Credit deflation and the reflation cycle to come (part 6)

[HousePriceMania]

See BP down to 4.50.

restarted buying them now.

[Innkeeper]

9 hours ago, sancho panza said:

 

 

The survey, from accountancy firm BDO, found that 91% of the companies questioned said difficulty getting capital means growth plans are being rethought.

Something that many CEOs no doubt have never experienced.  Even if they can get capital, it will now be at a cost that doesn’t fit with their expansion plans unless of course they re cost them.  Leading to further inflationary pressures.

One other factor I had totally forgotten about until yesterday when I was discussing plans with a couple of other people with a view to taking a small business.  I remembered that an old adage used to be ‘if you’re not making at least 5% net profit then you might as well sell up and stick the capital on deposit in a bank’.  This was when deposit accounts routinely paid 5% without trying.  Those days are nearly here again and companies will now will be revising their margins accordingly, otherwise why stay in business?

Inflation will not be going away soon....

Edited June 26, 2023 by Innkeeper
Edit

[azzuri82]

10 minutes ago, Innkeeper said:

Something that many CEOs no doubt have never experienced.  Even if they can get capital, it will now be at a cost that doesn’t fit with their expansion plans unless of course they re cost them.  Leading to further inflationary pressures.

One other factor I had totally forgotten about until yesterday when I was discussing plans with a couple of other people with a view to taking a small business.  I remembered that an old adage used to be ‘if you’re not making at least 5% net profit then you might as well sell up and stick the capital on deposit in a bank’.  This was when deposit accounts routinely paid 5% without trying.  Those days are nearly here again and companies will now will be revising their margins accordingly, otherwise why stay in business?

Inflation will not be going away soon....

Interest rates/GILT yields are definitely having this effect.

People in 50s or close to retirement often ran/continued to run businesses as there was little to no return on savings.

Now that rates are close to 5% for easy access, if you've a million plus in the bank (which I'd expect maybe 1/5 or 1/6 of mature, small business owners do) - why continue to run your business with decreasing margins/profits, in an ever more hostile business/tax environment?

I constantly look at small businesses for sale, and there's definitely a turn in the last few months (and the constantly increasing new listings) of folk just chucking in the towel.

[jamtomorrow]

1 hour ago, Cattle Prod said:

Wait till someone tells them there's not enough copper for a grid rebuild either. Then I guess they'll announce a full nuclear rebuild...till someone tells them the uranium is all contracted. I have my piece of both.

@Cattle Prod what is your estimate of how much copper will be needed? With overhead cables on the high voltage network being aluminium, I suppose it's stuff like transformers and busbars where the copper is needed?

How does the back-of-a-fag-packet calculation look for that?

[Stuey]

22 minutes ago, Innkeeper said:

 

Inflation will not be going away soon....

It will have more than halved by year end, and there will be a clamour for interest rate cuts - to get ahead of the curve. 

[sancho panza]

2 hours ago, jamtomorrow said:

Interesting to see you post this @sancho panza while I was thinking about the question upthread about "what does a successful economy look like?".

Capital formation is both the cause and the symptom - not only does it sow the seeds of productive employment and economic sovereignty, it also feeds that intangible sense of shared endeavour. Of a country that's "doing something".

Then contrast that with the decades of malaise and economic autophagy where we've gradually consumed our little-remaining productive capital. A country that's not "doing something" - see the bennies bill.

Obsession of UK elites over FDI three *decades* ago was a sure sign all was not well here. Early 90s it seemed like a minister popped up on TV every other week to sing the praises of some multi-national or other building a factory here or there. Whereas that was in fact the writing on the wall.

I think you highlight a key looming theme JT.and it's something @Innkeeper looks at above from a slightly different angle ie return on capital.

Post oil disocvery in the North Sea in 70's,UK manufacturing has declined signifcantly.As Dr Tim Morgan has sadi,we've gone from producing things to finacializing assets in a service led economy.Both govt policy and monetary policy,steered capital into assets and therefore finacialized our economy even more it becoming a virtuous circle of increasing financialization/indebtedness and increasing GDP growth

As the govt ran out of room to grow GDP by financializing real estate and otehr finacial services,they began to grow GDP by finacializing people on bennies as @DurhamBorn has sort of laid out.And somewhere above,from iirc he talked recently about how he got that slightly worng in terms of expecting the govt to onshore productive cpacity rahter than try and stimulate demand via higher bennies.At the moment,that really does seem to be their game plan however nonsensical that may appear.

