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

[belfastchild]

I just finished reading 'When Money Dies' last night on the way home. (german inflation 1920s)
I'll be planting more sprouted potatoes in a couple of weeks then....

Its scarily familiar.

[sancho panza]

Wolf St on leverage.USing the Doug SHort's old FINRA chart.

Key thing here is that it really looks like we're getting a replay of 2000 with some of the insider type investment stories getting pummelled as the broader indices holds up up/heads higher.

Markets move at the margins first nd it definitely looks like they're moving given how some of these psoter boys for the tech bubble have got hit.Back in 2000 there were a number of shares that peaked 6-12 months before the indices peaked clearly flagging that the run up was running out of steam.

I'm clearly talking my book here in some respects as we're sat sweet in valuestocks,but there's clearly historical precedent for a move higher a la DH but there's also clearly historical precedent to say that the red flags are being thrown off.

key thing here is as wolf says,the FINRA debt is the tip of the iceberg.Leverage can take the form of rehypothecation of assets which we jsut can't gauge and which creates a huge structural instability under the assets.

In bold for skim readers.Charts are epic as ever from wolf.

https://wolfstreet.com/2022/02/18/margin-debt-plunged-as-stocks-tumbled-and-highest-fliers-got-crushed-but-its-still-gigantic-long-way-to-go/

Margin Debt Plunged as Stocks Tumbled and High-Fliers Got Crushed. But Leverage Still Gigantic, Long Way to Go

by Wolf Richter • Feb 18, 2022 • 176 Comments

Biggest dollar-plunge ever and one of the biggest percentage-plunges.

By Wolf Richter for WOLF STREET.

The only measure of stock market leverage that is reported monthly is margin debt at brokers, via FINRA. Much of the stock market leverage isn’t reported, such as Securities Based Lending, and even banks and brokers that fund this leverage don’t know the leverage in the overall market, or even the leverage of their client if that client is levered as well at other banks. Funds can leverage at the institutional level. There is leverage associated with options and other equities-based derivatives, etc.

 

But margin debt is still gigantic, with just a small portion having been unwound. The blistering historic spike in margin debt during the Fed’s $4.7 trillion QE in 22 months was a historic outlier, peaking last October with a two-year increase of 67%.

In November, the Nasdaq peaked as we now know with hindsight. Since then, it has fallen 16%.

But many high-flying stocks have gotten totally crushed, one by one, many of them started getting crushed in February a year ago, with many dozens of these high-fliers down 60% to over 90% from their highs. And leveraged bets by enthusiastic retail investors on these stocks were brutally unwound, either voluntarily or via margin calls.

Margin debt is the great accelerator on the way up because it creates buying pressure with borrowed money, and on the way down because it creates forced selling pressure.

In percentage terms, margin debt plunged by 8.8% in January from December, the largest decline in the data since some key moments:

Fed shifts from QE to QT:

• January 2022: -8.8%

Covid Crash:

• March 2020: -12.1% (Covid crash)

Euro Debt Crisis:

• August 2011: -10.4%

Financial Crisis:

• May 2010: -9.1%
• November 2008: -18.1%
• October 2008: -19.7%
• August 2007: -13.0% (Financial Crisis starts oozing to the surface)

Dotcom crash:

• March 2001: -12.1%
• December 2000: -11.6%
• April 2000: -10.4% (dotcom crash begins)

Many of the highest-flying stocks have already gotten crushed: A good sample of the most hyped and highest-flying stocks is included in the ARK Innovation ETF [ARKK]. It dropped 5.0% today to $64.80, the lowest close since June 15, 2020, and is down by 59% from the peak in February last year. Some stocks in the ETF have collapsed much more from their peaks, such as Twilio (-64%), Zoom (-72%), or Roku [-77%].

People who took on high levels of margin debt to fund their holdings of stocks represented by the ARK Innovation fund have either voluntarily liquidated at least part of their positions or were forced to by their broker – and this widespread forced selling accelerated the plunge in prices of those stocks:

High leverage in the stock market is one of the preconditions for a massive sell-off.

In October, just before the sell-off took shape in the Nasdaq, the Fed warned in its Financial Stability Report about high leverage among young retail investors: “The median leverage ratios of younger retail investors are more than double those of all investors, leaving these investors potentially more vulnerable to large swings in stock prices, as they have a larger debt service burden.”

“Moreover, this vulnerability is amplified, as investors are now increasingly using options, which can often boost leverage and amplify losses,” the Fed said.

“A potentially destabilizing outcome could emerge if elevated risk appetite among retail investors retreats rapidly to more moderate levels,” the Fed said.

