plays-out-says-blackrocks-head-of-ishares-strategy-11633630485

I've not contributed much as it's playing out a lot as we expected and new job & life in general has got in the way deeper research- still lurk this thread pretty much daily. 

Inflation pretty much hitting all the headlines. So grateful to have found this thread to be somewhat prepared for it!

[DurhamBorn]

What a complete crock of shit this is from the BOE

https://www.bankofengland.co.uk/monetary-policy/quantitative-easing

"we do QE to keep inflation low" 

Its not to help government spending 

Id expect a reception class at school to do more in depth work than that.

 

[jamtomorrow]

I know we're supposed to try and keep this thread as a no-crypto safe space, but hopefully the crypto snowflakes here will permit a relevant exception (since this one fuses monetary policy, grid stabilization and energy policy).

Short version: elaborate energy storage schemes are unnecessary if you can just add elasticity on the demand side.

Start scrolling now if you might be triggered ...

 

[MrXxxx]

17 hours ago, DurhamBorn said:

I think people feel comfort in small numbers and it costs them dear.Prime example are IFA fees.Add in fund fees and platform fees and it can be 2.2% a year,even cheap ones 1.7%.Of course someone sticks a £200k inheritance with them and sees it going up 11k a year during the good times they think what a great job the IFA is doing when really a third of their gains before inflation are going out the door

After reading the arguments [here and elsewhere] for/against the passive ETF vs active approaches this summarizes the conclusion that I came to i.e there is not one right approach but a right time, with the passive approach being right when a) the market is less volatile/erratic, and so b) the gain is not coming from the 'expertise' of the IFA that you are paying for, but the market direction as a whole.

[DurhamBorn]

Here is the other side of the reflation cycle

https://www.bbc.co.uk/news/business-58867906

As i said a few years ago these type of companies would have to transfer margin to delivery companies and the de-complex areas.Exactly whats happened to them.Sales ok etc,but they simply cant pass on the costs quick enough.In dis-inflation the opposite happened,costs went  down slowly,but the prices only fell with a lag so stable or growing margins.

I remember lots of MSM articles saying to buy Asos a year ago and sell oilies.Doesnt matter how good of a company they are at the moment cost push inflation is upon them.

 

[Harley]

On 08/10/2021 at 10:02, sancho panza said:

we're long KGC from about $3 bottom ladder to $4.30 top ladder from when @DurhamBorn was steering the basement faithful towards them oct/Nov 2018.Bottom laddered of HMY remains at $1.60 from that time too.

We've tkane profits in Spet last year-sold Sib/GFI Anglogold which had multibagged alogn with a few others Sept 20 but have since reinvested that in some of the other horses int he race eg YAmana/B2G/Oceana.

When you game through what's coming-then I'm totally with Luke Gromen thesis that gold could go back to fulfilling it's mutli millenial role as final payment-these shares all have a lot of upside.

Coma scores for my spray n pray operations below.All based on full year reuslts.Share price moves would obviously change the rating but these are a snapshot of the my opinion of the value at the time.17 and above is what I call a buy but we own a good few that have lowish scores for non financial reasons.The FCF coming off some of these is something to behold.Jsut wait till the banks are offering them cheap moeny to dig.......