And thats where Innkeeper's point looms out of the msit.Increasingly,those holding capiatla and looking to deploy it in productive businesses are seeing their parameters change and why wouldn't they wehn risk free moeny is pay 5%.You're going to want more than 10% to get out of bed.

Overall,it looks highly likely that capital will demand higher returns to deploy in the UK going forweard,which in itself is inflationary.

The real worry for me is that we see deflation in the credit system at the same time ,highly likely if real estate takes a bath given how the Uk's fincaical eco system is built upon real estate(take a look at Nat Wests loan book)

[Cattle Prod]

Just now, jamtomorrow said:

@Cattle Prod what is your estimate of how much copper will be needed? With overhead cables on the high voltage network being aluminium, I suppose it's stuff like transformers and busbars where the copper is needed?

How does the back-of-a-fag-packet calculation look for that?

I don't really know JT, but there is a lot of news coming out about copper supply problems, particularly in Chile. I don't follow copper production too closely, but there are two big things in common with oil and gas: 1) It takes about ten years to get a big new project going, 2) Copper production will follow the same normal distribution any other resource does. And apparently the large legacy mines have dropping production, as do the large copper miners. Declining ore grades is the same thing as the oil industry going for shale (which is exactly the same as a poor quality ore grade), except you can't frack copper and make it flow out of the ground.

One other thing in common I suppose is a political assumption that it's just 'there' and you can have as much of it as you want. 

It doesn't work like that.

I was scanning this list for financials, but I noticed most of them had declining production.

https://finance.yahoo.com/news/15-biggest-copper-companies-world-132108207.html

Gorozen also has a good piece on copper in this quarters newsletter.

https://info.gorozen.com/2023-q1-hubberts-peak-is-here

Snippet:

Comments welcome, especially from our transmission system experts. How much copper will be needed to transmit 50 GW of wind power into the grid, and how on earth do you balance it and stop the grid blowing out?! 

[RJT1979]

17 minutes ago, Stuey said:

It will have more than halved by year end, and there will be a clamour for interest rate cuts - to get ahead of the curve. 

Little stuey will be living under the bridge at the end of the road he used to own a house in.

[Stuey]

6 minutes ago, RJT1979 said:

Little stuey will be living under the bridge at the end of the road he used to own a house in.

You can buy gas for 80p per therm now, it had previously been over £7 if you go back less than twelve months. It's a no-brainer that will cause inflation to be transitory and plummet 

[Axeman123]

25 minutes ago, sancho panza said:

Overall,it looks highly likely that capital will demand higher returns to deploy in the UK going forweard,which in itself is inflationary.

Somewhat related, although the man is obviously talking his book

Quote

Sir Rocco Forte has said he is investing overseas and giving Britain a miss due to the Government's lack of economic direction.

The 87-year-old owns a chain of luxury hotels, including Brown's in London's Mayfair, as well as The Balmoral Hotel in Edinburgh.

But Forte told the Mail that he had ripped up plans to pump money into the UK economy through opening a series of boutique hotels in regional tourist centres, such as Oxford, Bath and the Cotswolds.

He said: 'I have abandoned that. I would rather invest overseas where I can get a good return.' 

Quote

Forte pointed to Sicily, where he opened a hotel resort with the help of a 25 per cent subsidy of €14m and was made an honorary citizen after creating hundreds of jobs and invigorating the local economy.

'We can't compete with that in this country in the same way.'

Forte said the UK government's policies were 'restricting enterprise' and there was no compelling economic vision from UK leaders.