Everybody knew that, and margin debt tracks some of it, but it just took the Fed a while to figure it out.

In the long-term view of margin debt and its relationship to stock market “events,” it’s not the increases in dollar amounts that matter – given the effects of inflation – but the steep increases in margin debt before the selloffs, and the stock market sell-offs that followed. But no increase was more magnificent than that of 2020 and 2021, neither in absolute terms (dollars) nor in relative terms (percentage):

 

Longer term perspective from DOug SHort

https://www.advisorperspectives.com/dshort/updates/2022/02/16/margin-debt-down-8-8-in-january

[Lightscribe]

On a slightly different subject, as I’ve mentioned over the years, I was collecting ‘junk’ silver and pre-1920 silver coins for below spot.

I used to be able to get a Victorian crown for roughly £17 or slightly below. Now the standard price is around the £40 mark.

Just shows how the VAT now put on silver has effected the price of junk physical (as well as physical moving away from paper price)

 

[Chewing Grass]

2 minutes ago, Lightscribe said:

On a slightly different subject, as I’ve mentioned over the years, I was collecting ‘junk’ silver and pre-1920 silver coins for below spot.

I used to be able to get a Victorian crown for roughly £17 or slightly below. Now the standard price is around the £40 mark.

Just shows how the VAT now put on silver has effected the price of junk physical (as well as physical moving away from paper price)

 

Big thing about Queen Victoria Crowns is that they are Finite and Collectable as well as Silver, some years were sparsely produced as well.

Have bought quite a few over the years at around the £17 mark as well.

The ones above although not obviously hammered I would have passed on due to them being slightly below my low standards.

[Lightscribe]

11 minutes ago, Chewing Grass said:

Big thing about Queen Victoria Crowns is that they are Finite and Collectable as well as Silver, some years were sparsely produced as well.

Have bought quite a few over the years at around the £17 mark as well.

The ones above although not obviously hammered I would have passed on due to them being slightly below my low standards.

Even the bashed up ones are going from £30+ and you have to bid for them. Try filtering for ‘Buy it now’ and you won’t find any below that price.

[CVG]

This has possibly been answered elsewhere, so I apologise in advance.

I understand that each person's S&S ISA is only protected for the first 85K if the platform goes bust. Does anybody set up with new providers and manage their existing portfolios within this limit? Or do you just risk losing everything over 85K?

[geordie_lurch]

Canada update via Jordan Peterson - thanks to @Long time lurking who posted this in another thread

Contrarian view - is it deliberate as some on Twitter are hypothesising... could TPTB be trying to cause instability in traditional banks so they can 'save' the system with their new Central Bank Digital Currencies (CBDCs)

 

[sancho panza]

For those TEF Deutsch fans .SHares have dipped this morning so I think we'll have some more,2.45 is better than the 2.65 of a few days back.

decl long

https://www.telefonica.de/news/press-releases-telefonica-germany/2022/02/preliminary-annual-results-telefonica-deutschland-closes-2021-as-record-year.html

Combined with an excellent price-performance ratio, the company was able to gain market share in the fiscal year 2021 and record more than 1.5 million additional postpaid mobile net additions. This is an increase of 46% year-on-year and the largest growth in the company's history since the merger with E-Plus in 2014. At the same time, fewer customers than ever switched to other providers. The so-called monthly churn rate at the core brand O₂ was 0.9%. This means that less than one percent of O₂ customers switched to another provider each month. Around 46 million mobile lines now use the O₂ network for telephony and mobile data. Data consumption rose to more than 2.4 billion gigabytes in the 2021 financial year. No provider thus transports more mobile data in Germany, and none connects more people with mobile communications.

Revenue increased on a broad basis by 3.1% to 7.765 billion euros. The company had forecast a slightly positive year-on-year development here for the financial year. Mobile service revenue climbed 3.5% to a record EUR 5.492 billion.

Telefónica Deutschland continued to drive forward the expansion of its network and the improvement of the customer experience in the financial year 2021. With around EUR 1.3 billion, the company invested over 17% more than ever before in the expansion of its mobile network and the satisfaction of its customers. Telefónica Deutschland is rolling out the new mobile technology 5G at record speed. At the end of the year, around 30% of the German population was covered by the company's 5G, and this figure is set to rise to 50% by the end of 2022. In 4G, the company achieved population coverage of over 99% by the end of 2021

[geordie_lurch]

3 minutes ago, sancho panza said:

For those TEF Deutsch fans .SHares have dipped this morning so I think we'll have some more,2.45 is better than the 2.65 of a few days back.