Company	Share price	Date	Chart	Inc	BS	CF	Sector	SCS
Agnico	USD 60.61	23/02/21	1	2	4	2	4	13
Alamos	USD 7.55	03/03/21	3	3	5	3	4	18
Anglogold	USD 20.89	23/02/21	3	4	3	4	4	18
B2Gold	USD 4.55	03/03/21	2	5	5	5	4	21
Barrick	USD 18.67	01/03/21	3	3	4	4	4	18
Buenaventura	USD 10.65	16/04/21	4	1	4	2	4	15
Centamin	GBP 1.13	16/04/21	3	4	5	5	4	21
Centerra	CAD11.88	03/03/21	2	5	5	5	4	21
Eldorado	USD 11.01	03/03/21	3	3	5	5	4	20
FNV	USD 136.52	16/03/21	1	2	5	2	4	14
Freeport	USD 37.55	23/02/21	1	2	2	2	4	11
Fresnillo	GBP 9.42	03/03/21	3	3	4	3	4	17
Gold fields	USD 8.69	23/02/21	2	4	3	3	4	16
Gold resource	USD 2.69	01/03/21	4	1	5	3	4	17
Harmony	USD 3.49	10/08/21	4	1	3	2	4	14
Hochschild	GBP 2.13	01/03/21	4	2	3	4	4	17
IAM gold	USD 3.02	01/03/21	3	2	4	2	4	15
Kinross	USD 6.73	23/02/21	3	5	4	5	4	21
Kirkland	USD 33.24	01/03/21	2	3	5	3	4	17
New gold	USD 1.65	01/03/21	4	1	2	1	4	12
Newcrest	USD 20.04	23/02/21	3	3	4	3	4	17
Newmont	USD 54.52	01/03/21	1	3	4	4	4	16
Oceana	CAD 1.78	01/03/21	4	1	4	1	4	14
Osisko Gold Royalty	USD 9.80	01/03/21	3	2	4	1	4	14
Pan African	GBP 00.184	23/02/21	2	5	3	3	4	17
Pan American	USD 32.18	01/03/21	1	3	5	3	4	16
Petropavlosk	GBP0.2596	16/03/21	3	2	3	1	4	13
Polymetal	GBP 14.57	05/03/21	2	4	3	3	4	16
Royal Gold	USD 103.29	01/03/21	1	2	5	2	4	14
Sandstorm	USD 6.07	01/03/21	3	2	5	3	4	17
Sibanye	USD 18.91	01/03/21	1	2	3	4	4	14
SSR	USD 13.87	01/03/21	3	3	4	3	4	17
Wesdome	CAD 9.85	16/03/21	2	2	5	1	4	14
Wheaton	USD 42.03	16/03/21	1	2	5	5	4	17
Yamana	USD 4.015	01/03/21	4	3	3	4	4	18
Silvercrest
First Majestic	UD 17.28	03/03/21	1	2	4	2	4	13
Endeavour Silver	CAD 7.94	03/03/21	1	2	5	2	4	14
Fortuna Silver	CAD 9.33	03/03/21	1
Mag Silver	USD 18.71	03/03/21	1					1
Silvercorp	USD 5.69	03/03/21	2	3	4	3	4	16

Thanks for this @sancho panza.  To return the favour, I ran these through my own momentum model.  Only one data point but suggests any uptick from here is early days (green/amber/blank shows the strength of the signal) with any sustained uptick yet to follow through into the weekly and monthly data.  I have anonymised the data to stop any position taking off it as DYOR and no responsibility accepted, just one data point based on the way I look at things.

[wherebee]

3 hours ago, jamtomorrow said:

I know we're supposed to try and keep this thread as a no-crypto safe space, but hopefully the crypto snowflakes here will permit a relevant exception (since this one fuses monetary policy, grid stabilization and energy policy).

Short version: elaborate energy storage schemes are unnecessary if you can just add elasticity on the demand side.

Start scrolling now if you might be triggered ...

 

That's an amazing insight.  Using energy on site to mine bitcoin you can then spend anywhere.

 

By the way, you can do that on Mars.  Get robot mining rigs up there, mine bitcoin, send data back.

[Noallegiance]

I would be 'very worried' if I was Chancellor (msn.com)

[HousePriceMania]

43 minutes ago, Noallegiance said:

I would be 'very worried' if I was Chancellor owned 10 houses. (msn.com) 

 

[planit]

3 minutes ago, HousePriceMania said:

I would be 'very worried' if I was Chancellor  'owned' 10 houses mortgaged up to the hilt. (msn.com) 

FTFY

[janch]

On 10/10/2021 at 12:19, Cattle Prod said:

For example, did you know that 2% eventually goes exponential? Remember that when they say 2% is a desirable rate of inflation. It might take a while, but it eventually goes parabolic and wipes out all your wealth. And well they know it. 

I don't mind if it works in reverse for my savings/investments

If IRs go up a bit I shall be glad to have some cash.  I think the highest I had was 6% in Bradford & Bingley just before they went bust.