He said: 'People have got to be carried along with a belief in something, a belief there's a destination which we are trying to reach. There's no destination at the moment and that's been the case for the last 15 years in this country, with Labour and Conservative.'

https://www.thisismoney.co.uk/money/markets/article-12232123/Sir-Rocco-Forte-invest-overseas.html

[Nomad]

The politicians from all side seem to be so focused on the woke agenda and ensuring benefits are ever increasing they seemed to have forgotten what their real job is, (i.e. ensuring the UK is competitive and staying ahead of the game). We really are in a mess. I've got two children, early 20s, and the future looks very bleak IMO

[Transistor Man]

1 hour ago, jamtomorrow said:

@Cattle Prod what is your estimate of how much copper will be needed? With overhead cables on the high voltage network being aluminium, I suppose it's stuff like transformers and busbars where the copper is needed?

Renewables and electric vehicles are where the additional copper is needed. 

It's generators, power electronics, power converters, transformers, and more.

Right now, Glencore are trying to acquire Teck, and Barrick Gold have approached First Quantum. 

Glencore say 2x current copper per year by 2050.

 

Edited June 26, 2023 by Transistor Man

[JoeDavola]

Got a letter from my electricity supplier.

GOOD NEWS, wholesale electricity prices are down 8% and we're passing the saving on to you....

....however the government assistance is ending, so that still means your electricity is going up 5% overall....

[sancho panza]

5 minutes ago, Cattle Prod said:

I don't really know JT, but there is a lot of news coming out about copper supply problems, particularly in Chile. I don't follow copper production too closely, but there are two big things in common with oil and gas: 1) It takes about ten years to get a big new project going, 2) Copper production will follow the same normal distribution any other resource does. And apparently the large legacy mines have dropping production, as do the large copper miners. Declining ore grades is the same thing as the oil industry going for shale (which is exactly the same as a poor quality ore grade), except you can't frack copper and make it flow out of the ground.

One other thing in common I suppose is a political assumption that it's just 'there' and you can have as much of it as you want. 

It doesn't work like that.

I was scanning this list for financials, but I noticed most of them had declining production.

https://finance.yahoo.com/news/15-biggest-copper-companies-world-132108207.html

Gorozen also has a good piece on copper in this quarters newsletter.

https://info.gorozen.com/2023-q1-hubberts-peak-is-here

Snippet:

Comments welcome, especially from our transmission system experts. How much copper will be needed to transmit 50 GW of wind power into the grid, and how on earth do you balance it and stop the grid blowing out?! 

Mckinsey Feb 23.For my cyncial old eye,this is classic 'wishspeak' from people with an aim and no realisitc plan of how to get there.

This is straight out of the @DurhamBorn 'economic ambush' playbook where 50 mn new fridges in India throws the best laid WEF plans into utter chaos-'what do you mean they want to store food.....'

Another thing you need to consider is that during covid,a lot of South Amewrican exploration was shut down due to mainly socialsit govts in Chile/Peru who were fully on board the coof train.

Full article worth a read but you'll see in the final para they use the word that should never be used when forecasting supply in key commodities-the Scottish word.

https://www.mckinsey.com/industries/metals-and-mining/our-insights/bridging-the-copper-supply-gap

One such commodity is copper, which is an essential ingredient for this process. In fact, electrification is projected to increase annual copper demand to 36.6 million metric tons by 2031. Although current supply projections based on restarts, certain or probable projects, and recycled production offer a pathway to 30.1 million metric tons, another 6.5 million metric tons of capacity (an additional 20 percent) remain to be found.

However, the adoption of new emergent technologies—including coarse particle recovery, sulfide leaching, and process optimization with machine learning—has the potential to close a significant portion of that gap (Exhibit 1). The obstacles to commercialization and widespread adoption are not trivial, and the numbers presented in this article are an estimate of full potential, not a forecast. But technological levers should be recognized alongside new mine development as part of the solution.

The trend of declining copper head grades is well established and unlikely to be reversed. Similarly, oxide ore bodies, which do not require concentrators and can be processed through less capital-intensive routes, are being exhausted. The mining industry has responded to these challenges by processing ever-increasing volumes of sulfide ores. In fact, over the past ten years, the volume of ore sent to concentrators has increased by 1.1 billion metric tons, representing 44 percent growth.