decl long

https://www.telefonica.de/news/press-releases-telefonica-germany/2022/02/preliminary-annual-results-telefonica-deutschland-closes-2021-as-record-year.html

Combined with an excellent price-performance ratio, the company was able to gain market share in the fiscal year 2021 and record more than 1.5 million additional postpaid mobile net additions. This is an increase of 46% year-on-year and the largest growth in the company's history since the merger with E-Plus in 2014. At the same time, fewer customers than ever switched to other providers. The so-called monthly churn rate at the core brand O₂ was 0.9%. This means that less than one percent of O₂ customers switched to another provider each month. Around 46 million mobile lines now use the O₂ network for telephony and mobile data. Data consumption rose to more than 2.4 billion gigabytes in the 2021 financial year. No provider thus transports more mobile data in Germany, and none connects more people with mobile communications.

Revenue increased on a broad basis by 3.1% to 7.765 billion euros. The company had forecast a slightly positive year-on-year development here for the financial year. Mobile service revenue climbed 3.5% to a record EUR 5.492 billion.

Telefónica Deutschland continued to drive forward the expansion of its network and the improvement of the customer experience in the financial year 2021. With around EUR 1.3 billion, the company invested over 17% more than ever before in the expansion of its mobile network and the satisfaction of its customers. Telefónica Deutschland is rolling out the new mobile technology 5G at record speed. At the end of the year, around 30% of the German population was covered by the company's 5G, and this figure is set to rise to 50% by the end of 2022. In 4G, the company achieved population coverage of over 99% by the end of 2021

Good to hear as I'm still -15.78% on Telefonica Deutschland Holding AG (O2D) shares I bought mid 2020 

[CannonFodder]

1 hour ago, belfastchild said:

I just finished reading 'When Money Dies' last night on the way home. (german inflation 1920s)
I'll be planting more sprouted potatoes in a couple of weeks then....

Its scarily familiar.

Good book, suggest 'defying hitler' by haffner also, talks a lot about that time before the war

[JMD]

14 hours ago, sancho panza said:

I jsut coma scored three fund managers you've mentioned on 2020 results and the scores on the doors are impressive.I scored the sector a 4 due to historical value levels and upside,which is supported by the scores across the 3 below.The sector looks to be good value.

              Chart  Income Balance Sheet FCF Sector Coma Score

ABRN     4        5             4                      2       4           =19

JUP        4       4              4                      4      4           =20

M+G      3        5              1                       5     4            =18

M+G carries their policy liabilites on their balance sheet hence the poor BS score,I'll have to look inot that tmrw if I get time.If I can sort that out M+G could be scoring 20+.

Looks a very interesting sector from a Basement dweller point of view,not least that there's some serious FCF getting thrown off without any serious insto moeny flowing in, jsut like the big goldies in may ways.

If you or anyone else can throw me some more names in the sector then I'd appreciate it.

 

 SP, I also like the asset manager sector. You may already have the following names, but listing in case not...                                                             Premiere Miton, Ashmore, CMC Markets, Cohen&Steers, Janus Henderson, Old Mutual, Aegon.

[Cosmic]

21 minutes ago, CVG said:

This has possibly been answered elsewhere, so I apologise in advance.

I understand that each person's S&S ISA is only protected for the first 85K if the platform goes bust. Does anybody set up with new providers and manage their existing portfolios within this limit? Or do you just risk losing everything over 85K?

Happy to be corrected, but I believe it will be the cash balance on the S&S ISA that will be at risk if the platform went under, not your holdings. As I can not see a way to do partial transfers of S&S ISAs, how would you keep your ISAs under 85k? I believe you also need to look at where the cash balance is held - i.e. which bank they are using, you would only be covered for the first 85k of your cash balance if for example you had 100k cash balance split across two platforms that used the same bank.

 

[Harley]

2 hours ago, Lightscribe said:

Yes they just move you on to the new scheme after a cut off date. In the emergency services, the fire brigade won at court (after some judges sorted themselves out first) in the unfairness of cut off age related threshold. They managed to get it all extended on the old scheme for a few years more.

No such problem for me of course. Although I’ve now switched to the Alpha career average scheme (at my higher pay threshold I’m on now) after being on Partnership for the last 10 years (I’m going to attempt to move this to my SIPP now payments will no longer be going in). Figured keeping up with CPI linked inflation at 1:43 this next decade or so has to be a winner (and due to my age). 

Yes, I thought they could close it to new members but if you were in then you were in.  And maybe close it to new contributions but what was already in was in.  But not the case then?

[CannonFodder]

30 minutes ago, CVG said:

This has possibly been answered elsewhere, so I apologise in advance.

I understand that each person's S&S ISA is only protected for the first 85K if the platform goes bust. Does anybody set up with new providers and manage their existing portfolios within this limit? Or do you just risk losing everything over 85K?

I do to an extent to manage the counter party risk which i view as different to the 85k guarantee. Its not a 85k ceiling for me, its more about max of 20% of wealth with any one counter party.

Im old enough to remember the Maxwell pensions and while some people got some money back, it took nigh on a decade I think to play out.

You can open one s&s isa a year and transfer funds between them in terms of mechanism, some providers charge, some are free, some allow partial transfers, some the whole hog only. Some have different rules for in rather than out.

 

 

 

[CannonFodder]

14 minutes ago, Cosmic said:

Happy to be corrected, but I believe it will be the cash balance on the S&S ISA that will be at risk if the platform went under, not your holdings. As I can not see a way to do partial transfers of S&S ISAs, how would you keep your ISAs under 85k? I believe you also need to look at where the cash balance is held - i.e. which bank they are using, you would only be covered for the first 85k of your cash balance if for example you had 100k cash balance split across two platforms that used the same bank.

 

You can do partial s&s transfers.

Your holdings also at risk as well as cash balance if someone is creative with them.

[Harley]

1 hour ago, Chewing Grass said:

Here is my Private Sector workplace SIPP with no input from me (yet), been in this one for 12 months, here is its performance over the last 6.

Its amazing how many staffies have no clue about how bad their companies pension is performing.

I don't think my work pensions ever made money, especially after inflation.  They only went up because of the contributions.  At least I get divs in my SIPP.

[Calcutta]

I am in the process of transferring a couple grand out of a nest pension. I didn't want it, didn't notice the contributions coming out, so afaic it's house money and the whole lump is going on Gazprom. 

[Harley]

23 hours ago, Harley said:

Well if JRS can't deliver major alpha right now (plus a few months) with all this volatility then it's a final feck to investment trusts and Harley will defo roll all his own from now on.

Now one day doesn't make it so and RUB is down 1.5% today and the HRUB ETF 3.63%, but JRS is 2.05% down while my Russian stocks (in RUB) continue to soar.  JRS getting closer to my naughty step!

[Harley]

On 22/02/2022 at 11:25, DurhamBorn said:

Iv sold my ladder in HL for a quick 8%,im not a trader,but couldnt resist 

You may be the man but someone needs to keep you pure and honest!  HL currently up 4.43% today.  Day trading is for losers.  You know that.  And if you still insist, please remember gaps get filled!!!!!!

 

PS: Div on 3Mar so you'd better buy back in!!!!!

[CannonFodder]

I know this is asinine but fedwatch.s odds of rates increase at fomc has been becoming more and more dovish as ukraine moves on. 

Its looking more and more as a 0.25 rather than a 0.5 rise. Plenty more time to become even more dovish and not raise at all.

[Harley]

What a lovely day.  Nice greens and all my downies really want to go upsies!

[christh]

1 hour ago, Harley said:

I don't think my work pensions ever made money, especially after inflation.  They only went up because of the contributions.  At least I get divs in my SIPP.

This has usually been the story for me when invested in the default fund, but I recall a couple of positive examples: 2016 when I dumped everything in the only PM mining fund Aviva had (30% up in one year) and the pensions I had in US funds (20% up Jan 21 to Jan 22)

So rather annoyingly I think my work pensions have outperformed my stock picking. Mostly blame that on my penchant for PM miners.

Still I'm in the process of moving my pensions into my SIPP so I'll soon be able to fuck them up properly.

[MithrilVest]

For the folk buying Gazprom, are you buying OGZD or GAZ - probably OGZD?

[DurhamBorn]

1 hour ago, Harley said:

You may be the man but someone needs to keep you pure and honest!  HL currently up 4.43% today.  Day trading is for losers.  You know that.  And if you still insist, please remember gaps get filled!!!!!!

 

PS: Div on 3Mar so you'd better buy back in!!!!!

Ha,i know,i decided i didnt want to commit to it,iv got ladders running in most of the sector.Interesting to see how things play out and who merges with who.I think some of the smaller deals will be friendly takeovers with 20% premiums.HL looks like it is planning on going alone.Its a mid to long term play but i think steady accumulation will do well.Abrdn need to do a share buy back though with the stake sales ,they need to keep great balance sheets but clear some shares out at these levels.

[jamtomorrow]

2 hours ago, Lightscribe said:

Even the bashed up ones are going from £30+ and you have to bid for them. Try filtering for ‘Buy it now’ and you won’t find any below that price.

Good grief, not *another* shitcoin bubble?