Nevertheless, to supply via traditional methods the copper needed for the energy transition, miners will have to repeat this feat again, increasing the volume of ore processed by another 44 percent by 2031 (see sidebar, “About the research”). Of the 1.6 billion additional metric tons of ore required, 0.6 billion metric tons can be provided by recently announced mines or expansions. However, a gap of one billion tons per annum remains. There is an imperative to extract more metal from the ore being mined.

Metal buyers

For buyers of metals, the supply constraints facing the metals necessary for the energy transition can appear daunting, but new mineral-processing technologies are an indication that human ingenuity and the market economy tend to find a way to provide. However, this is not an invitation for passive optimism: buyers have a role in working with the supply chain by funding and promoting technological breakthroughs where they can. This requires careful analysis and staying abreast of industry trends.

---

As the world electrifies, the demand for copper will be difficult to meet. However, with innovative new mining and processing technologies, there is hope. Players from across the industry, from mine operators to developers to metal buyers, can make moves today to support the implementation of these new technologies and to innovate further. If they do, they could provide humanity with the key resources it needs for the future.

[Stuey]

Just now, JoeDavola said:

Got a letter from my electricity supplier.

GOOD NEWS, wholesale electricity prices are down 8% and we're passing the saving on to you....

....however the government assistance is ending, so that still means your electricity is going up 5% overall....

8% ?!

92% would be a closer guess 

[JoeDavola]

1 minute ago, Stuey said:

8% ?!

"As wholesale electricity costs have reduced, we have reviewed our unit rates the utility regulator. This has resulted in a 7.1% decrease."

So fair enough it's not the wholesale costs that have gone down that much, that's just how much of a saving they're passing on.

[leonardratso]

when have you ever seen a 92% decrease in price on anything? unless you are stealing it.

[Stuey]

1 minute ago, JoeDavola said:

"As wholesale electricity costs have reduced, we have reviewed our unit rates the utility regulator. This has resulted in a 7.1% decrease."

So fair enough it's not the wholesale costs that have gone down that much, that's just how much of a saving they're passing on.

If NI is anything like GB, there's about ten other charges they have to lump on top.

CfD, Renewables Obligation, Capacity Market, transmission costs, distribution costs, line losses, green gas levy, warm home discount, Feed In Tariff levelisation....etc etc

[Jeff2500]

17 hours ago, MrXxxx said:

Worth a listen, especially regarding UK property:

https://many-happy-returns.captivate.fm/episode/how-high-will-interest-rates-go

...but what I find amazing is that we have two educated economists [one worked in the city and US], yet the only way they can see to reduce inflation is to have a recession this then creating unemployment, reducing the number of jobs per person available, and so reduce inflation caused by wage demands......surely you could reduce the number of jobs by increasing the number of people available for work, and do this by reducing benefits and so making work a more attractive option?...doing the latter would give you extra economic benefits as well i.e. reduce government spending bill, no recession, more disposable income to be spent into the economy, more tax return....to me it seems the obvious/best solution, or am I missing something?

You can control people more easily when they are on benefits. I think governments like that.

[sancho panza]

1 hour ago, azzuri82 said:

Interest rates/GILT yields are definitely having this effect.

People in 50s or close to retirement often ran/continued to run businesses as there was little to no return on savings.

Now that rates are close to 5% for easy access, if you've a million plus in the bank (which I'd expect maybe 1/5 or 1/6 of mature, small business owners do) - why continue to run your business with decreasing margins/profits, in an ever more hostile business/tax environment?

I constantly look at small businesses for sale, and there's definitely a turn in the last few months (and the constantly increasing new listings) of folk just chucking in the towel.

We back onto farmland.A month or so back,the farmer approached me by my spud patch and started chatting.First time in near 18 months of our tenancy.So I engaged,nice bloke.

He seemed keen to work out my angle on our retnal and I explained 2% gross yield/couldnt mortgage for less than 5% etc.We tlaked a bit about economy more broadly as he had two kids trying to sell big houses.Long story short,he rents his land,works all days,all year,pays £15k in land rents,spends 6 weeks a year living in a caravan near his sheep(lambing I think).Bloke works very hard/long hours.Told me he'd talked all his kids out of going into farming and we tlaked about the economics of farming

I came away from the covnersation thinking how we've been living off people like him for years. @Joncrete Cungle might know what he'd be earning as a tenant farmer but there's no way I'd consider it for less than say £60k and even then,I'm wincing say that.

As a society,we have a generation of self starters in their 50's all looking for an exit.When I look at our little family invesment project,it'd take a 20%-30% return on capital in a reasonably bouyant marekt to get me to give up the security of our oil/baccy/comms invesments.

I think you're absolutely right that returns are going to need to rise to draw more people into setting up businesses especially given the hassles with the VAT/Tax man

 

when you sya there's been a turn do you mean in the qualitry of busniesses for sale as well as the amount?What differences have you noticed if you dont mind me asking?

 

[Starsend]

1 hour ago, Cattle Prod said:

I don't really know JT, but there is a lot of news coming out about copper supply problems, particularly in Chile. I don't follow copper production too closely, but there are two big things in common with oil and gas: 1) It takes about ten years to get a big new project going, 2) Copper production will follow the same normal distribution any other resource does. And apparently the large legacy mines have dropping production, as do the large copper miners. Declining ore grades is the same thing as the oil industry going for shale (which is exactly the same as a poor quality ore grade), except you can't frack copper and make it flow out of the ground.

One other thing in common I suppose is a political assumption that it's just 'there' and you can have as much of it as you want. 

It doesn't work like that.

I was scanning this list for financials, but I noticed most of them had declining production.

https://finance.yahoo.com/news/15-biggest-copper-companies-world-132108207.html

Gorozen also has a good piece on copper in this quarters newsletter.

https://info.gorozen.com/2023-q1-hubberts-peak-is-here

Snippet:

Comments welcome, especially from our transmission system experts. How much copper will be needed to transmit 50 GW of wind power into the grid, and how on earth do you balance it and stop the grid blowing out?! 

I recall reading how the giant copper mines have been in production for a hundred years or some crazy long time and are a bit long in the tooth now. The original orebodies were something like 6% copper, new copper discoveries are often 0.1% - quite a difference.

 

[Starsend]

13 minutes ago, sancho panza said:

We back onto farmland.A month or so back,the farmer approached me by my spud patch and started chatting.First time in near 18 months of our tenancy.So I engaged,nice bloke.

He seemed keen to work out my angle on our retnal and I explained 2% gross yield/couldnt mortgage for less than 5% etc.We tlaked a bit about economy more broadly as he had two kids trying to sell big houses.Long story short,he rents his land,works all days,all year,pays £15k in land rents,spends 6 weeks a year living in a caravan near his sheep(lambing I think).Bloke works very hard/long hours.Told me he'd talked all his kids out of going into farming and we tlaked about the economics of farming

I came away from the covnersation thinking how we've been living off people like him for years. @Joncrete Cungle might know what he'd be earning as a tenant farmer but there's no way I'd consider it for less than say £60k and even then,I'm wincing say that.

As a society,we have a generation of self starters in their 50's all looking for an exit.When I look at our little family invesment project,it'd take a 20%-30% return on capital in a reasonably bouyant marekt to get me to give up the security of our oil/baccy/comms invesments.

I think you're absolutely right that returns are going to need to rise to draw more people into setting up businesses especially given the hassles with the VAT/Tax man

 

when you sya there's been a turn do you mean in the qualitry of busniesses for sale as well as the amount?What differences have you noticed if you dont mind me asking?

 

One of the biggest problems in this country now for the formation of new business is the tax/vat man. The have become more and more aggressive over the years + more and more incompetent and unable to help while forcing you to to comply with their latest stupid rules (often at cost to yourself) and great confusion + time wasting. Often, they do not understand their own rules yet expect you to.

A good example is where you have a simple query and you need to call them. Your heart sinks, you know it will take an hour or two most likely, will be frustrating and annoying and have a good chance of not resolving the issue. People don't want to do this bullshit anymore so they're all jacking it in so they can have as little as possible to do with any branch of Government.

 

 

[Pip321]

2 hours ago, Innkeeper said:

Something that many CEOs no doubt have never experienced.  Even if they can get capital, it will now be at a cost that doesn’t fit with their expansion plans unless of course they re cost them.  Leading to further inflationary pressures.

One other factor I had totally forgotten about until yesterday when I was discussing plans with a couple of other people with a view to taking a small business.  I remembered that an old adage used to be ‘if you’re not making at least 5% net profit then you might as well sell up and stick the capital on deposit in a bank’.  This was when deposit accounts routinely paid 5% without trying.  Those days are nearly here again and companies will now will be revising their margins accordingly, otherwise why stay in business?

Inflation will not be going away soon....

Interest rates were always a huge consideration as BTL boomed and then super boomed. As @azzuri82 has said its about return on capital and I knew that whilst I was paying 1% on any mortgage and earning 5% yield on rent then property was likely to be a winner. 

However whilst many thought rising interest rates would be an issue for the BTL brigade in terms of mortgages I was actually thinking it was a double pronged issue (Zulu attack style) in that not only did costs go up.....but the potential return on just sticking the money in the bank looks much much more attractive. No boilers, no gas certificates, no new carpets, no leaks, no broken bath panels, no missed payments.....just a passive stream at 5%.

When you add into the mix some property yields have been less than 5% (ie London) when then that just makes the potential for a readjustment even greater. 

Anyhoo.....today we just exchanged and completed on the infamous bungalow......just over £250k will be dropping into my bank account this week, mainly to be used to repay mortgages on this and other properties and then I will begin to adjust my cash position to be more aggressively into stocks and in particular gold miners. Happy days

 

[Yadda yadda yadda]

6 hours ago, Bilbo said:

At last the truth is coming out. But I would say low interest/printing from the banking crash not just from lockdown.

Free to read.

https://www.telegraph.co.uk/business/2023/06/26/britain-inflation-crisis-blame-covid-bailouts-bank-england/

 

“But we won’t leave future generations with a tab they cannot repay so we have taken difficult decisions to balance the books and get debt falling.”

What attempts have been made to balance the books?

Also the article wasn't free to read for me. I had to paste it into 12 foot ladder. Perhaps free to people who have registered?

[DoINeedOne]

All this copper talk, Harmony bought into a copper mine last year gold, uranium in the tailings apparently and also gold

Maybe it's one to build a holding position in for the future 

 

Anyway

44 minutes ago, sancho panza said:

We back onto farmland.A month or so back,the farmer approached me by my spud patch and started chatting.First time in near 18 months of our tenancy.So I engaged,nice bloke.

He seemed keen to work out my angle on our retnal and I explained 2% gross yield/couldnt mortgage for less than 5% etc.We tlaked a bit about economy more broadly as he had two kids trying to sell big houses.Long story short,he rents his land,works all days,all year,pays £15k in land rents,spends 6 weeks a year living in a caravan near his sheep(lambing I think).Bloke works very hard/long hours.Told me he'd talked all his kids out of going into farming and we tlaked about the economics of farming

I came away from the covnersation thinking how we've been living off people like him for years. @Joncrete Cungle might know what he'd be earning as a tenant farmer but there's no way I'd consider it for less than say £60k and even then,I'm wincing say that.

As a society,we have a generation of self starters in their 50's all looking for an exit.When I look at our little family invesment project,it'd take a 20%-30% return on capital in a reasonably bouyant marekt to get me to give up the security of our oil/baccy/comms invesments.

I think you're absolutely right that returns are going to need to rise to draw more people into setting up businesses especially given the hassles with the VAT/Tax man

 

when you sya there's been a turn do you mean in the qualitry of busniesses for sale as well as the amount?What differences have you noticed if you dont mind me asking?

 

Whilst working in online advertising I didn't realise how good I had it with margins and pretty much low risk as some companies would pay us daily or every 3 days, then it all became too much headache increased competition nobody thinking for themselves just copy and past all outbidding each other on ad space and then the different timezones 

So I walked away and closed my company accountants, VAT exchange rates, and HMRC all added to the headache, the dividend tax doesn't help either

looking around at a lot of businesses now and thinking their margins are fucking mental, one significant fuck up can set a company back if not destroy them, so much debt and little rainy day funds

 

 

Edited June 26, 2023 by DoINeedOne